There were many deficit hawks who came out of hiding during the campaign to bemoan the size of the deficit – I wonder if they are going to support Bush in his attempts to reduce it?
Sharpening the Knife
As Bush Vows to Halve Deficit,
Targets Already Feel Squeezed
Less Budget Funding for Aid,
Education, Cities, Science;
Bracing for the Boomers
Republican Governors Resist
By JACKIE CALMES
Staff Reporter of THE WALL STREET JOURNAL
December 21, 2004
WASHINGTON – In his first term, President Bush’s domestic policy focused on creating winners, through tax cuts, a new prescription-drug-benefits plan for seniors, large farm subsidies, big homeland-security contracts and increased spending for education, scientific research and more.
Now, with worries about the size of the deficit widespread, get ready for a second Bush term about identifying losers.
“This cannot afford to be a guns-and-butter term,” says Sen. Judd Gregg, the New Hampshire Republican who will be the Senate Budget Committee’s new chairman. “You’ve got to cut the butter.”
With guns – or military spending – growing, the butter is likely to include some of the most visible areas of domestic spending, including the Medicaid health program, subsidies to Amtrak, agricultural research and even some federal education programs.
In the just-finished fiscal 2005 budget, which came in 10 weeks late, big cities received less federal aid to comply with anti-pollution laws and job training requirements. The National Science Foundation, which underwrites the country’s basic research saw its funding cut from 2004 levels.
Funding for the National Aeronautics and Space Administration came in below Mr. Bush’s request, despite House Majority Leader Tom DeLay delaying a vote to get more money for the space program, which has major installations in his district. Even spending on the president’s own initiatives for education, health research and the promotion of economic and political change overseas were cut to levels below his requests or last year’s spending. A similar fate befell Laura Bush’s program to sponsor cultural events in local communities.
The resulting budget “was the wake-up call,” says Douglas Holtz-Eakin, a former Bush White House economist who heads the Congressional Budget Office.
Fights over what gets cut, and by how much, will likely become a defining feature of Mr. Bush’s second term. The president has pledged to halve the deficit, a promise that will likely clash with some of his pet policy initiatives. His vision of a Social Security overhaul requires more borrowing. Mr. Bush will also likely face opposition from cash-strapped Republican governors.
California’s Arnold Schwarzenegger, Jeb Bush in Florida and George Pataki in New York, among others, will likely resist attempts to shift the funding of major programs, such as Medicaid, to the states. Of the 38 governorships up for grabs in 2006, 22 are now held by Republicans. “All the Republican governors were pretty reserved because they wanted Bush to get re-elected,” says former Republican Rep. Vin Weber. “But they’re not going to keep quiet now.”
The Republicans who control Congress will also fight to avoid deep cuts in popular programs and to maintain their ability to bring home funds for local projects. So difficult were this year’s choices that Congress’s initial cuts weren’t deep enough to bring the budget within pre-set limits. In the end, lawmakers opted to cut all programs across the board. They even put off a highway-construction bill – a surefire way for Congressmen to find money for their states – until next year.
“I think you will see the emergence of George Bush the deficit hawk in the second term,” says Rep. Tom Cole, an Oklahoma Republican. The president’s prey, he adds, will be “the very spending Congress loves most.”
In Mr. Bush’s first two years, domestic spending – not including defense and entitlement programs such as Social Security and Medicare – grew roughly 10% annually. It grew 6.4% in his third year. The President and Congressional Republicans, for all their anti-spending rhetoric, have shown themselves to have big appetites for splurging on matters such as roads, farms, education and business subsidies.
In fiscal 2004, which ended Sept. 30, the U.S. registered its biggest-ever deficit in dollar terms: $412 billion. At 3.6% of gross domestic product, that deficit was proportionally smaller than those of the mid-1980s, which surpassed 5% of GDP. With economic growth, good weather, stricter spending discipline and a favorable turn in Iraq, the 2005 deficit could shrink. But the imminent retirement of the baby boomers and the inexorable rise in health-care costs makes the question of government spending more pressing.
Tax revenues now represent 16% of GDP, the smallest since 1959. Government outlays are at nearly 20%. By 2008, Mr. Bush’s final year in office, the oldest of the baby boomers will qualify for early Social Security benefits. That sets in motion a demographic tidal wave that will overwhelm that program – as well as Medicare and Medicaid – unless they’re changed.
Meanwhile, big political and economic forces are putting extra demands on the Treasury. Overhauling Social Security, for example, will raise costs in the short term. The administration plans to borrow as much as $2 trillion over a decade to divert a slice of workers’ payroll taxes into private accounts. As for health care, administration officials say Mr. Bush has no intention of revisiting Medicare after the bruising 2003 fight to introduce health-saving accounts and add a prescription-drug benefit for seniors.
Mr. Bush has ruled out raising taxes and is widely expected to win an extension of his first-term income- and dividend-tax cuts, moves that will reduce revenues flowing into the Treasury beyond his presidency. Moreover, both Mr. Bush and Congress are committed to changing the alternative minimum tax, a levy designed to prevent rich taxpayers avoiding taxes altogether, which is about to ensnare about 30 million mostly middle-class Americans. Fixing the AMT will cut projected tax revenues by hundreds of billions of dollars.
As a result, deficit hawks including conservative Republicans, Federal Reserve Chairman Alan Greenspan and foreign investors who hold U.S. government bonds, have pressed Mr. Bush to practice the fiscal restraint he preaches. Their concerns have been buttressed by the weakening dollar, which raises the possibility that investors are losing confidence in U.S. economic policy.
