"Suppose a civil war were going on in China and nobody here knew about it," District government official was saying."Would that make it any less important? Well, it's the same thing with the gross budget. It's a revolution, and nobody's noticing."

The City Council, in a kind of palace coup, has wrenched from Mayor Marion Barry new power over city spending and borrowing, and the traditional ability of department heads to move money around at will is being undercut.

In the phrase "gross budget," the adjective is one of quantity, not quality.

Around the District building, it seems to be an idea whose time has come, whether the bureaucracy likes it or not.

The ascendancy of "gross budgeting" can be dismissed as an argument philosophy over another. But the issues are tangible: Public scrutiny of the process by which the city government gets and spends a third of its money, and the accountability of department heads for their management of those funds.

As the city budget is reported in the press, reviewed by the City Council and approved by Congress each year, Washington is a city with about 31,000 employes and annual expenditures of $1.4 billion. Actually, there are more than 37,000 workers on the payroll and annual expenditures total nearly $2.5 billion.

The difference is in federal grants -- mostly money given directly by Cabinet departments to city agencies for specific programs, such as job training.

Since those grants are appropriated by Congress to the federal agencies that then redistribute them to cities and states, they do not have to go through the appropriations process again in the District budget. The funds, and the city jobs they finance, are listed in the annual budget document, but little detail is given about them because they do not have to be justified. The money is available for the asking.

As a result, the city takes in and spends hundreds of millions of dollars a year without any public, City Council or congressional scrutiny over whether the programs are really necessary or whether they are properly managed. Often the city must spend tax dollars to obtain the grant funds on a matching basis, as with Medicaid, so that participation in the grant-funded program creates a standing, inflexible claim on the city's scarce resources.

This system has been under attack since 1976. Arthur Andersen & Co., the accounting firm engaged by Congress to review the city's books, recommended at that time that "all revenues and expenditures regardless of the source should be included in both the budget preparation and approval cycle of the District" -- that is, that the city switch to what is known as a "gross budget."

That report and subsequent analyses by other critics noted that excluding the grants from consideration in the budget review process has both political and administrative deficiencies.

The City Council, and by extension the public, is denied the opportunity to review the usefulness of the programs the grants are financing. The agencies receiving the grant money have not been held responsible for collecting all the revenue due them -- with any shortfall requiring payment out of some other account. Since the money was not part of the appropriated budget, it could be moved around from use to use without City Council or congressional review. And it often was, by anonymous department chiefs whose names appeared on no ledger sheet.

A series of events have now changed this traditional way of doing the city's business.

Over Barry's veto, the City Council enacted a law requiring that the mayor give notice to the council and the public of every grant application, specifying what the money is for, who will spend it, how much it will require in matching city funds, and how he proposes to ensure that the money is efficiently managed. The bill also requires that the mayor obtain prior consent from the council before applying for any grant of more than $5 million.

The House Appropriations Committee instructed the city to "develop an annual financial plan which addresses all expenditures and sources of funding in the operating and capital budgets." The committee said that "grant-funded programs and other off-budget accounts have contributed substantially to cash flow and budget problems" because tax money has had to be used to offset "under-collection of grant revenues and over-obligation of grant budgets."

That means people were hired or contracts let in the expectation that grant money would be used to pay them, but tax revenues had to be diverted to cover them when the grants went uncollected.

The $38-million computerized accounting system that the District government began using last October presumes the use of the gross budget as the basis of its calculations. The computer, asked to print out figures on the current year's budget, puts it at $2.44 billion, not the $1.4 billion used in public discussions.

The computer system also presumes that the names of the individuals responsible for the money will be listed at every one of the "control centers" and "responsibility centers" into which it divides the city's budget. Last month, the city administrator, Elijah B. Rogers, ordered that "each responsibility center must have a named manager who is actually responsible and accountable for the day-to-day financial operation and control of the programs and activities of the unit."

The effect of that, according to analysts of the city's fiscal affairs, will be to identify instantly any official who has failed to collect grant revenues, overspent his budget, or switched funds around without authorization. "They can't hide the money anymore," as one source put it.

Budget director Gladys Mack said that the computer system and the Home Rule charter "in effect mandate gross budgeting," and that the format of the city's budget document -- often criticized as uninformative -- "will be revised. We want to do a better job."

Edward G. Winner, assistant city administrator for financial management, said that "gross budgeting, insisting that everybody review all the pieces, is a sound management principle. If you want to know how much we spend to teach kids to read, in the appropriated budget it doesn't look like much.

"But on a gross basis, with the grants, you get a wholly different picture," he said. "Or take driver education: it's never seen in gross costs. It looks like very little in appropriations, just a few teachers, but you add in the federal investment, in simulators and things, and it appears as a big program. That offers the kind of look at a budget that legislators and policy makers should take."

When Barry vetoed the council bill requiring council review of grant funds and approval of applications, he said that "to acquiesce in the dictates of this bill would be to participate in a serious weakening of this government's ability to confront and resolve many of the difficult problems that we are faced with at this time."

He said it would in effect require the preparation of two budgets each year, further hinder the already cumbersome process of getting each year's spending program through Congress, and possibly cost the city money by delaying applications for grants that become available on short notice.

He also objected strongly to another provision of the bill requiring council approval of any short-term borrowing by the city government. In the past, the city has routinely borrowed from the Treasury Department to pay current bills, and its ability to keep doing that is a key to meeting payrolls and sending out welfare checks in periods of slack tax collection. The bill, he said, "would critically interfere with my responsibilities as chief financial officer of this city and virtually destroy one of the few instruments of financial flexibility Congress has left to us."

The council, unpersuaded, overrode the veto, and the bill is scheduled to become law on Sept. 26.