President Reagan yesterday sent Congress a $1.09 trillion budget whose outlines were approved by Capitol Hill in last year's agreement on deficit reduction, but which will still provoke some disagreements on domestic-spending priorities and defense cuts.

The president's fiscal 1989 budget, which effectively represents his last -- but sharply circumscribed -- opportunity to recast government spending and tax policies that he vowed to revolutionize upon taking office seven years ago, proposes significant increases in spending for education, science and space, AIDS research, drug interdiction and law enforcement and the nation's air traffic control system.

On the basis of more optimistic economic assumptions than those projected by the Congressional Budget Office, the president's budget would leave a federal deficit of about $130 billion, $6 billion under the deficit target set for the year by the Gramm-Rudman-Hollings budget law. In an election year, however, Congress appears more than willing to wink at what many consider deception.

"You are now engaged in the phantom of the budget," said Sen. Ernest F. Hollings (D-S.C.).

In compliance with the budget summit agreement, Reagan is asking for the lowest defense-spending increase that he has ever sought. The $299.5 billion in Pentagon spending authority called for in the budget would not keep pace with inflation and would require reductions in troop strength and abandonment of the administration's cherished goal of a 600-ship Navy.

Though the spending plan includes fewer of the hardy perennials that Congress has repeatedly rejected -- such as the elimination of the Legal Services Corp. -- it does propose broad cutbacks in spending on mass transit, public works, sewage-treatment plants and economic development that will come under close scrutiny by the Democratic-controlled Congress. It also calls for the kind of wholesale program eliminations that Congress has historically rejected, including abolishing the Interstate Commerce Commission, the Economic Development Administration, Amtrak rail subsidies and Urban Development Action Grants. {Related article, Page A17.}

The budget proposes a major expansion of the administration's efforts to privatize government functions -- from selling the Naval Petroleum Reserve to studying the transfer to the private sector of some postal services and the government's uranium-enrichment program. Those, too, are likely to be controversial on Capitol Hill.

Though most tax questions were settled last year, the budget does propose to make permanent a tax break that allows mutual fund investors to avoid taxes on the funds' operating expenses.

Despite the expected skirmishes, congressional budget leaders greeted Reagan's budget with little of the partisan rhetoric that has traditionally accompanied his spending plans in past years, when the president invariably asked for more military spending and sharply lower domestic expenditures than Congress was willing to approve.

Senate Budget Committee Chairman Lawton Chiles (D-Fla.) called it a "good faith budget" that is consistent with last year's deficit-reduction agreement.

His House counterpart, Rep. William H. Gray III (D-Pa.), predicted battles over some domestic-spending proposals but said "now we have a fight over priorities, not just over whether there will be a federal government."

Whatever disputes ensue, Hollings said, will be largely "intramural" and of little consequence, "like tying two cats by the tail and throwing them over the clothesline."

The relative calm with which Congress received the budget reflects the November agreement with the administration that followed the Oct. 19 stock market plunge.

That two-year agreement locked in a $76 billion reduction in the federal deficit to be achieved by tax increases totaling $23 billion and a variety of spending cuts, user fees and asset sales to achieve set spending targets for defense and domestic programs.

Referring to that agreement in his budget message, Reagan said, "I am . . . keeping my part of the bargain. I ask Congress to do the same."

Congressional leaders, relieved to avoid another prolonged budget fight with the administration in an election year, have vowed to uphold the agreement and act quickly on the budget and the appropriations measures needed to implement it. The accord, said House Majority Leader Thomas S. Foley (D-Wash.), "will facilitate speedy action."

That spirit of conciliation is likely to prevail unless the economy's performance over the next seven months falls short of the administration's forecast, an event that could force a new round of deficit cutting or automatic budget cuts under the Gramm-Rudman-Hollings law.

The $130 billion deficit projected in president's budget would be $16 billion below the level that would trigger that law's automatic spending cuts.

However, the administration's forecast assumes more economic growth and less inflation than projected by the nonpartisan Congressional Budget Office. The CBO's "current services" analysis -- which reflected the budget summit agreement but did not include the policy changes proposed by the president's budget -- recently projected a fiscal 1989 deficit of $176 billion.

