The Fog of the Budget
By Howard Gleckman
In his Feb. 2 State of the Union address, George W. Bush laid out the overarching goals of his second term -- building a stable, friendly state in Iraq and remaking the Social Security system with individual investment accounts. The President's ambition may know no bounds, but at the opening of his remarks, he acknowledged that a federal budget that has been gushing rivers of red ink will have to be dealt with in a second term.
"America's prosperity requires restraining the spending appetite of the federal government," he said. "The principle here is clear: A taxpayer dollar must be spent wisely, or not at all."
Stirring words, to be sure, but as the time comes for Bush to put numbers behind his aggressive agenda, the usually bold President is likely to become uncharacteristically reticent. In the $2.5 trillion budget he plans to present to Congress on Feb. 7, the President will say hardly a word about the cost of his most important domestic and foreign initiatives. Instead, he'll trumpet spending cuts that may grab headlines but will have little impact on the tide of red ink that Bush has ridden since 2001.
TRILLIONS NOT BILLIONS.
White House budget writers of both parties have a long history of fiscal gimmickry. In 1981, President Ronald Reagan relied on a "rosy scenario" -- optimistic economic assumptions -- to show he could shrink deficits while cutting taxes. President Clinton never liked to propose cutting programs right away. Instead, he'd promise to trim such spending in future years but leave the actual cuts to Congress -- the better to shift the blame.
And as Social Security moved from balance to deficits to cash cow, Presidents have moved it on and off the budget to suit their needs. But those tricks hid mere billions of dollars. Bush's new spending plan will mask trillions.
This budget -- which will cover fiscal years 2006 through 2010 -- will largely ignore the costs of Bush's own top priorities, including Iraq, restructuring Social Security, and taming the Alternative Minimum Tax. Nor will it reflect the long-term costs of making his 2001 and 2002 tax cuts permanent, which will largely occur starting in 2011. At the same time, it will spotlight initiatives that are unlikely to save much money, such as effectively freezing spending on most domestic programs or slowing the growth in federal funding for Medicaid, the joint federal-state health program for the poor.
Such legerdemain will allow Bush to claim that he will meet his goal of slicing the deficit in half by fiscal 2009, the last budget he'll propose. But in reality, it will obscure an agenda that is likely to generate ever-larger deficits over the coming decades. "It will show how tough the President can be on [some] spending," says Robert L. Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates balanced budgets. "But to leave out Social Security, the AMT, and the war costs and say you have a plan to cut the deficit in half over five years is beyond chutzpah."
Administration officials insist the omissions are justified. While Bush described his ideas for Social Security in his State of the Union speech, the White House doesn't yet have a specific plan to cost out (see BW Online, 2/3/05, "The State of Social Security"). And, Bush insists, the price of the Iraq war can't be estimated in advance. "The President is making clear he will put resources behind [his] vision," says a White House official. "But it's not appropriate to stick in numbers plucked out of thin air."
But Social Security aside, there's little disagreement on the price of other key items on Bush's agenda. If the costs of Iraq, AMT relief, and making tax cuts permanent were included, the projected deficit in 2009 would be closer to $400 billion than the $250 billion Bush is likely to cite. Over the next 10 years, those three items could add almost $3 trillion more to the national debt than Bush's budget will claim, according to the nonpartisan Congressional Budget Office. Even if Bush froze most domestic spending over the decade, he'd still add an extra $2 trillion in debt.
As a result, Bush's budget resembles Swiss cheese -- and the holes may be more interesting than the substance. Start with Iraq. On Jan. 24, Lieutenant General James J. Lovelace Jr., the director of Army operations, said that for budget planning purposes, the Pentagon was assuming the U.S. would maintain current troop levels in that war-torn country at least through calendar 2006. The CBO figures the price tag at $70 billion a year. But the Bush budget will not include any new money to keep U.S. troops on the ground after Sept. 30, 2005.
The Administration acknowledges it will ask for $80 billion, but not until after the budget comes out. "Iraq is not in the budget because [including] it accentuates the cost of the war," says University of Maryland political scientist Allen Schick.
Much the same will happen with restructuring Social Security, Bush's top domestic priority. Estimates of the cost of shifting to a new system range from $1 trillion to $2 trillion over the next 10 years. But the Bush budget will include neither details of a plan nor any estimate of its cost (see BW Online, 2/3/05, "The Social Security Blueprint").
Then there is the AMT -- a parallel tax system that today imposes a second, higher tab on about 3 million mostly middle-class families. The levy's exemptions are not indexed for inflation, so as incomes grow, as many as 30 million families could be paying the AMT by 2010. Bush vowed in his reelection campaign to fix the mess, but that would cost more than $500 billion over the next 10 years.
His budget will include some recognition of the need for a fix. But it is likely to request only a modest sum for a temporary one-year patch. Longer-term repairs, the White House says, must await proposals for broader tax code changes that are not due until summer.
Similarly, the budget will exclude the costs of making permanent Bush's tax cuts, such as lower rates and the repeal of the estate tax. Because the budget will only project deficits though 2010, it will not include the costs of extending the tax cuts, which start to bite in 2011. The price tag: nearly $1.5 trillion from 2011 to 2015.
While Bush's budget ignores these big-ticket items, it will project savings from holding down growth in government spending. Trouble is, while those changes could have a major effect on the programs themselves -- and on those who benefit from them -- they won't have much impact on the overall deficit.
The President's major target will be what's known in Washington-speak as domestic discretionary spending. He'll propose boosting spending for the Pentagon and homeland security in 2006. But spending on the rest of government, from parks to cancer research, will be all but frozen at this year's levels.
Bush will promote that freeze as tough fiscal restraint. And a GOP-controlled Congress is likely to give him what he wants. But, in reality, such cuts would trim less than $10 billion a year from the $2.5 trillion budget.
DEEPLY SPLIT GOP.
To make his numbers work, Bush will also propose major cuts in future spending for Medicaid. Some observers expect the White House will ask Congress to slash the $200 billion program by $10 billion a year. The chairmen of both the House and Senate Budget Committees are likely to back such Medicaid cuts. But while the program may be in for some modest trimming, Democratic and Republican governors alike are lining up to oppose any big changes. Major cuts in federal contributions would shift more of the burden of Medicaid to the states, which already pay for about half of its costs.
Bush's efforts to trim any government spending will run head-on into a deeply split congressional GOP. Many hard-core House conservatives, such as Majority Leader Tom DeLay of Texas, strongly favor big cuts in domestic programs -- not to trim deficits, but because they want to eliminate what they see as big government. But House moderates and many Senate Republicans, such as Lincoln Chafee of Rhode Island, will oppose cuts in popular social programs. And in the Senate, a faction including Budget Committee Chairman Judd Gregg (R-N.H.) is focused much more on the long-term costs of Social Security and Medicare.
When the congressional fiscal wars finally conclude next fall, Bush will likely get his freeze on domestic spending. But the rest of his budget may be largely forgotten. What will be hard to overlook, though, is this: Washington could well be looking at deficits in the range of $400 billion-plus for the rest of his Presidency.
Gleckman is a senior correspondent in BusinessWeek's Washington bureau