Calling for a record $2.9 trillion in spending while using rosy revenue projections to soften the fiscal impact, President George W. Bush aims to increase military spending to near-record levels and to adopt expensive tax cuts, while making modest reductions or holding the line on domestic programs such as education and health.
The White House hopes to spur alternative-energy research and use with an extra $20 million for ethanol research. The budget also adds new user fees at airports and industry fees on generic drugs while cutting subsidies to farmers and student lenders. (see BusinessWeek.com, 02/01/07, "Ethanol: Too Much Hype—Corn")
The Bush Administration projects that healthy tax receipts and a strong economy will help reduce deficit spending from $244 billion this year to $239 billion in fiscal 2008, predicting the U.S. will balance its budget by 2012. "The federal deficit is declining and on a path to elimination," Bush said. "With continued strong economic growth and spending discipline, we are now positioned to balance the budget by 2012, while providing for our national security and making tax relief permanent."
Cuts in Medicare and Medicaid
Yet Bush, who struggled to get an all-Republican Congress to endorse many of his spending priorities over the last six years, has little to no chance of getting the Democrats who now control both houses of Congress to approve his budget package for fiscal year 2008, which begins Oct. 1.
"I would characterize this proposal as filled with debt and deception. It's disconnected from reality, and it continues to move America in the wrong direction," House Budget Chairman John Spratt (D-S.C.) told reporters. House Speaker Nancy Pelosi (D-Calif.) called Bush's 2008 plan "more of the same fiscal irresponsibility and misplaced priorities."
Democrats railed against the President's calls to curb spending on higher education, Medicare, and Medicaid, the health-care program for the poor and disabled. Bush's plan calls for $77 billion in funding cuts for the two health-care programs over the next five years and $280 billion over the next 10 years.
No Fix for the AMT Problem
Republicans, meanwhile, argued that Bush's budget would help keep the U. S. economy strong. House Minority Leader John Boehner (R-Ohio) says Republican tax relief has helped expand the U.S. economy, created millions of new jobs, and boosted federal revenues. Former House Rules Chairman David Dreier (R-Calif.) endorsed Bush's plan to shrink deficit spending by expanding the economy. "Republican pro-growth policies have slashed the deficit in half in just two years and led to historic revenue growth and the creation of more than 7 million new jobs in the past three and a half years," he says.
House Minority Leader Roy Blunt (R-Mo.) calls for bipartisanship in a Congress more known for partisan gridlock. "This is a great opportunity for Republicans and Democrats to work together to eliminate the deficit and bolster economic growth," he says.
Democrats complained that the President, while opposing tax increases, balances his budget with a backdoor tax increase on the middle class through the Alternative Minimum Tax. The AMT was created decades ago to prevent the wealthiest of Americans from avoiding a minimum of taxation, but over the next decade it will cost tens of millions of middle-class families billions and billions of tax dollars. Democrats want to fix it, saying they want to protect hard-working Americans. The White House thinks it's too expensive to fix and simultaneously achieve a balanced budget. No permanent AMT fix is included in Bush's budget. Budget watchdog the Center for American Progress estimates that some 30 million people will get caught by the AMT by 2010.
Congress is likely to increase the education budget by significantly more than the small hike proposed by the President.
Bush's priorities prompted some Democratic lawmakers to complain that the White House was trying to balance the budget on the backs of the poor, the young, and the elderly. "The President has proposed spending billions of dollars on more tax breaks for high-income individuals, while raising taxes on middle-income families…and reducing our ability to meet important priorities like education [and] health-care," says Senator Chris Dodd (D-Conn.).
House Democratic Caucus Chairman Rahm Emanuel of Illinois says: "There is no clearer sign of the President's misplaced priorities than asking our seniors to sacrifice while leading the largest expansion of American resources in Iraq this country has seen."
But such rhetoric doesn't mean that Bush's budget blueprint is irrelevant. Several of the President's budget goals match those of Capitol Hill Democrats—though they achieve those objectives through very different means.
A Boon for the Pentagon
First, both Bush and congressional Democrats hope to eliminate the deficit in five years. Of course, the President wants to do it with no new taxes and massive increases in military spending, while Democrats want to roll back some of Bush's tax cuts and rearrange his spending priorities. Democrats will insist on—and are likely to get—more money for college aid, early childhood programs such as Head Start, as well as health and technology research.
Second, the budgets of domestic agencies are certain to be squeezed. Under Bush's plan, they will get an average of 1% more than last year, despite inflation and population increases, according to budget director Rob Portman. Democrats will say that that amounts to a cut, but because of the budget constraints, they're unlikely to spend much more.
Third, the Pentagon will be the big winner under both parties' plans. While Democratic Presidential candidates rail against the war, most Democratic lawmakers are unwilling to cut spending for troops on the battlefields. Instead, they may squeeze other Pentagon spending, such as the funds needed for the next round of military base closures and consolidations. The bottom line, however, will not substantially change the President's upward trajectory in defense spending. Bush asked for $481.4 billion for the Defense Dept., in addition to an extra $93.4 billion for the wars in Iraq and Afghanistan this fiscal year and $141.7 billion for next year.
Farmers Face Subsidy Cuts
Democrats, however, say the President doesn't budget for the long-term costs of the Iraq and Afghanistan wars. The White House says you can't predict the distant future—and its budgetary implications. Democrats also accuse the President of low-balling current costs. They say the White House estimate of $6 billion for the "surge" in Iraq understates the likely cost by at least 50%. Conrad accused the White House of a "continuing deception about our real fiscal condition."
Fourth, the President and the congressional Democrats both favor a continuing strategy to rein in pork-barrel spending, known as earmarks. Democrats last month adopted a moratorium on earmarks through the 2007 fiscal year. The President wants Congress to reduce earmarks by 50%. On this issue, they can do business.
And fifth, rural America could face cuts. The President is proposing a reduction in agriculture spending. While some farm state Democrats, including Senate Budget Committee Chairman Kent Conrad of North Dakota, will object, the urban- and suburban-centered Democratic majority may go along to some degree with trimming farm subsidies.
The good news: Bush is reaching out to Democrats, including his appearance in Williamsburg, Va., at the House Democrats' retreat on Feb. 3. "I'm under no illusions of how hard it's going to be," Bush said. "The only thing I want to share with you is my desire to see if we can't work together to get it done."