Give President Reagan credit. Instead of sticking with diehard supply-side theory, Jack Kemp-style, he has conceded what a lot of his critics were saying two years ago: if you persist in cutting revenues (by lowering the tax rates) at the same time you increase expenditures (especially for defense), not only will deficits be inevitable, but they will get progressively larger.

Faced with what his friend, Sen. Paul Laxalt, calls "terrifying" budget deficit numbers for the years 1985 through 1988, Reagan has decided-- with reluctance--to recommend a package of tax increases to go into effect if budget deficits turn out to be as gross as now predicted.

It is a concession to reality, and a move away from untenable theory. Whether, in the end, this fallback program will be enough to deal with the problem remains to be seen. So far, Reagan has ruled out tinkering with the July installment of the Kemp-Roth tax cut--and, given the deep recession, that is a sensible decision.

But whether Reagan can stick with the tax-indexation system that is scheduled to come into play beginning in fiscal 1985 is another matter.

In some ways, tax-indexation can be considered the crown jewel of Reaganomics. It would adjust the tax brackets to the rate of inflation, making sure that no one pays higher taxes merely because inflation had raised his or her pay. In effect, tax indexation perpetuates the annual tax-cut ritual set in motion by the Kemp-Roth tax-reduction act.

If actually introduced in 1985, indexation will cost about $8 billion in tax revenues. But by fiscal 1987, indexation would add $35 billion to the annual deficit, and could be much higher in later years, according to experts on the Hill.

The combination of excessive tax reductions and mighty increases in defense outlays has brought the U.S. economy to its knees. It was inevitable that the budget would spin out of control with a fiscal policy that created $732 billion in tax cuts through fiscal 1986, as well as a $1.5 trillion boost in defense outlays (which the right-wing Heritage Foundation this week said underestimated the real cost of the defense program).

"Nobody believes this budget will ever get balanced," New York banker Robert V. Roosa told me as far back as August 1981. "Therefore, interest rates will continue to go up. But it's a real Catch-22 situation: if the Fed should ease its pressure to keep money tight, the markets would conclude that a new inflation would be triggered."

Wall Street's hardheaded assessment, reflected in the Reagan bear market in stocks and bonds in 1981, was considered by the Reagan administration as verging on the unpatriotic. But gone now is the Laffer Curve nonsense that had some people believing tax rates could be slashed in this way--and that revenues would magically increase. Last year, in response to the fading hopes that Reaganomics would succeed, $99 billion worth of the 1981 tax cut was recouped in the 1982 tax and reform bill.

But it's become clear that more needs to be done. Not only has the worst recession in 50 years--created by that excessively tight money policy--reduced the income base on which taxes are levied, but the Reagan tax cuts and spending increments ensure an underlying or "structural" deficit that no economic recovery can offset.

That's why indexing has to be abandoned--or at least drastically modified--and defense spending cut back, along with sizable reductions in the growth of entitlement programs, including Social Security and government pension programs.

Almost no one challenges Reagan's contention that it would be unwise to raise taxes this year: that would only worsen the recession.

But the prospect of annual budget deficits in the $200 billion or more range for an indefinite period is intolerable--and the Reagan team of advisers has made that clear to the White House. Deficits of that magnitude, the president has been told, will put Fed policy in a straitjacket. Paul Volcker (or whoever may succeed him at mid-year) won't be able to let interest rates slide further down--and lower interest rates are critically needed to restart a cycle of business expansion.

This is the delicate fix that Reaganomics has got us into: the recession bars putting tax hikes and spending reductions into force now. But if the later-year deficits aren't cut back, interest rates will go up, aborting chances for a real recovery. The answer, ultimately, is to trade a tighter fiscal policy for an easier monetary policy. If Reagan and Congress can strike this kind of deal, there may yet be light at the end of the tunnel.