President Reagan yesterday delivered to his Cabinet a spending plan for the next fiscal year that includes a 5 percent pay cut for civilian federal employes, elimination of the Small Business Administration and a one-year freeze in automatic inflation adjustments in all indexed benefit programs except Social Security.
That freeze would include such programs as food stamps and federal aid to the needy aged, blind and disabled. There also would be deep cuts in spending on college student aid, grants to cities and farm price supports, among other programs.
A federal pay increase of 3.5 percent next month will be allowed to go into effect, White House officials said. Under Reagan's proposed budget for fiscal 1986, federal paychecks, including those of civilians working at the Pentagon, would be cut 5 percent in January 1986, although there could be pay raises in years after that. Congress is likely to resist the federal pay cut.
The budget also includes a one-year delay in cost-of-living adjustments and other retrenchments in federal retirement benefits.
Reagan has not decided whether to freeze military pay and pensions, officials said.
Overall, the proposal Reagan gave his Cabinet would save $34 billion in fiscal 1986, $60 billion in 1987 and $75 billion in 1988. This means that Reagan is still significantly short of his goal of cutting the deficit in half, to $100 billion, by fiscal 1988. Further savings are expected to come from the Defense Department, but Reagan has yet to decide how much.
Sources said, however, that the key defense-spending issue is whether to adopt a plan by Office of Management and Budget Director David A. Stockman that would slow the projected defense buildup by $8 billion in fiscal 1986, $20 billion in 1987 and $30 billion in 1988.
Defense Secretary Caspar W. Weinberger is expected to argue especially against the reductions for 1987 and 1988 when he returns from Europe next week, officials said. They think he is not likely to fight as hard against the $8 billion proposed cut for fiscal 1986.
One senior official said it was significant that the amount Reagan is still short from his deficit-cutting goal is almost exactly the amount that Stockman is proposing be trimmed from defense in later years.
A second official said that even if Stockman's plan were adopted -- and it has support in the White House and among many Cabinet members -- the president still would need more domestic spending cuts to reach his deficit goal of $100 billion in 1988. All budget projections assume neither a tax increase nor Social Security cut; Reagan has ruled both off limits.
Reagan took the unusual step yesterday of presenting the budget to his Cabinet as a group and appeared to leave little room for appeals.
"Look for more areas where savings might be possible," Reagan was quoted as saying by White House spokesman Larry Speakes. "All contributions will be gratefully accepted."
An official present said there were surprisingly few objections from Cabinet members given that many of their departments and programs would be cut. "There was very little questioning," the official said.
Reagan, in remarks to the Cabinet, said he would move against the deficit in two ways, "sustained economic growth without inflation and additional spending reductions," Speakes said.
Some of the spending reductions under discussion are cuts in absolute dollars from year to year; others are simply cuts in the rates of growth that would occur in programs absent some action by the president and Congress.
The administration now estimates that the fiscal 1986 deficit will be about $206 billion, up from an estimate of $174 billion several months ago. Reagan's aim is to trim $42 billion from this for a deficit next year of about $170 billion.
To accomplish this without a tax increase, he must hold next year's overall spending almost exactly at this year's level, $835 billion when interest on the national debt is not counted, or $968 billion if interest is included.
Because some programs such as Social Security and defense are slated to grow, many others will have to be cut if overall spending is to hold steady.
"We must get control of federal spending," the president was quoted as saying. "Our goal is to bring the deficit down from where it is, which is 5 percent of GNP gross national product , to 4 percent of GNP in fiscal 1986, 3 percent of GNP in fiscal 1987 and 2 percent of GNP in fiscal 1988."
But a White House official noted that Reagan will not come close to those goals if he discards the Stockman proposal for defense cuts, given the other areas of the budget that have been put off limits.
The recent slowing of the economy has complicated budget-cutting by reducing federal revenues and increasing the deficit. Treasury Secretary Donald T. Regan said yesterday that the slowdown had resulted in a net revenue loss of $9 billion in the third quarter of this year and is expected to produce a $14 billion revenue falloff in the final quarter of 1984.
Stockman emphasized to a group of incoming Republican congressmen at the White House yesterday the symbolic importance of holding total spending next year below the $1 trillion mark that it would exceed if no action is taken, according to the congressmen.
Stockman later yesterday gave a separate group of House Republicans an overview of the president's budget decisions, using a chart showing that the deficit is persisting despite the economic recovery.
The spending plan Reagan delivered to the Cabinet includes:
* A one-year "freeze" in the cost-of-living adjustment in railroad retirement, black-lung benefits, food stamps, Supplemental Security Income and veterans compensation and pension programs. "Freeze" means that, although inflation is expected to be 4.4 percent next year, the spending would remain the same.
In the case of three other programs also adjusted for inflation -- federal civilian pay, federal civilian pensions and child nutrition -- there would be cuts that would be deeper than just a freeze. In the case of child nutrition, however, these cuts would only affect those children receiving what Stockman called "upper-income subsidies," the rest would experience a freeze.
* A one-year "freeze" in federal aid for handicapped and disadvantaged education, as well as for vocational, elementary and secondary education and public broadcasting. A number of programs already "frozen," such as the government's social services block grant, would remain so. There would be changes in eligibility in college student financial aid that would target it on the neediest students, and cuts in federal aid to libraries and in federal job training and employment programs.
* Elimination of the Small Business Administration and urban development action grants to cities. There would be cuts of varying amounts in community development block grants, sewer grants, revenue sharing, postal subsidies, rural electrification subsidies, Amtrak subsidies, and low-income weatherization assistance.
* Highway grants would be cut. These grants are financed entirely by user taxes, and then apportioned from the Highway Trust Fund to the states. The total apportionment is more than $13 billion this year and is projected to increase to $16.5 billion in 1989. But fiscal experts say the trust fund is expected to run into the red by the end of the decade. A spending reduction, as Reagan apparently is proposing, would keep the fund solvent without additional taxes. Reagan would cut some mass-transit subsidies, but not those paid out of the recent increase in the gasoline tax.
* Other programs to be targeted for "reforms" with some savings include Medicare, Medicaid and aid to families with dependent children, the main welfare program. There would also be cuts in subsidized housing; rural water and sewer programs; veterans' health and housing; farm price supports; the strategic petroleum reserve; foreign economic aid, and operations of the National Aeronautics and Space Administration. There may be a stretch-out of NASA's manned space station project, but it would not be eliminated, officials said.
* Elimination of the Export-Import Bank's program of subsidized lending in 1986. Under the administration proposal, the bank would be left with only responsibility for guaranteeing and insuring loans to support overseas sales by American companies.
* Reagan apparently would freeze but not cut further the "Superfund" program to clean up toxic waste, and airport and airways system.