Officials are breathing easier these days at Cambridge City Hall after putting finishing touches on the $159.3 million fiscal budget for 1985, submitted to the city council this week.

In his annual budget message, City Manager Robert W. Healy said that for the first time since voters approved the tax-cutting measure Proposition 21, in 1980, Cambridge complies with its stringent limitations on the city budget.

"There are no real strains on any department" in next year's projections. Budget Analyst John Flynn said last week.

According to the city manager's report, budget figures for fiscal year 1985 exceed last year's revised estimates by almost $9 million. The increased expenditures will probably require a "slight increase" in taxes next year, including a nine cent hike in water bills, the report said.

Among those areas slated for financial improvement in 1985 are the city's public safety division, where the budget allocates funding for 10 more uniformed police officers, three more fire personnel, and the lease or purchase of 14 new police vehicles, the report added. Cambridge police have not purchased any new vehicles in three years, said Sullivan.

Healy's budget also designates $1 million for the creation of a pension reserve fund for city employees and another $1 million--net reflected in the $159.3 million budget--for a brand new "pay-as-you-go" capital improvements fund.

The money from this fund will pay for city wide construction, requests for equipment, and maintenance costs of streets, sidewalks, and playgrounds. Assistant City Manager Richard Rossi said yesterday.

Massachusetts voters approved Proposition 2 1/2 in 1980. in an attempt to decrease state property taxes. The measure calls for cities to reduce taxes until they reach the 2 1/2 percent mark.

For municipalities which formerly taxed property at about 15 percent, the limitations in most cases meant substantial revenue losses, with resulting cutbacks in budgets and services.

Cambridge, however, recently finished a complete reassessment of all real estate in the city which added about 60 percent to the value of each property. This reevaluation enabled Cambridge to collect about the same amount of revenue from property taxes, while complying with the lower tax rates mandated by Prop. 2 1/2.

The city council is expected to approve the 1985 budget by May 14 after a series of open hearings with the city manager and department heads. Since the council can only cut items from the budget, it must go through the city manager for increased expenditures.