Let the horse trading begin

Yes, the president's serious about his budget, but look for some serious deal making first

Author: Kenneth T. Walsh; Matthew Benjamin; Angie Cannon

Published: February 21, 2005

The sturm und drang in Washington was deafening, and neither side seemed willing to back down. "We said we would invigorate our economy by giving people greater freedom and incentives to take risks and letting them keep more of what they earned," the president boasted, in announcing his budget. "We did what we promised, and a great industrial giant is reborn." But the critics condemned him for using phony economic assumptions, slashing important domestic programs, spending too much on defense, cutting taxes too deeply, and risking calamity by ballooning the deficit to unheard-of proportions.

All this happened 20 years ago, when Ronald Reagan proposed the first budget of his second term. The numbers in February 1985 were much smaller than today's--Reagan's $ 974 billion budget provided for a deficit of "only" $ 180 billion. But the battle lines were similarly drawn. And then as now, no one really expected Congress to pass the president's budget in its original form, and the predictions were right. "It's an iridescent dream, almost a product of fantasy," says Rutgers political scientist Ross K. Baker. "President Bush's budget is a provocative document but rather mendacious, and people don't have any difficulty figuring it out." Adds Ken Duberstein, former White House chief of staff to Reagan: "The president's budget is going to be adjusted. The give-and-take is just beginning. This is equivalent to the kickoff at the Super Bowl."

But this particular game is certain to be tougher, because Bush's proposed $ 2.57 trillion budget for 2006 is arguably further out of whack than any offered in recent years. He omits costs for the occupation of Iraq and Afghanistan, long-term expenses for the war on terrorism, and planned changes in the alternative minimum tax, each of which is expected to cost at least tens of billions over the next five years. He assumes that all discretionary spending beyond domestic security and the military will be frozen for five years. He wants to make permanent the massive tax cuts of his first term, further starving the government for money.

From all this alchemy, White House officials claim the deficit in 2006 would be $ 390 billion, down from $ 427 billion this year, and would gradually narrow to reach $ 233 billion in 2009. In another measure preferred by some economists, the deficit supposedly would decline from 3.6 percent of the nation's gross domestic product to 1.5 percent in 2009. This would allow the president to say he kept his promise to cut the deficit in half.

"The elephant in the room." But skepticism about the administration's credibility deepened last week when Bush advisers admitted that the Medicare prescription drug benefit will cost more than he projected when Congress passed it in 2003. Back then, the administration estimated the cost at $ 400 billion over a decade. The latest forecast is $ 724 billion. And Bush's proposal to partially privatize Social Security has down-the-road fiscal implications as well. The White House estimates that the transition to private investment accounts would entail borrowing $ 100 billion to $ 150 billion a year for 10 years, starting in 2009. "The deficits in the last few years have become the elephant in the room," says Democratic pollster Geoff Garin. "They have defined the fiscal reality of the Bush second term. Deficits are becoming symbolic for how we have mortgaged our future. It's becoming a pretty powerful feeling in the electorate." Only 32 percent of respondents approved of Bush's handling of the deficit in a January CNN/USA Today/Gallup poll.

In some ways, the perils of the deficit are worse than ever. Says Robert Bixby, executive director of the Concord Coalition, a private group devoted to deficit reduction: "We are 20 years closer to the retirement of the baby boom generation, which gives us less time to pull out of them [deficits] before we have this big demographic shift. We have huge fiscal challenges about to hit the budget. "

Edwin Truman, senior fellow at the Institute for International Economics, also warns about challenges ahead if the deficits aren't restrained. As domestic savings are depleted, interest rates could eventually rise, driving down stock and bond prices, all of which would slow the U.S. economy, he says. If the world lost confidence in U.S. economic policies, the dollar could collapse. This could cause a recession. "It may not be the most likely scenario," says Truman, "but it's what the president and Congress should be thinking about as they draft budgets."

Perhaps more than anything else, Bush's budget is a political document. Bush wants to show he is compassionate but frugal at home, while strong on defense and tough against America's enemies abroad. To this end, Pentagon spending would increase by 4.8 percent to $ 419.3 billion under Bush's plan--not including money for the wars in Iraq and Afghanistan. Among the programs targeted for cuts are Medicaid and agricultural subsidies.

If homeland security, defense, and other international programs are funded at the levels Bush has proposed, then funding for domestic discretionary programs such as education, veterans' healthcare, and environmental protection would need to be cut in 2010 by about $ 66 billion, or 16 percent below 2005 levels, according to the liberal-oriented Center on Budget and Policy Priorities.

Yet Stan Collender, managing director of the Washington office of Financial Dynamics, a communications firm, says Bush may have included too many cuts in programs supported by his allies: "Bush has created a lot of questions among congressional Republicans as to his commitment to their re-election."

Squeeze play. Bush's political problem is that while the critics are using the budget to rally their troops, few of his allies are running to his colors. Fiscal conservatives are fretful about the red ink, and other conservatives are upset at the costs of new initiatives like the prescription drug entitlement. This dynamic is different from the one Reagan faced, because he never lost credibility as a conservative. As a result, many congressional Republicans will be tempted to go their own way rather than remain loyal to a president who seems more interested in his legacy than their survival.

Follow the Bouncing Deficit

The president's budget proposes to reduce the deficit from 3.6 percent of the national economy (gross domestic product) in 2004 to 1.5 percent, meeting his goal of cutting it in half by 2009. Economists beg to differ.

President Bush

The administration's proposal does not include costs for wars in Afghanistan and Iraq, the privatization of Social Security, and reforming the Alternative Minimum Tax. It assumes no rise in discretionary spending outside the military and domestic security.

Brookings Institution

Economists William Gale and Peter Orszag include making the tax cuts permanent, fixing the AMT, and increasing discretionary spending to reflect population increases.

Concord Coalition

This nonpartisan budget watchdog group includes war costs, AMT relief, and increasing appropriations with GDP.

Stan Collender

This independent budget analyst includes costs of war, extending tax cuts, AMT reform, and increasing appropriations by inflation.

Sources: OMB; Brookings Institution; Concord Coalition; Stan Collender

Graphic by Rob Cady--USN&WR

GRAPHIC: Picture, Treasury Secretary John Snow (right) at the House Ways and Means Committee (CHARLIE ARCHAMBAULT FOR USN&WR); Chart, Follow the bouncing deficit (Brookings Institution; Concord Coalition; Stan Collender; Graphic by Rob Cady--USN&WR)