Copyright (c) 2004, Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.WASHINGTON -- Preparing the way for his re-election bid, President Bush proposed a $2.4 trillion budget that promises to sharply slash the deficit over the coming five years but relies on some fiscal sleight of hand in an effort to reach his goal.
Among the gimmicks: failing to provide for the future cost of occupying Iraq, which Mr. Bush's budget director suggests could cost as much as $50 billion in 2005; pledging steep cuts in some popular programs that Congress will probably reject; and anticipating large savings by making the federal government operate more efficiently, a timeworn budget pledge that rarely pays off as expected.
The fiscal blueprint, which now goes before Congress, estimates that the budget deficit in the current fiscal year, ending Sept. 30, will balloon to a record $521 billion, from $375 billion last year. Over the next five years, though, the budget projects a steady improvement in the deficit, as it shrinks to $237 billion in fiscal year 2009 from $364 billion in fiscal year 2005. The White House attributed the improvement to restraint on domestic spending, and the continuation of what Mr. Bush describes as pro-growth economic policies, including the extension of the soon-to-expire individual and investment tax cuts.
The budget reflects the president's top political priorities -- taxes and security -- at the expense of other domestic programs. While the overall budget for basic government services would rise at only a 3.9% clip, spending for defense would grow 7% and homeland security would increase 10%. Other domestic programs would rise by a scant 0.5%.
Nevertheless, Mr. Bush still manages to boost funding for politically symbolic programs, including $100 million for a "compassion capital fund" to support charitable organizations, $23 million for drug testing at schools, $120 million in grants for programs supporting "healthy marriages" and $200 million to start a program that would lead to the manned exploration of the moon and Mars.
After meeting with his cabinet, Mr. Bush said his budget was shaped by the forces that have defined his own presidency: the recession, the Sept. 11, 2001, terrorist attacks and the war with Iraq. "These are high hurdles for a budget and for a country to overcome, and yet we've overcome them," he said
But Democrats attacked the fiscal blueprint as lacking in credibility. "The new Bush budget is more of the same: record deficits, tax cuts for the wealthy and special interests," said Massachusetts Democrat John Kerry, the Democratic presidential front- runner.
The president's attempt to gain control of the deficit reflects the mounting political pressure from conservatives within his own Republican Party as well as Democratic presidential contenders to show fiscal rectitude. On his watch, the huge budget surplus built up by President Clinton has been replaced by what Mr. Bush's own accountants anticipate will be about $1.35 trillion in deficit spending over the next five years.
Part of the problem facing Mr. Bush is of his own making. To convince Congress to pass three rounds of tax cuts since 2001, he agreed to mask their long-term costs by having them expire at various times over the next decade. Now, he is stuck with paying for the cost of extending them -- and is again reaching for ways to defer the cost of doing so. Only 14% of the $936 billion cost of making his tax cuts permanent comes due in the next five years. The balance of the cost of extending the tax preferences, $804.6 billion, falls in the years 2010 to 2014
The budget deficit may turn out to be much larger than Mr. Bush lets on. He seeks domestic spending cuts that Congress will probably ignore, including some cuts that target constituencies that have grown politically powerful in the post-Sept. 11 world. Mr. Bush proposes to cut a firefighters grant program in the Department of Homeland Security, from the $746 million in the current year to $500 million. In the Justice Department, assistance to state and local law- enforcement authorities would be cut to $2 billion, a drop of 31.7% from the current year.
Mr. Bush also claims budget savings by vowing to wring inefficiencies out of the federal bureaucracy, such as collecting $23.5 billion over 10 years by tightening controls over Medicaid, the state-federal program for the poor. The administration would save $800 million by imposing new reforms on student-loan programs, where default rates are a continuing concern. Attacking "waste, fraud and abuse" is a budget perennial that rarely yields the kind of savings claimed.
Mr. Bush also scrimps on some congressional favorites, knowing lawmakers are likely to add to his request. For instance, Mr. Bush slates the National Science Foundation, a popular program that funds basic research, for a modest 4% increase that would raise funding to $5.59 billion. The congressional favorite received a 13% increase in the current fiscal year. And he claims increased revenue from a controversial plan to crack down on tax shelters that is by no means certain to pass.
The White House estimates that the crackdown will bring in $45 billion over the next 10 years. That sum includes $34 billion from transactions relying on leasing deals to generate big depreciation breaks; the administration regards those as improper manipulations of the tax code.
But the president may have given himself a little budget wiggle room by using conservative economic assumptions about the growth of the economy and the tax revenue the federal government expects to collect in the coming year. Should the economy and tax receipts grow faster, the deficit would be smaller than otherwise anticipated.
The budget deficit has forced the president to make some tough political choices that could bring him into conflict with some of his allies on Capitol Hill. He proposed a six-year measure for highway spending that is tens of billions of dollars less than the cheapest plan pending on Capitol Hill. Meanwhile, some of Mr. Bush's conservative allies are talking about trying to pare back a top Bush accomplishment -- the just-enacted Medicare prescription drug benefit. Why? Mr. Bush's budget discloses that the benefit will cost taxpayers $534 billion over the next decade -- $134 billion more than estimated by Congress last month.
The release of a White House budget is an annual rite in the nation's capital, but only the opening gambit in a year-long process that ultimately involves Congress, which must pass legislation to make the Bush agenda reality.
The White House is making clear that Mr. Bush's top economic priority is the coveted tax-cut extension. While Democrats wouldn't want to give Mr. Bush an election-year win, he may be able to maneuver them into supporting a narrower bill that extends popular tax cuts, such as child tax credits or marriage-penalty relief. Even Mr. Kerry, the Democratic presidential hopeful, has talked of cutting taxes for middle-class families.
Regardless of what happens on taxes, Congress must deal with the 13 annual spending bills that fund basic government services, ranging from Pentagon tank purchases to Forest Service salaries to education grants.
Last year, the fight over the spending bills dragged on for months. It wasn't resolved until a few weeks ago when Congress approved the last of the 2004 measures. The fights this year could be even more bitter if Mr. Bush's Democratic challenger is a senator. That is because Democratic leaders in Congress will want to help their nominee by staging fights on budget priorities that illustrate party differences.
The Bush budget sets out likely points of conflict. He is targeting the Environmental Protection Agency for a 7.2% cut, and the departments of Agriculture and Commerce also would see their budgets trimmed. Mr. Bush is also putting the squeeze on health research. He has supported a doubling of the National Institutes of Health research budget but now is vowing to slow NIH's growth by reducing the annual increase in grants to scientists.
He is trying to avoid another big fight by pushing off a supplemental spending request for Iraq until after the election.
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Question of the Day: Which area should get the largest spending increase in the new federal budget? Visit WSJ.com/Question to vote.
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Winners and Losers
President Bush proposes big increases for some popular spending areas but
deep cuts in others. Proposed outlays in selected agencies, in billions.
DEPARTMENT/AGENCY 2004 2005 PERCENTAGE CHANGE
NASA $14.6 $16.4 +12.3%
Veterans Affairs 60.3 67.3 +11.6%
Education 62.8 64.3 +2.4%
Transportation 58.0 59.0 +1.7%
Homeland Security 30.7 31.1 +1.3%
Corps of Engineers 4.3 4.2 2.3%
Labor 60.0 57.0 5.0%
HUD 46.2 38.9 15.8%
Source: Office of Management and Budget