February 8, 2005
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February 8, 2005
The Big Picture May Seem Rosy, but the Deficit Is in the Details
By EDMUND L. ANDREWS
and DAVID E. ROSENBAUM
ASHINGTON, Feb. 7 - The large tables in President Bush's new budget show he intends to keep his promise of slicing the federal deficit in half by the end of his term, but the fine print indicates that the goal may be elusive.
The budget is notable for including limits on spending that are unlikely to be enacted and for excluding expenses that are sure to be incurred. Here are the most important points:
¶It assumes that all discretionary spending outside of military and domestic security - everything from paperclips to space shuttles - will be frozen for the next five years.
¶It includes no spending for the war in Iraq and Afghanistan in 2006. Those costs are now running about $5 billion a month and are likely to continue at some level in the 2006 fiscal year and beyond.
¶It omits the initial cost of Mr. Bush's Social Security plan, which would let people divert some of their payroll taxes to private saving accounts. Administration officials estimate the plan would cost $23 billion in 2009 and $754 billion over the next decade.
¶It leaves out the cost of reining in the Alternative Minimum Tax, a tax that was created to affect the nation's wealthiest taxpayers but is now ensnaring millions of moderate-income families as incomes rise with inflation.
"It's a very unrealistic budget for a document that is supposed to reflect the president's policies," said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan organization that lobbies for deficit reduction.
In his message to Congress, Mr. Bush promised to hold "federal programs to a firm test of accountability" and take "the steps necessary to achieve our deficit reduction goals."
The budget envisions the annual deficit shrinking to $233 billion from $427 billion by 2009. As a share of the national economy, a measure economists consider more meaningful, the deficit would decline from 3.6 percent to 1.5 percent, meeting the president's goal of cutting the deficit in half.
But even with all the expensive omissions and problematic spending cuts, many of which Congress rejected last year, Mr. Bush's goal of deficit reduction has already slipped further into the future.
One year ago, when he first pledged to cut the deficit in half by the 2009 fiscal year, the White House predicted that the budget deficit would decline to $364 billion in 2005 and $268 billion in 2006.
Now, the White House is predicting that the budget deficit will rise to $427 billion in 2005, the current fiscal year, and decline to only $390 billion in 2006.
Many people who follow budgets closely doubt much deficit reduction is in the offing. Speaking especially about the proposed freeze in most domestic programs, Stanley E. Collender, who writes an impartial annual guide to the federal budget, said, "It is unrealistic to expect Congress to march in lockstep and accept the president's proposals." Mr. Collender said he expected the deficit to be "in the $400 billion range for the rest of the decade."
By any measure, the new budget is austere. It calls for deep cuts next year in almost every category of domestic spending outside the mandatory entitlement programs like Social Security and Medicare, which are based on laws adopted in previous years.
Analyses show that preventing these programs from rising with the rate of inflation and population growth over the next five years would amount to a 16 percent cut, or $65 billion out of $391 billion now being spent.
After adjusting for inflation and including federal salary increases already approved for next year, the vast majority of domestic programs would experience real cuts for the second year in a row, a development that has not happened under modern budget procedures.
Over the past four decades, spending for domestic discretionary programs has declined in only four years - in the first budget year under President Richard M. Nixon, at the beginning of President Ronald Reagan's first and second terms and one year under President Bill Clinton. Each time, spending climbed again the next year.
Mr. Bush's Republican allies in Congress are already chafing about proposed cuts to farm subsidies, education programs, veterans' benefits and community development block grants.
Moreover, while projecting aggregate spending reductions, the budget does not spell out which specific programs would be cut after 2006.
Many of the savings that Mr. Bush is proposing are recycled ideas included in budgets year after year to show a lower projected deficit, even though their enactment is doubtful. Mr. Bush proposed substantially cutting or eliminating 65 programs last year, for a total proposed saving of $4.9 billion, but Congress eliminated fewer than a half dozen of them, for a total saving of less than $200 million.
Among the proposals that Congress rejected last year and that cropped up again on this year's list are reductions in community development block grants, which included $302 million in projects that were earmarked by individual members of Congress, higher deductibles and copayments for veterans receiving prescription drugs and medical services, and elimination of "Even Start," a $247 million education program aimed at helping children of illiterate parents.
Budget analysts noted on Monday that Mr. Bush's plan also assumed a sharp slowdown in the growth of military spending, which has soared 35 percent in the past four years.
Not counting money for the wars in Iraq and Afghanistan, the new budget envisions that expenses for salaries, weapons systems and other military costs will climb 4.6 percent this year to $419 billion.
By 2009, the budget is projecting only a 2 percent rise, but that would require the Pentagon to forgo some of its long-term modernization projects. As a practical matter, Pentagon officials are almost certain to push for the money and are likely to have the ear of Congress.
As for the cost of fighting in Iraq and Afghanistan, the administration plans to ask Congress for $81 billion on top of the normal military budget for this year, but it has not said what may be necessary in the 2006 fiscal year. Army commanders, however, are planning on the assumption that at least 120,000 troops will remain in Iraq through 2006.
The new budget also omits any cost estimate for dealing with the Alternative Minimum Tax. The alternative tax was intended to prevent high-income people from taking too much advantage of special tax breaks. But because it is not indexed for inflation, it is leading to tax increases for millions of additional families each year.
