In a caption yesterday, Diane Fraser of Cox Newspapers was misidentified. (Published 2/20/88)

The unspoken message of the budget that President Reagan sent to Congress yesterday is that much of the big federal government created during the 1960s and 1970s will survive the Reagan revolution.

But a huge budget deficit will also survive, leaving Reagan's successor little room to maneuver, especially if he wants to expand the federal government's social role.

The Reagan legacy diverges sharply from the rhetoric of Reagan's first inaugural address, when he denounced the evils of deficits and decried government spending as the source of the economy's ills.

Reagan's budget for his last year in office envisions a federal establishment that, in its broad outlines, is remarkably similar to the governmental structure he found when he came to office in 1981.

True to the two-year agreement he struck with congressional leaders in November, Reagan proposes only marginal domestic spending cuts in his fiscal 1989 submission.

The result is a document showing that, while Reagan has slowed growth of domestic spending and tilted priorities significantly in favor of defense, the bedrock programs of the New Deal and the Great Society are enduring -- even thriving in some cases -- at the end of an extraordinarily conservative administration.

For example, the budget projects fiscal 1989 outlays for two of the biggest and best-known Great Society programs -- Medicare and Medicaid -- that are 70 percent higher than their 1980 levels, after adjustment for inflation.

But those programs grew less rapidly than they would have without some Reagan-era changes. And other programs, notably federal grants to localities and subsidies for economic development, have been cut substantially. So have some programs for the poor, including low-income energy assistance and subsidized housing. In addition there has been a tightening of standards for some programs such as Aid to Families with Dependent Children.

But the outcome hardly matches the expectations generated in 1981, when Reagan's top aides spoke confidently of rolling back the legacy of Lyndon B. Johnson, or in 1985, when opponents of the Gramm-Rudman-Hollings law warned that the law's stringent fiscal restraints would lead to a "gutting" of social programs.

The situation is especially frustrating to many conservatives because they believe the programs that have weathered the Reaganite assault are more entrenched than ever.

"After eight years, the welfare state has emerged intact, and it is probably stronger for having retained its claim on the federal treasury," said John F. Cogan, a scholar at the Hoover Institution and a former senior official at the White House Office of Management and Budget.

Yet Reagan's impact on the shape of government is certain to last far beyond his tenure, making him in some ways a three-term president. His successor will find it extraordinarily difficult, budget experts agree, to undertake expensive new social programs aimed at dealing with, say, homelessness or improved child care.

Reagan's success in dampening the public's desire for an expanded federal role will provide some of the spending constraint on his successor.

But more important will be the deficit, which reached a record $221 billion in fiscal 1986. OMB projects that the deficit will shrink substantially, to $129.5 billion in fiscal 1989 and $104.2 billion in fiscal 1990. But using a less-optimistic economic forecast that is closer to the expectations of private analysts, the Congressional Budget Office projects deficits of $160 billion and above in the next several years.

"I hear all these presidential candidates talking about education and other things. I say, where are you going to get the money?" said Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee.

The idea of getting the money by raising tens of billions in taxes appears to be playing poorly with voters. The presidential candidate who most strongly advocated higher taxes, former Arizona governor Bruce Babbitt (D), withdrew yesterday. Babbitt "seems to have done nothing but inspire warm feelings among editorial writers," said Kirk O'Donnell, president of the Center for National Policy, a Democratic think tank.

The upshot of the Reagan legacy, some analysts fear, may be fiscal gridlock, in which conservatives are unable to slash domestic programs, liberals are unable to expand them or start new ones and, as a result, the deficit remains stubbornly high.

In a new book, scholars at the Urban Institute warn that the deficit "is like a debilitating disease," and not only because it entails massive government borrowing that mortgages the nation's economic future. The deficit has also "weakened government's ability to undertake important initiatives," the authors write.

John L. Palmer, a fellow at the institute, said, "In the extreme, we are moving more toward a government that is writing checks to the aged, providing for the national defense and delivering the mail."

The administration, not surprisingly, sees its legacy in a much different light. Budget Director James C. Miller III said he is particularly proud of the fact that overall spending adjusted for inflation fell in fiscal 1987 from the prior-year level, the first time in 14 years such a thing had happened. "I'll tell my grandchildren," Miller said.

As for Reagan's failure to balance the budget, Miller noted that the president had achieved most of his other goals, such as reduced inflation, a bigger military and lower tax rates. "Nine out of ten ain't bad," Miller said.

In a 19-page historical chapter contained in the budget released yesterday, the administration credits itself with having achieved "a substantial restructuring of federal outlays" during the 1980-87 period, with government "now devoting more of its resources to basic national priorities" while "lower priority domestic programs . . . have been curtailed."

The figures cited in the chapter do show some major shifts within the budget. Outlays for defense rose over 50 percent in real (inflation-adjusted) terms, while "discretionary" spending -- domestic programs such as energy and transportation that do not involve benefits to individuals -- fell 35 percent.

