A gloomy new report on D.C. government finances has intensified the District Building debate between Mayor Marion Barry, who wants to impose a $17.9 million income tax increase, and leading members of the D.C. Council, who are searching for an alternative.

Philip M. Dearborn, vice president of the Greater Washington Research Center and a former Barry budget adviser, sent to City Hall an eight-page report that recommends an immediate hiring freeze, urges the city to appropriate funds for deficit reduction and chastises the Barry administration for spending too little on public safety while creating new programs and jobs in other areas.

The report comes as the council prepares to vote June 23 on Barry's midyear supplemental budget request, which contains the proposed income tax increase.

"Neither the mayor nor the council nor the Congress want to face up to the facts," said Dearborn, who was Barry's financial counselor in 1981, the year after the District raised taxes, increased water rates and laid off hundreds of employes to offset a hefty deficit.

This year, the accumulated deficit left from those days is still more than $200 million, and Barry has proposed postponing this year's scheduled repayment installment. In his report, Dearborn warned of the return of the "budgetary bad habits" that brought about the 1980 crisis and predicted that future midyear supplemental budgets also could be accompanied by tax increases.

"The problem is not revenue," Dearborn said in an interview. "There's ample money coming in to the District. It's . . . the purposeful efforts to add programs and employes that are causing the problem."

Dearborn's report appeared on the desk of every D.C. Council member last week as well as in the in-boxes of the Barry administration budget officers who have been defending the mayor's supplemental budget against frequently hostile council scrutiny.

Council members have made clear that they loathe the very thought of a tax increase. At one budget hearing, John A. Wilson (D-Ward 2) questioned agency heads about the cost of paper clips and stamps. At another, Betty Ann Kane (D-At Large) chastised a top official by inquiring whether she lived in the District. When the official said she didn't, Kane snapped: "Then you don't have to worry about people's taxes, do you?"

All of this is a little melodramatic, including Dearborn's conclusions, according to city Budget Director Richard C. Siegel.

"The city's budget process . . . does not have a crystal ball," he said. Special programs such as the $15 million Operation Clean Sweep drug eradication program, which was not introduced until after the 1987 budget had already passed, added unexpected costs to this year's budget, he said.

That explanation doesn't wash with some council members. Said Wilson: "If you didn't perceive the cost of it when you initiated it and didn't budget for the cost of it when you initiated it, then you were mismanaging the government, period."

But Siegel said that talk of continuing tax increases, hiring freezes and the return of the unbalanced budgets that precipitated the 1980 crisis is "pure, intergovernmental politics."

If the 1988 budget is uncertain, Siegel added, it is because yet-unnegotiated pay raises for city employes could add millions of dollars to the city's budget needs.

"If there are tax increases it will be because of the pay raises," said Siegel. "The city has a limited tax base, limited resources and a number of needs."

The $17.9 million income tax increase plan, he said, is considered to be a one-time only event, but he does not rule out increases caused by future midyear budget alterations.

Wilson and Council Chairman David A. Clarke have targeted underspending by agencies as the most likely way to cut. An unbalanced budget, Clarke said, "looms large in our future" because of ballooning expenses for the corrections department, the transfer of St. Elizabeths Hospital from federal to local control, continuing personnel growth and unfunded pension liabilities.

"I've taken the approach where I'm not raising any more money," Wilson said. "A lot of people in the council are taking that position. The taxpayers are angry.

"You've got to separate the fiscal from the political if you're being responsible," he said. "Even a liberal government must pay its bills."