December 31, 1984

When the House and Senate open the 99th session of Congress Thursday, legislative leaders say the biggest issue they will face is the Federal budget deficit - the same big issue they have faced each of the last four years. Once again the same question will be asked: Can the deficit, which Congress and the Administration have sought to cut each year since 1981, be reduced? Since 1981, when the deficit was $57.9 billion, the red ink total has steadily grown, reaching a record $195.4 billion in 1983 and threatening to top $200 billion in 1985. House and Senate leaders in both parties have said that reductions in the deficit are their top legislative priority and that they are willing to work with President Reagan. Sharp Clashes Seen as Likely This cooperative tone is important, particularly because leaders say any deficit-reduction package must be approved quickly. But it is still likely there will be sharp clashes with the White House, first over the military budget, and possibly over the specifics of any domestic spending cuts.

Almost everyone in this town of 2,100 people knows E. W. Dixon as a first-rate farmer. Most would describe John Killgore in the same way. But after his experiences of the last few years, Mr. Dixon is not so sure, despite the 3,500 sleek hogs he fattens on the farm he has expanded to 720 acres. ''This situation,'' he said, looking out over his frozen fields the other day, ''sort of shakes your confidence.'' What few here realize is that Mr. Dixon has spent many sleepless hours thinking about the farm debts that piled up while his land values were slipping away, or that Mr. Killgore has begun to wonder whether his independence is worth the work and worry of years like the last three, when he spent $30,000 more than he received for the grain and livestock he produced.

The new year will bring a host of Federal tax changes that will simultaneously produce a reduction in personal income taxes, an increase in Social Security taxes and extra record- keeping headaches for millions of taxpayers. The most prominent change will be the automatic adjustment, or ''indexation,'' of the income tax for inflation. The historic change, resulting from the Economic Recovery Tax Act of 1981, means that Americans will no longer be forced to pay taxes on increases in income that have merely kept pace with the cost of living. The inflation adjustment of 4.08 percent will mean a reduction in income taxes for those whose income gains fall short of the inflation rate. Others would still end up paying less than they would have in the absence of indexation.

President Reagan will meet with Japanese Prime Minister Yasuhiro Nakasone in Los Angeles on Wednesday but it is unlikely that he will make specific demands for Japan to narrow its trade deficit with the United States, according to Administration officials. Despite the growing concern of American officials over the trade imbalance, the aides predicted a low-key meeting that would emphasize the friendship and cooperation between the two allies. However, the talks could lead to meetings of Cabinet officials of both countries who would sit down together in coming months to consider specific actions to reduce the deficit, both American and Japanese officials said. Dollar's Strength Cited Many analysts here and in Tokyo believe that so long as the dollar remains high-priced relative to the yen - making American products less competitive than Japanese goods - only limited progress is possible in cutting the deficit. The trade deficit with Japan is projected at more than $30 billion this year and $40 billion in 1985.

In what appeared to be the most important shake- up in China's General Staff in years, 40 officers at corps level or above - equivalent to at least three-star generals in the United States - have responded to insistent prodding and have retired. The retirements were made public Saturday. They appear to mark a major step forward for the Government in its drive to rid the aging officer corps of veterans who have resisted the campaign of Deng Xiaoping, China's paramount leader, to get the four-million member armed forces out of politics and into a more modern approach to warfare. For more than five years Mr. Deng has been maneuvering to rid the military of holdovers from the Mao Zedong era who typically favor baggy uniforms, plastic sandals and concepts of soldiering rooted in the guerrilla campaigns conducted by the Communists 40 years ago.