URL: http://businessweek.com/magazine/content/04_07/b3870050.htm

   <h>FEBRUARY 16, 2004

   <h>NEWS: ANALYSIS & COMMENTARY
   <h>The Budget: Hey Guys, Get Real
   <p>President Bush says he wants to cut the deficit in half by 2009.
   Here's why that's not likely to happen
   <p>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.

   <p>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.
   <p>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.
   <h>FIVE-YEAR PLAN.
   <p>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.
   <p>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.
   <p>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.
   <p>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.
   <p>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.).
   <p>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.
   <p>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.
   <p>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
   <h>NICKELS AND DIMES?
   <p>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.
   <p>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.
   <p>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.
   <p>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."
   <p>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.
   <h>By Howard Gleckman, with Paul Magnusson and Stan Crock, in Washington

