Federal spending will have to be cut by 4.6 percent during the current fiscal year for numerous domestic programs under the Gramm-Rudman-Hollings deficit-reduction act, according to budget analysts.
The cuts will have to be made at a higher annual rate -- about 8 percent -- for many programs whose appropriated money is spent early in the fiscal year, according to this analysis. This is because the cuts become effective March 1 and are spread over the remaining seven months of fiscal 1986.
Because so many parts of the budget are exempt from the cuts, and because of great variations in the speed with which different programs actually spend money, the short-term impact of Gramm-Rudman-Hollings will be far less evenhanded than generally realized.
Under Gramm-Rudman-Hollings, declining deficit targets are set that would lead to a balanced budget by 1990. If spending exceeds those targets, cuts would be automatic, although many major programs such as Social Security would be exempt, and other programs could be cut only to certain limits. That would mean that unprotected programs must bear the brunt of the cuts.
The new law's requirements are certain to be triggered this year with a prospective federal budget deficit of at least $30 billion higher than the Gramm-Rudman-Hollings target of $171.9 billion.
In fiscal 1987, the target is $144 billion, compared with current estimates of a deficit of more than $200 billion, unless Congress and the president can agree how to slash spending or raise revenue.
If the fiscal 1987 budget gap turns out to be about $60 billion, some defense and nondefense programs would have to be cut by one-third to one-half, possibly even more, under the automatic cutting provisions of Gramm-Rudman-Hollings.
"The mechanical cuts in outlays which the bill mandates to meet deficit targets are almost certainly unworkable," said former Council of Economic Advisers chairman Alan Greenspan of Townsend-Greenspan & Co.
"The best that can be expected is that the prospect of across-the-board spending cuts, probably deeper for fiscal year 1987 than envisioned now, will create pressure for a tax-spending deal between Congress and the president," Greenspan said.
While the 1987 situation remains murky, there is little question about what will happen this March. According to estimates by congressional budget specialists, many domestic programs will have to be trimmed about 4.6 percent. Other domestic programs will see only a small cut in 1986 because of various exemptions and cutting formulas, but will have larger cuts in later years. Some defense programs will also be cut significantly more than others this year.
Almost three-fourths of the budget -- more than $700 billion in fiscal 1986 -- is exempt from cuts, according to estimates by the House Budget Committee. Earlier estimates by some observers put the exempt share much lower because they did not include the $178.5 billion worth of outlays that the government has legally obligated itself to make this year out of appropriations made in prior years. Of that total, about $100 billion is in defense, the remainder in domestic programs, such as highway construction, in which obligations run well ahead of actual spending.
Of the roughly $265 billion in spending that is not exempt in 1986, the law limits this year's cuts to $11.7 billion over the seven months beginning in March -- the equivalent of a $20 billion cut spread over the entire fiscal year.
Eliminating cost-of-living adjustments (COLAs) on federal civilian and military retirement benefits would account for $1.3 billion of that total.
That leaves $10.4 billion of reductions to be divided equally between defense and domestic programs.
On the domestic side, a set of specifically limited cuts in other COLAs, health and "special rules" programs, such as government student loans, accounts for another $1.1 billion.
That leaves $4.1 billion, 4.6 percent of the remaining $89.1 billion of eligible domestic spending that must be cut.
For defense, $5.2 billion must be cut, but that comes out of a much larger amount of eligible spending, about $173.5 billion. That would be a 3 percent cut.
All of these figures are estimates for outlays in the 1986 congressional budget resolution. The figures will change somewhat when the effects of the appropriation and reconciliation actions taken by Congress this week are calculated.
But Congress sets program levels and appropriates money in terms of budget authority, not outlays. Since many programs involve multi-year obligations, budget authority appropriated in a given year often is larger than the amount of money that will actually be spent that year.
In budget jargon, some programs -- say, a salary and expense account at the Department of Housing and Urban Development -- have a much faster "spend-out" rate than the Urban Development Action Grant program. The former may spend 100 percent of its appropriation in the first year while only 10 percent of the UDAG money flows out in the first year. The remaining UDAG money may be obligated but it will not be spent until later years.
With a spend-out rate of only one-tenth in the first year, actual UDAG spending for 1986 would be cut by only about half of 1 percent -- that is, by 10 percent of 4.6 percent.
For a salary and expense account, all paid out in one year, outlays will have to fall by the full 4.6 percent.
Because of the late start for this year's cuts, according to these calculations, cuts in defense budget authority will have to be made at more than a 5 percent annual rate. The same adjustment for domestic programs indicate cuts in budget authority -- and in outlays for many programs -- at nearly an 8 percent annual rate.
Congressional budget sources said that the basic division of the budget into exempt and nonexempt portions would be about the same next year as it is for 1986. Moreover, the amount of money to be saved by eliminating COLAs, cutting the "special rules" programs and doubling the allowed cut in health programs to 2 percent, would still add up to only about $3.3 billion.
By many estimates, current spending and revenue projections show a 1987 deficit of $200 billion or higher. President Reagan has committed himself to proposing a budget next month that will include a deficit that meets the Gramm-Rudman-Hollings target of $144 billion. But many of the cuts he will propose have been rejected in the past by Congress, and Reagan this week strongly reiterated his opposition to any sort of tax increase.
Unless there is an economic boom that floods the Treasury with unexpected revenue, and nothing else is done to change current spending and revenue tracks before next October, Gramm-Rudman-Hollings would mandate cuts of more than $50 billion, in addition to those in COLAs and other areas. Half of that, or more than $25 billion, would fall on nonexempt domestic programs, likely about $90 billion.
The amount of defense spending available to be cut in 1987 may be somewhat higher than the $173.5 billion estimated for this year, congressional budget sources said. Taking more than $20 billion out of perhaps $180 billion would be about an 11 percent cut.
This is the sort of arithmetic that leads so many financial analysts to believe that Gramm-Rudman-Hollings will never be allowed to function unless an agreement can be reached on major cuts and revenue increases before its provisions come into play.
"The feeling in financial markets is that they will have to come up with more money," said Scott Pardee, an economist with Discount Corp. of New York, a government-securities dealer. "The politicians have said no, but one way or another they have got to have at least another $20 billion or $30 billion.
"Gramm-Rudman won't work. It's just too brutal," Pardee declared.