The Budget: Hey Guys, Get Real

President Bush says he wants to cut the deficit in half by 2009. Here's why that's not likely to happen

Under increasing pressure from conservatives, George W. Bush, a man not known as a penny-pincher, is seeking to make fiscal restraint a centerpiece of his fiscal 2005 budget. After three years of surging deficits, Bush is sounding like an old-school GOP budget hawk. "With spending restraint and continued pro-growth economic policies, we can cut the deficit in half over the next five years," he says.

Bush's Feb. 2 fiscal blueprint indeed proposes to cut the deficit in half by 2009. And, if it were adopted, it would effectively freeze funding for one high-profile chunk of domestic spending for the next five years. But critics argue that in the end, as they say in Texas, the President is all hat, no cattle.

Why? For starters, the budget does nothing to trim massive spending on entitlements, by far the largest chunk of federal spending. Instead, to hit his deficit target, Bush relies on a five-year freeze on the much smaller spending that goes into hundreds of domestic programs, such as law enforcement, environmental protection, housing, and education.

FIVE-YEAR PLAN. Yet even that is largely illusory, given that Congress has never accepted that level of restraint. Even less realistic: The budget calls for no additional funding for Iraq and Afghanistan after Sept. 30, even though the nonpartisan Congressional Budget Office figures reconstruction of the two war-torn countries could cost $50 billion and continued occupation will cost at least an additional $20 billion a year.

Perhaps most misleading, Bush is offering up a five-year budget rather than the traditional 10-year plan. In doing so, he is hiding the long-term costs of last year's Medicare drug law, big future hikes in Pentagon spending for non-Iraq-related projects, and the impact of his latest $1.3 trillion tax-cut plan. Indeed, the President's latest plan includes the $990 billion cost of making his '01 and '03 tax cuts permanent as well as $300 billion in new subsidies for saving and buying health insurance. But less than 20%, or about $200 billion, of the revenue drain will take effect through 2009. The rest will occur in 2010-14 -- meaning ballooning deficits just past the horizon of the five-year budget estimates.

So how serious are Congress and the President about deficit reduction? Politicians will come to blows over a handful of fiscal matters in the coming months. Pay special attention to battles over two major bills -- one to build and repair highways, airports, and mass transit; the other a long-awaited energy bill aimed at providing subsidies to domestic producers with the stated goal of reducing reliance on foreign oil. And don't forget the fight over Bush's proposed tax cuts.

Capitol Hill conservatives are putting heavy pressure on Bush to restrain spending even more than he has proposed. And, already, rising deficits have opened a major rift within the GOP. On one side, hardliners such as House Majority Leader Tom DeLay (R-Tex.) see the deficit as a wedge into the issue they really care about -- shrinking the size of government. On the other, traditional fiscal conservatives such as Senator Olympia J. Snowe (R-Me.) favor government spending for domestic programs but worry about red ink. Then there are the lawmakers whose main concern is protecting home-state projects. The GOP chairmen of both the House and Senate Appropriations Committees are warning that they can't pass Bush's freeze.

With an election looming, most Democrats and many Republicans prefer to avoid chopping popular programs. "It's going to be a very difficult budget year," says House Budget Committee Chairman Jim Nussle (R-Okla.).

The first test of fiscal credibility will come when Congress acts on a massive six-year transportation bill. House committees favor spending $375 billion. The Senate is debating a $318 billion version. But the Administration warns that Bush will veto any measure that costs more than $256 billion. There is little chance Congress will O.K. less than $285 billion. So in any my-way-or-the-highway showdown with Bush, who has yet to veto any spending bills, bet on the highway to win.

A second test will come once debate on the long-delayed energy bill starts again. Bush initially asked for $20 billion in production incentives. That has ballooned to $31 billion as a result of added congressional pork. The White House is trying to trim the measure. But unless lawmakers scale it back to $20 billion or less, it will be hard to claim fiscal discipline.

Then there are taxes. There's no chance Bush will win approval of his full $1.3 trillion tax package. But GOP lawmakers will push to make permanent a fistful of middle-class breaks that were first adopted in 2001 but due to expire over the next few years. They include marriage-penalty relief, an increase in the child credit, and a temporary fix to the painful alternative minimum tax. But if Congress is serious about deficit reduction, it will have to ditch much of the tax package

NICKELS AND DIMES? Already, legislators are looking at finessing the Bush budget. One strategy: delay key spending votes until after the elections. Another idea is to grant Bush's total $800 billion-plus spending request for all nonentitlement programs but shift funds from defense to domestic priorities. Congress would still give Bush the money he wants for the Pentagon -- but in a later supplemental bill of about $50 billion. In the yearend confusion, the President could take credit for holding down spending, while getting all the money he wants for defense.

But even if such a strategy succeeds in holding spending down in 2005, it is unlikely to have much impact on long-term deficits. That's because the programs the President wants to freeze represent barely one-fifth of the budget, making his newfound deficit concerns seem illusory at best. Environmental protection, crime prevention, and the like may be important to many Americans, but they don't cost much -- at least not by Washington standards. Of the $2.4 trillion that Bush would spend in '05, these domestic programs account for just $485 billion. "This is not the problem," says Robert L. Bixby, director of the Concord Coalition, an anti-deficit group.

The real money is in defense -- which will cost nearly $428 billion next year, even without Iraq -- and the entitlement programs such as Medicare, Medicaid, and Social Security. The big three will soak up a staggering $1 trillion next year. And, says the CBO, they will cost more than $1.4 trillion a year by 2010.

To put it another way, Washington will be arguing over a mere $10 billion in domestic programs. By contrast, Medicare spending will increase by more than twice that next year -- even before a costly new drug benefit kicks in. "Spending will not be brought under control until entitlements are seriously reformed," says Heritage Foundation budget expert Brian M. Reidl. "You can't nickel-and-dime your way to balancing the budget."

Not that $10 billion doesn't matter. And fiscal responsibility needs to start somewhere. But Bush's budget -- and the likely congressional response to it -- will prove to be little more than election-year gamesmanship. It may help Bush, who could claim progress toward fiscal restraint. And it will allow lawmakers to campaign with new ribbons to cut. What the budget gymnastics won't do, however, is reduce the deficit by very much.

By Howard Gleckman, with Paul Magnusson and Stan Crock, in Washington

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