(FORTUNE Magazine) – Say this for the Administration's budget proposal: As announced at the end of January, it would not do major harm to the economy. Trouble is, there's no telling what Congress will add when it makes its inevitable contributions. In that sense, the deadline President Bush set for action on his putative growth- boosting measures is unfortunate. Better he should have urged the legislators to take their time. As Senator Robert Dole said when leaving the White House after a preview of the budget: ''If we are still arguing about our growth package in June, July, and August, the economy is going to turn around on its own.'' Granted, there's scant sign of a rebound now. Real GDP in the fourth quarter of 1991 grew at an insignificant 0.3% annual rate. Outlays for defense dropped more sharply than expected, partially offsetting stronger net exports. Indicators for this year's first quarter are still few and mixed. Early January sales of domestic cars were disappointing, forcing the manufacturers | to trim assembly schedules. New claims for unemployment insurance climbed in the middle of the month. And orders for capital goods declined in December, erasing increases of the previous two months. On the other hand, personal income -- a key to recovery -- registered a hefty 0.5% gain in December, even excluding special subsidies to farmers and bonuses to auto industry workers. Despite the weaknesses still gnawing at the economy, a recovery worthy of the name will finally be evident by midyear. Growth of the GDP will average a 3% annual rate in the second half. FORTUNE agrees with Federal Reserve Chairman Alan Greenspan that any larger fiscal stimulus than the President proposed would do more harm than good. The two notable initiatives the Administration has seized won't do much for growth. Bush's order that the Department of Transportation should quickly disburse appropriated funds for highways and transit projects will help some state and local governments. But White House claims that this and accelerated payouts from other departments will add an extra $10 billion to the economy in the next six months seem exaggerated. Some of the speedup has already occurred -- federal grants jumped in the fourth quarter -- and many municipalities are building about as fast as they can. Give the Administration credit for ingenuity in the surprise withholding- schedule changes, aimed at raising take-home pay immediately. The cuts will be automatic, unless a taxpayer chooses to decline the offer, and they are supposed to put some $25 billion in consumers' pockets over the next year. But they don't win much praise from economists. ''Where did this idea come from?'' asks Mickey Levy, chief economist of CRT Government Securities. Along with many others, Levy questions whether people will even notice the relatively small additions to income as much as they will the absence of the refund come April 1993. The withholding gambit could even be a small negative for the economy. At first glance it seems like a relatively cheap stimulus. By the time taxpayers get smaller refunds or bigger tax bills, the economy should be strong enough to withstand the dampening effect. But Cornell University behavioral economist Richard Thaler worries that it will reduce savings in the years ahead. Says he: ''This is short-term thinking at its worst.'' The reason people overwithhold is that they want it that way, he says -- ''They like getting a lump-sum refund. It helps them save.'' Now they won't have this help. Nobody knows how many are likely to bother with filing the complex W-4 form required to undo the changes. For the rest of his game plan, President Bush faces off with a feisty Congress. Debate is likely to drag on while Congress settles on the price it will extract for his long-sought reduction in capital gains taxes. Still, the election makes a compelling deadline, so fiscal 1993 might actually start with a budget in place -- a rarity in recent years. Whenever the budget does emerge, it will probably include some of the less controversial proposed prescriptions for the long-run health of the economy (see Politics & Policy). An investment tax allowance will do some good. So should enhanced tax benefits for R&D. Spending by American multinational companies on R&D is considerably more sensitive to small changes in taxes than economists have generally assumed, according to James R. Hines Jr. of Harvard's Kennedy School of Government. In a study just published by the National Bureau of Economic Research, Hines estimates that the curbs on deductions in the 1986 tax law reduced America's R&D spending as much as $2.2 billion a year -- in return for $1.2 billion in added tax revenue. On balance, the President's budget purports to stay within the guidelines of the 1990 deficit agreement. The Administration's estimate for the fiscal 1992 shortfall comes to $285.1 billion, excluding deposit insurance, vs. $202.4 billion in fiscal 1991. The nonpartisan Congressional Budget Office will render its own judgment after studying the myriad revenue and spending proposals. Suffice it to say that this Administration has probably behaved the same as all its predecessors, turning every estimate to advantage. But Congress poses the bigger risk of trampling the budget agreement by shoving back too hard with its own growth strategy. If the name of the game is sustained growth, Washington is definitely a dangerous playground.

Nevertheless, FORTUNE hopefully sticks to the assumption of a minimal-damage budget that shaped our base forecast for the coming year and a half. The final package should preserve enough of the budget agreement to prevent a rebound of inflation expectations in bond markets here and abroad. Most important, the perceived need for stimulus will begin to fade as the recovery becomes apparent by midyear. Even without a bigger tax package than we assume, the federal deficit will grow this year (see chart). Chalk up over half the expected $70 billion $ increase to the artificial narrowing last year when foreign governments paid for the American materiel used in the Gulf war. Another $20 billion or so is the result of the recession. During fiscal 1993, the economy and the earlier budget agreement will be squeezing the deficit down again. Revenues should grow more than 5%, despite tax cuts. At the same time, the rise in outlays will slow, led by a sharp 6% decline in real defense spending and the absence of those payments from abroad. While Congressmen and Senators try to concoct fiscal stimuli, elected officials back home are working in the opposite direction. Most states and localities have laws precluding deficit financing and have been raising taxes and cutting spending to work off operating deficits. When social insurance funds are included, these governments have been increasing their surpluses for the past year. Nevertheless, Washington still outspends them by a country mile -- meaning that the fiscal drag from their cutbacks that has worried some economists is hardly noticeable. It will increase when the federal deficit starts to shrink later this year. By then, however, the economy should be strong enough to cope.

BOX: OVERVIEW

-- Don't expect a jolt from the President's package. -- The deficit will shrink again during fiscal 1993. -- Real GDP will grow at a 3% rate in the second half.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART CAPTION: FEDERAL GOVERNMENT THE PEACE DIVIDEND As more military equipment is mothballed, like these F4s in Tucson, Arizona, the decline in defense spending will help slow the growth of federal outlays. Receipts will grow faster as the economy picks up steam.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART CAPTION: THE SLIDE IS ENDING The recession has raised the federal deficit, but recovery will stanch the bleeding. State and local governments have added taxes and cut spending. State & local surplus Federal deficit