The president campaigned for re-election on a promise to cut the deficit in half by the time he leaves office. The White House is basing its target on a 2004 deficit estimate it made last February of $521 billion, or 4.5% of GDP. A number of independent analysts said that number was inflated; at about the same time, the CBO predicted a deficit of $477 billion.
But finding areas to cut isn’t easy. Of the government’s $2.3 trillion spending this year, about 85% is almost untouchable by public consensus. About 20% of the total goes toward defense. Spending in that area has increased 55% on Mr. Bush’s watch. The war and reconstruction efforts in Iraq and Afghanistan are running about $5 billion a month, congressional analysts say. Mr. Bush has also embarked on ambitious plans to modernize the armed forces through the use of advanced technology.
Cutting Social Security benefits, which represent another fifth of the budget, is also off-limits – for now. An additional fifth is spent on Medicare and Medicaid health-insurance programs. A thinner slice goes to unemployment compensation, farm subsidies and other benefit programs.
Interest on the nation’s borrowing is a big and growing budget item, one that cannot be cut except by slashing the debt itself. The $168 billion in annual payments, much of it to overseas holders of Treasury bonds, represents just over 7% of the federal spending. That’s more than the government will spend on education, housing, transportation, science, space and technology combined.
The remaining discretionary funds – and the area Mr. Bush has targeted for shrinking – cover much of what many Americans typically think of as government work, including breast-cancer research, aid to rural and inner-city schools, veterans’ medical care, weather forecasting and park rangers. These annually appropriated activities accounted for about 18% of the federal budget in fiscal 2004.
For fiscal 2005, the growth in that domestic spending was held to just 0.8%. At that rate, spending in this area will decline as a portion of the overall budget. Yet the president aims to shrink this piece even further. In February, Mr. Bush will call for a spending freeze for fiscal 2006, according to people familiar with administration’s deliberations.
“It’s going to be a tough budget, no question about it, and it’s a budget that I think will send the right signal to the financial markets and those concerned about our short-term deficits,” Mr. Bush said yesterday at a White House news conference.
The cut in the National Science Foundation’s 2005 funding will mean about 1,000 fewer federal research grants. That will affect perhaps 2,000 senior university researchers and 1,000 science and engineering graduate students, estimates Joel Widder. A longtime NSF official, he now works for Lewis-Burke Associates, a company that helps universities navigate the government’s grant-approval process. Two years ago, the law that re-authorized the program promised that the NSF’s budget would double by 2007.
Pell grants, the main source of federal funding for disadvantaged college students, are frozen at $4,050 for the third consecutive year. During the same period, the cost of tuition at four-year public colleges has risen 28%, according to the College Board, the nonprofit administrator of the SAT, a national college-admissions test. The number of Pell recipients has also risen by over one million in that time, to more than five million, resulting in smaller average grants. The president received nothing for his proposed pilot program to give extra Pell funds to poor students who take college-preparatory courses in high school.
Funds for heating assistance to low-income households increased because of pressure from Northeastern Republicans, but it’s not enough to match the spike in energy costs. The final tally of almost $2.2 billion is $164 million below what’s needed, estimates the liberal Center on Budget and Policy Priorities.
Easier to Cut
This discretionary spending, which is about the same size as the deficit, isn’t the fastest-growing part of the budget by far. Why target that almost exclusively? White House Budget Director Joshua Bolten says this spending is easier to cut than entitlement programs such as Social Security, Medicare and Medicaid because it’s approved each year rather than mandated by legislation. “That is a lot of money that’s in that portion of the budget. It’s almost $400 billion,” he adds. Moreover, Mr. Bolten says, “in a time of war, there will be a priority for making sure that our defense needs and our homeland-security needs are met.”
With cuts in the domestic appropriations, and economic growth ahead, “we will be in very low deficit territory” by Mr. Bush’s exit, he predicts. Mr. Bolten says the president will declare victory if he gets the deficit down to 2.2% of GDP.
Governors of both parties are poised to fight any move to shuffle expenses in their direction. The White House is likely to target the joint state and federal Medicaid program for the poor, which increasingly goes to middle-class seniors who have exhausted their assets on nursing-homes costs. Mr. Bush is expected to propose changes that eventually move more costs to the states.
“That would be a disaster for us,” says Arkansas Gov. Mike Huckabee, the Republican vice chairman of the National Governors Association. “You can’t mask the deficit by cost-shifting.” With states only now emerging from their worst fiscal downturn in 50 years, and with Medicaid their fastest-growing cost, Mr. Huckabee says any such shift will force them to cut services, especially for rural residents and those needing long-term care.
Rep. David Price, a North Carolina Democrat, sits on the House Appropriations subcommittee where housing funds compete with popular veterans, space, science, community-service and environmental programs. Already, he says, officials in his district of Durham, N.C., have stopped taking low-income applicants for federal housing vouchers because the waiting list is too long. This year, Congress used a one-time accounting change to save $1 billion on public-housing costs, but that gimmick won’t be available for 2006.
Ultimately, some budget-watchers predict that Congress and the president will be forced to cut from the budget’s more intractable parts before the end of Mr. Bush’s term. Some even believe the option of raising taxes might be up for consideration.
“The pressures on [discretionary spending] is what, in the long-run, may force action,” says Eugene Steuerle of the Urban Institute think tank and a former Treasury official in the Reagan administration. Otherwise, he says, “ten years from now, there’s no revenues left for anything but defense.”
–David Rogers contributed to this article.
Write to Jackie Calmes at firstname.lastname@example.org