GOV. Paterson and state legis lative leaders announced yesterday that they’ve agreed to use most of New York’s unfettered federal stimulus money to restore spending to the governor’s budget and to avoid any further spending cuts.

The result will be to partially reinflate an unsustainable budgetary baseline—and thus expand the budget gaps in the years ahead.

Of course, that’s not the way they put it. Instead, the governor’s press release headlined an “agreement to eliminate $1.3 billion in planned tax increases.”

But do the math: Paterson’s proposed tax-and-fee hikes came to over $4 billion. Yesterday’s deal affects only one-third of that amount.

Meanwhile, the state’s share of the so-called “State Fiscal Stabilization” portion of the stimulus—a virtual block grant from Washington—will approach $5 billion for 2009-10. Paterson, Assembly Speaker Sheldon Silver and Senate Majority Leader Malcolm Smith have now agreed to use just over one-quarter of that amount to avoid higher taxes and fees.

So, what will they do with the remaining three-quarters of the cash? Well, as they learned this week, they’ll need $370 million to fill a hole left by the collapse of the Aqueduct Raceway casino-development deal. And they’ll need to cover another $1 billion in falling tax receipts.

That still leaves more than $2 billion for other purposes.

Now consider this: Not counting the governor’s baseline reduction in school aid (which separate provisions of the federal stimulus will largely restore), the cost-containment and baseline-spending cuts in Paterson’s original budget plan came to about $3.7 billion.

In leaving two-thirds of his tax and fee hikes on the table, the governor has just taken a giant step toward conceding lawmakers the use of stimulus funds to reverse more than half of the noneducation spending restraint he originally proposed.

Meanwhile, Speaker Sheldon Silver is still widely expected to propose some form of “millionaire tax” on top of that (although Paterson, as of yesterday at least, was still rejecting it).

It doesn’t have to be this way. State Senate Republicans last week proposed an alternative budget plan that would use the stimulus money to avoid any tax or fee increase. (Even if you assume that the GOP plan relies on some creative accounting, you can drop its ill-advised restoration of the school property-tax rebate, and there’s another $1.7 billion in breathing room.)

Since the federal stimulus only extends through Fiscal 2010-11, why is it more responsible to use this temporary money to hold the line on taxes rather than increase spending? The answer: Further annual spending hikes only compound the structural budget gap, making the future problem bigger.

That is, most of the added spending would represent an increase of the previous spending trend in areas like health care—which has been rising at a simply unaffordable pace.

A dollar in avoided tax hikes will add less to future gaps than a dollar of added spending—and it will help avoid any further dampening of New York’s already hammered economy.

As the Senate GOP has shown, a balanced 2009-10 state budget without tax hikes is feasible. So why won’t the Democrats who now control both houses of the Legislature join their governor in doing just that?

Because their aim isn’t only to restore some of the spending removed by Paterson. Their apparent goal—notwithstanding Silver’s assertion that his colleagues know “deep cuts have to be made”—is to loosen the budget belt a lot more.

At this rate, next year’s State Funds spending increase will come to 4 percent (counting the stimulus as a temporary “spe- cial revenue-other” replacement, rather than as a permanent federal aid formula increase). The budget increase could be considerably more, depending on whether legislators roll Paterson on the income-tax issue, and on how they choose to spend any resulting increase in revenues.

New York is deep in recession, with employment and personal income falling sharply—and Wall Street, the former heart of the state’s revenue base, in a shambles. For the state’s leaders to goose spending in this environment would be incredible—but sadly, not surprising.