However, under the Gramm-Rudman-Hollings revision of last year, it is the Office of Management and Budget's forecast that counts. If that agency's August analysis shows that the budget will meet the deficit target, there will be no requirement for further deficit reductions or automatic cuts in spending.

The budget accord also eliminated the usual battle over Pentagon expenditures by setting military-spending authority at $299.5 billion for the fiscal year that begins Oct. 1. That represents an increase over this year of $8.1 billion, $33 billion less than Reagan last year indicated he would seek for fiscal 1989.

Implicitly warning Congress against any deeper cuts, Defense Secretary Frank C. Carlucci yesterday said that any further economizing on the national defense would further reduce the power of U.S. forces to deter the Soviets from starting a war.

At the same time, Carlucci said the budget will not hollow out the Army, Navy, Air Force and Marine Corps. He said he is staying within its targets by making those forces smaller but giving them a big punch through modern weapons and skilled manpower.

"President Reagan and I believe that this budget preserves the common defense," Carlucci said in his 325-page defense report to Congress, "but we agree as well that it forces us to accept greater risks than we think wise." Striking a conciliatory tone toward Congress in contrast to the combative stance of his predecessor, Caspar W. Weinberger, Carlucci pleaded for cooperation to avoid a "return to the cycles of feast and famine that have plagued long-range defense planning."

In cutting "force structure" of all the services for the first time since Reagan took office in 1981, Carlucci would shrink the active duty military by 36,000 soldiers, sailors, aviators and Marines.

To maintain high morale in the smaller force, Carlucci is asking for a 4.3 percent military pay raise, costing $2.2 billion. Carlucci vowed to "come on very strong" in fighting for the raise, which is more than double the 2 percent increase other government employes would receive.

Carlucci's proposals are certain to provoke some controversy in Congress. "There will be substantial arguments on the Hill with reference to individual services, weapons systems and the like," said Sen. Pete V. Domenici (N.M.), the ranking Republican on the Senate Budget Committee.

Reducing "force structure" would save $3.2 billion in the military budget. Half of the remaining $33 billion cut from what the anticipated request would come from canceling or retiring weapons, saving $14.5 billion in the procurement account. Even here, however, some of the weapons programs were already in trouble in Congress.

Carlucci did not touch the hottest political potato, closing military bases, in his first budget as secretary but said such actions should be taken to save money.

In apportioning money to weapons for deterring or waging nuclear war, Carlucci is asking for $1 billion over two years to make the MX missile mobile, but in the face of congressional resistance, lowered his sights for the Strategic Defense Initiative antimissile system. He requested $4.64 billion for it in fiscal 1989 instead of the $6.3 billion projected this time last year, a drop of $1.7 billion.

Other budget highlights include:An increase of $1.5 billion in education spending, the first time Reagan has proposed a significant boost for an agency he used to vow to dismantle. This would be an 8 percent increase, to $20.3 billion. $11.5 billion for nonmilitary space programs, an increase of $2.5 billion that includes $1 billion for the manned space station and more spending to return the shuttle to a regular flight schedule. $1.3 billion to combat AIDS, up from last year's request of $791 million, which Congress increased to $951 million. An 11 percent cut to $4.8 billion for the Environmental Protection Agency, the biggest reduction coming in grants for construction of sewage-treatment plants, which would be given just $1.5 billion. That is expected to provoke a fight with Congress, which has authorized $2.4 billion for the grants. A 13 percent increase, to $3.9 billion, for enforcement of drug laws and for treatment programs. $363 million to begin building the Superconducting Supercollider.

Staff writer Don Phillips contributed to this report.

OUTLAYS IN BILLIONS OF DOLLARS SHOWN BY FISCAL YEAR ...................1987...1988...1989...1990....1991....1992.....1993










Deficit......... 70..... 3.... 17..... 26..... 25...... 28...... 28

PERCENT OF GROSS NATIONAL PRODUCT Receipts........19.4%...19.3%..19.2%...19.4%...19.5%....19.4%....19.5% Outlays.........22.8....22.4...21.8....21.3....20.9.....20.3......19.8 Deficit..........3.4.....3.1....2.6.....1.9.....1.4......0.8.......0.4

National Debt...43.0....43.0...42.8....41.9....40.5.....39.0......37.2

SOURCE: Office of Management and Budget