President Carter's decision to increase defense spending sizably the next several years has reduced prospects for a tax cut in the January budget and is likely to mean less room for growth in domestic programs in future years.
Although final decisions have not been made, administration officials say they are counting in financing next year's higher defense spending from extra tax revenues that will be generated as a result of inflation.
At the same time, they conceded that if Congress then cuts taxes the year after next, as most observers expect, the higher projected defense outlays could absorb some $25 billion a year from the money that otherwise could go for domestic programs.
Officials say Carter will ask Congress in January for $142 billon for defense spending in fiscal 1981, a jump of $14.6 billion from the current year and a rise of 3.5 percent after adjustment for inflation.
For fiscal 1982 and later, defense spending would increase about 4 percent a year after accounting for inflation.
Carter's decision to boost defense spending over the period was endorsed by most of his major rivals in the 1980 presidential race except for his leading Democratic challenger, Se. Edward M. Kennedy (D-Mass.).
Kennedy, campaigning in Denver, told reporters he would "support" Carter's call for "a 3 percent increase next year," but said "the question about the outyears is something we'll have to examine like any other federal program."
Kennedy also noted "there's a good deal of speculation that this request is being made to gain more votes for SALT. I don't think that's an adequate justification," he said.
However, Republican presidential candidate Ronald Reagan said he was "delighted" by the president's decision "if he really means it," noting that he and other conservatives have been advocating a big defense spending boost for years.
George Bush, another GOP candidate, also endorsed the proposed increase but questioned if "the president's decision was made out of conviction" or simply "to buy enough votes to pass a SALT II agreement."
And Senate Minority Leader Howard H. Baker (R-Tenn.) proclaimed the president "absolutely correct" in decideing to boost defense outlays, but called for simultaneous reduction in spending for cruise missiles.
A fourth GOP candidate, Rep. John B. Anderson (R-Ill.), declined comment on Carter's plan until he has time to study it further. However, Anderson expressed "concern over the inflationary impact that a large increase . . . would have."
Carter indicated in outlining his defense spending plans Wednesday that the increases were designed to bolster the U.S. military posture in the face of a continued buildup of Soviet forces and turmoil in such places as Iran.
The immediate impact of the defense boost is expected to be modest. Carter already had planned to raise defense outlays by 3 percent after adjustment for inflation in fiscal 1981. He now is calling for a 3.5 percent rise.
However, the effect on the overall budget in future years is likely to be substantial.
Financing the extra defense outlays in fiscal 1981 should not be especially difficult. Carter's top economic advisers have been leaning against a tax cut anyway. The need to underwrite the defense boost is strengthening their case.
However, both administration and congressional leaders are known to believe that even if they forgo a tax cut this coming year Congress will have to cut taxes in 1982 to offset the "drag" on the economy caused by rising tax burdens.
That means there would be less room in the budget in fiscal 1982 and later to provide for growth in domestic programs -- a squeeze amounting to as much as $25 billion, according to rough estimates.
At that time, the president would have the choice of crimping domestic programs further, enlarging the budget deficit or perhaps siphoning monies from the proposed tax on oil, assuming it passes Congress this year or next.
However, analysts noted that the oil tax now being considered by Congress would not begin to yield large amounts of revenue each year until 1984 or later.
Part of the extra oil tax revenues would be earmarked for spending on energy projects.
As a result, the most likely impact would be to restrict the growth of domestic programs, officials say.