THE FOREIGN AID program is being ground up by the budget process. Just about everyone agrees the appropriated funds aren't enough to support U.S. policies abroad and are poorly distributed besides; too large a share -- nearly 40 percent -- goes to Israel and Egypt. Other recipients, equally worthy, are being pushed aside.

The administration's response is that, here as with defense, Congress should extract the necessary funds from other areas of government -- domestic programs. But these have already been pretty well plucked, and the Democrats rightly say that the president should finance his defense and foreign policies with a tax increase. The foreign aid budget has thus become a hostage in the larger dispute over fiscal policy.

Until that is settled the proper course would be to reallocate the funds now available, to spread the shortage. But Congress and the president each find it useful to chide the other for squeezing the vulnerable recipients, and neither can bring itself to propose a cut for Israel. An example occurred in the markup of the current foreign aid appropriations bill last week. Subcommittee chairman David Obey proposed minor cuts in aid from last year's levels for both Israel and Egypt -- for Israel, $36 million out of a $3 billion total; for Egypt, $26 million out of $2.1 billion. He did it not for great and lofty policy reasons, not even particularly in the name of fairness, but, as he himself admits, in an old-fashioned effort to circumvent the congressional accounting rules and get a larger program for a smaller appropriation.

Some appropriations, including aid to Israel and Egypt, are spent relatively quickly, others not. Under the rules, Mr. Obey could appropriate more if he shifted money from fast-spending accounts to slow, and that's what he was pro-posing. The small amounts taken from Israeland Egypt, plus some other such maneuvering, would have translated into about $765 million more for other beneficiaries, he estimates.But the chairman says that 1) the administra-tion balked and 2) so, as the word leaked out,did any number of congressmen, who begged him not to put them on the rack with his proposal, which he finally dropped. It was not an inspiring sho