The only compromise President Reagan is willing to consider to reduce the $91.5 billion federal budget deficit for next year is deeper cuts in nondefense spending, Treasury Secretary Donald T. Regan said yesterday.
The talk about "running room for congressional consideration of alternatives . . . requires that we define the width of the track," Regan told a news conference. "And the Reagan track is not wide enough for tax increases or defense."
At the White House, James Baker, the president's chief of staff, emphatically ruled off limits the same two portions of the budget, even though they are the focus of most congressional attempts to offer an alternative budget. The large increases in defense spending and the personal income tax cuts scheduled for this July and July 1983 are "the heart and soul of the president's program," Baker said. Changing either is "obviously totally out of the question."
Secretary Regan specifically rejected a proposal by Sen. Ernest F. Hollings (D-S.C.) that would eliminate this year's tax cut, reduce next year's from 10 percent to 5 percent, freeze most of the defense budget, and temporarily halt annual cost-of-living increases for recipients of Social Security and other federal retirement programs.
Regan said the Hollings plan "would increase taxes by $200 billion and slash Social Security benefits by nearly $100 billion over three years. It would also weaken our defense program."
The administration cannot accept any compromise "that destroys the very fabric of the Reagan program," the secretary said. Earlier, Regan had termed the plan "ridiculous."
The Hollings proposal, however, has been praised as "worthwhile" by Senate Majority Leader Howard Baker of Tennessee, who said he was "delighted" Hollings had made it.
Other proposals similarly wide of the president's narrow track continued to emerge. Rep. Phil Gramm (D-Tex.), who cosponsored the administration's budget package last year, said he plans to offer a wide-ranging budget package of excise tax increases, loophole closings and lower spending for defense, foreign aid and business subsidies to hold the 1983 deficit under $60 billion and produce a near balance in 1985.
"The administration's budget is a step in the right direction, but it's not good enough," Gramm said. "We have to lower the deficit further if we are to assure downward pressure on interest rates, which is an absolutely essential ingredient for a strong economic recovery."
Meanwhile, Leland S. Prussia, chairman of the BankAmerica Corp., the nation's largest bank holding company, told a bankers' conference in San Francisco he believes the administration's economic forecast is too optimistic, as are its estimates of the budget deficits for the next several years.
"I don't think the economy will perform" with deficits as large as those predicted by the administration, he said. Moreover, Prussia continued, the supply-side economic theory on which the Reagan program is based "isn't going to work for a number of reasons, not the least of which is the deficit problem and the serious impact it has on interest rates and financial markets."
Secretary Regan again dismissed such concerns, saying that an increase in saving would be large enough to allow the budget deficits to be financed while leaving enough funds available to the public for investment and other uses that interest rates could come down.
Pointing to the small 0.4 percent increase last month in producer prices for finished goods, Regan said, "As this is reflected in the consumer price index , I believe we will see the rate of inflation coming down and interest rates coming down with it."
The secretary predicted that interest rates would fall when the economy begins to recover from the recession this spring. "Some time between March and June, interest rates will be coming down," Regan said. He declined to estimate how far they would come down.
Regan said the low rate of increase in producer prices also "should serve to strengthen the backbone of some of my Wall Street friends who have been skeptical about the drop in inflation."
Whatever the drop in inflation so far, Wall Street analysts are not dropping their skepticism about the president's program and the economic outlook. At the San Francisco conference, David M. Jones, an economist at Aubrey Lanston & Co., a New York bond dealer, predicted that the prime rate still would be between 15 percent and 16 percent in June, down only slightly from the current 16 1/2 percent.
Jones said the second quarter of this year would be "rough" for businesses. "We have a danger in this economy stemming from the business sector borrowing from banks out of weakness to finance inventories and to make interest payments," he warned. The situation potentially is "the worst since World War II.
"In 1982," Jones continued, "We'll have an old-fashioned capital goods recession. Nineteen eighty-two will be an absolutely dismal year in business activity and that could carry over into 1983 . . . I don't see any chance of sustained recovery."