Some discretionary programs have been decimated, the chapter shows. Reagan persuaded Congress to kill general revenue sharing, for example. Lawmakers agreed to slice, by nearly half, federal grants to communities to spur economic development. Outlays declined even more sharply for rural development programs -- Farmers Home Administration wastewater treatment plants, for example. These fell by three-quarters in real terms.

But the discretionary programs represent a relatively small and shrinking share of the budget -- 16 percent in 1987. Increasingly, the category is dominated by government services such as law enforcement and air traffic safety that are discretionary on paper alone.

Where Reagan has enjoyed considerably less budget-cutting success is in the big "entitlement" programs, which provide benefits to whomever qualifies and which now account for more than 42 percent of outlays.

In 1981, the president did induce lawmakers to tighten eligibility requirements for food stamps and other entitlements for poor people. In 1983, he gained important modifications in Social Security and Medicare aimed at keeping costs from rocketing out of control.

But entitlements, especially those for the middle class, have grown substantially, in part because of inexorable trends such as the aging of the population and soaring cost of medical care.

Nevertheless, many of the Reagan budget savings caused real pain to real people, a disproportionate number of them poor. The 1981 spending cuts deprived a number of low-income workers of health-care coverage by rendering them ineligible for Medicaid.

Despite the Reagan spending cuts, many Democrats said they believe the most-enduring legacy of the Reagan era will be a government hobbled by debt. "What you end up with is that the Reagan years represented another version of 'guns and butter,' " said Rep. Leon E. Panetta (D-Calif.), who is expected to chair the House Budget Committee in the next Congress. "The Democrats emphasized butter. Reagan emphasized guns. Both approaches end up borrowing."

To finance the Reagan revolution, the government added $500 million a day to its debts.

In yesterday's budget document, OMB blamed the deficit on two factors: the 1981-82 recession, which caused tax revenues to fall much faster than expected, and the fact that federal domestic spending is too high "on any reasonable basis." Reagan's budget message to Congress warned that continued high deficits "could precipitate rising inflation, interest rates and unemployment."

But administration officials, both past and present, said the president came to regard the deficit as a necessary evil. Reagan never intended to create the deficit, they said, but once it grew he saw the budget gap as a way of keeping Congress from resuming its free-spending ways of the 1970s.

But the red ink made it tougher for Reagan to achieve some of his fiscal goals, according to the Hoover Institution's Cogan. "The deficit made it harder to continue the buildup in defense, and to get funding for SDI {Strategic Defense Initiative}," Cogan said.

The upshot is a bleak fiscal landscape, with defense and domestic discretionary spending already squeezed. If the next president quickly raises taxes and cuts entitlements, then "he might have a chance to gain the resources for other priorities toward the end of his first term," Panetta said.

Such fiscal prudence from a leading Democratic lawmaker is music to the ears of administration officials. OMB's Miller exults that Reagan has "thrown cold water in the face" of those who favor increasing taxes and domestic programs.

"Would he like to get rid of a lot of {existing} spending? You betcha," Miller said. "Some may call that a failure. But I don't believe the Democrats are going to nominate someone for a damn long time who will say, 'I want to raise your taxes.' "

----------------------------- 1980 ---------- 1987

------------------------------- SHARE ------------- SHARE

PROGRAM -------------- OUTLAYS- OF GNP ----OUTLAYS- OF GNP

Medicaid...............$14.0....0.5%.......$27.4....0.6%

AFDC, Food Stamps,

other means-tested

programs for poor.......32.6....1.2.........46.5....1.1

Social Security........117.1....4.4........205.2....4.7

Medicare................33.9....1.3.........79.9....1.8

Other retirement and

disability..............31.5....1.2.........49.2....1.1

SOURCE: Congressional Budget Office

After seven years of the Reagan administration, the basic building blocks of the welfare state are still intact.

1) Reagan did cut many budget categories substantially and eliminated a few programs . . .

PROGRAMS AFFECTED 1980-87

1. Urban and

...community development..Cut by 45%

2. Rural development...Cut by 74%

3. General revenue

...sharing................Eliminated

4. Public Health

...Service hospitals......Eliminated

5. Conrail.............Sold

6. Comprehensive Employment

...and Training Act.......Replaced by smaller program

7. Energy technology,

...other nondefense applied R & D

.......................Cut by 35%

NOTE: Shows inflation-adjusted cuts.

SOURCE: Office of Management and Budget

2) . . . but he shifted resources to other areas to which he attached high priority.

PERCENTAGE OF INCREASED FUNDING, 1980-87

1. All spending.......UP 23%

2. Defense............UP 52%

3. Law enforcement....UP.36%

4. National Science Foundation,

...other basic scientific research

......................UP 39%

SOURCE: Office of Management and Budget

3) A huge federal deficit stifled the development of new programs . . .

DEFICIT IN BILLIONS OF DOLLARS

4) . . . And as a result of the burgeoning deficit, the national debt has skyrocketed, causing federal interest payments to zoom.

................... ...............FEDERAL

................... ..............INTEREST

................... ..............PAYMENTS

..................... ......... 1980 .. 1987

As share of federal outlays ... 8.9% .. 13.8%

As share of GNP ............... 2.0% ... 3.1%