Administration officials have already said they want to prevent that, but the proposed budget still assumes that the Alternative Minimum Tax will produce a rising torrent of new tax revenue. Preventing that tax increase would cost $72 billion in 2009 and $500 billion over the next decade, according to the Congressional Budget Office.
Joshua B. Bolten, the White House budget director, said the administration had not included the cost of a tax fix because the Treasury Department planned to address the alternative minimum tax as part of a broader tax overhaul later this year.
Perhaps the biggest initiative not in the budget is Mr. Bush's plan to overhaul Social Security and let people divert some of their payroll taxes into private accounts.
Administration officials acknowledged that their plan would force the government to borrow about $774 billion of the next decade, and several trillion more in the decades that follow, because the government would still have to pay full benefits to people who are already 55 years or older. All this borrowing will show up in annual budget deficits.
On Monday, Mr. Bolten affirmed the White House view that such "transition costs" are not an increase in government debt, because the government would get more than its money back many decades from now as future retirees depend more on their private accounts than on government-guaranteed benefits.
"Transition financing does not represent new debt," Mr. Bolten told reporters.
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February 8, 2005
EDITORIAL
Avoiding the Real Challenge
resident Bush's latest deficit-steeped budget, for all its tough talk of reining in spending, stands out as a monument to misplaced political capital. It would take some hard work, indeed, to get Congress to face up to the binge of deficit spending that is haunting the nation and future generations of taxpayers. Yet Mr. Bush is not going to face the music. Instead, he's investing his precious re-election clout in pushing a wildly expensive plan to divert some Social Security payments to private accounts, a step that would not even address the long-term financial problems with the current system. His proposed budget, meanwhile, is a picture of reduced revenue and swollen pockets of hidden spending. The lip service about draconian clampdowns will hardly solve the problem, particularly in the eyes of the international markets that are studying the administration for signs of commitment to closing the budget deficit.
Mr. Bush is right to call for a healthy analysis of government programs to determine which ones cost more than they are worth. But the reductions he proposes for the biggest targets are timid ones.
To his credit, for instance, Mr. Bush is asking for a reduction in farm and commodity programs. But his proposed cut of 5 percent - should it somehow survive in a Congress that has never shown signs of being willing to stand up to agribusiness - would hardly end that bloated giveaway. It offers little help for family farmers struggling to deal with the out-of-whack economics of an agricultural system that is distorted by monster subsidies to corporate farmers, or for poor farmers in the developing world who are hobbled by artificially cheap American exports.
While the Pentagon budget continues to boom, Mr. Bush has at least called for paring back some of the more unnecessary weapons programs from the cold war. But even if he manages to get the cuts past the arms industry's Congressional protectors, slowing weapons-building programs or cutting back on the number of weapons ordered by the Pentagon is never enough. History shows that these programs will be back to eat up tax dollars another day if Mr. Bush fails to kill off completely the contracts that feed them.
Proposed cuts in Medicaid funds, while fiercely unpopular with the states, deserve a close look to see whether the administration can prove its case that the states game the system for more than their fair share. But the administration has shied away from even starting to seriously address the financial problems in Medicare, which is far and away the most deeply troubled federal entitlement program.
Over all, the budget is a sham that takes big cuts out of politically vulnerable programs that have very little to do with the explosion of the deficit in Mr. Bush's tenure.
Programs benefiting low-income citizens, like community development and health care, are destined to bear close to half of the cuts even though they accounted for less than 10 percent of the spending increases during the first Bush term. Some of the cruelest cuts would affect hundreds of thousands of working poor people who rely on child-care assistance and food stamps.
The deficit problem is a reflection of lowered revenue more than high spending - a fact that the president and the Republicans in Congress are determined to ignore. To the contrary, their proposal is to lock the once-"temporary" Bush tax cuts into stone. Meanwhile, expensive outlays will continue for the Pentagon, homeland security and mandated costs like Medicare. With such a lopsided perspective, vital environmental, education and housing programs cannot help but be disproportionately trimmed.
As a political tract, the budget neatly omits any accounting for next year's costs of the Iraq war, lately running at more than $5 billion a month. Nor do the budget figures for later years mention the hundreds of billions in borrowing that would be required to start up President Bush's plan to allow Social Security taxes to be directed into private investments.
Washington hands expect many, if not most, of the president's proposed cuts to be reinstated by Congress. And given Mr. Bush's preoccupation with Social Security, it's hard to imagine him wasting much effort on a leaner Pentagon budget or saner agricultural subsidies. In the end, only the programs with the least political clout - generally aimed at helping the weakest groups in the country - will be pared down or eliminated. That might give some politicians a sense of political cover, but it would be a bad choice and would hardly solve the problem.
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February 8, 2005
OP-ED COLUMNIST
Spearing the Beast
By PAUL KRUGMAN
resident Bush isn't trying to reform Social Security. He isn't even trying to "partially privatize" it. His plan is, in essence, to dismantle the program, replacing it with a system that may be social but doesn't provide security. And the goal, as with his tax cuts, is to undermine the legacy of Franklin Roosevelt.
Why do I say that the Bush plan would dismantle Social Security? Because for Americans who entered the work force after the plan went into effect and who chose to open private accounts, guaranteed benefits - income you receive after retirement even if everything else goes wrong - would be nearly eliminated.
Here's how it would work. First, workers with private accounts would be subject to a "clawback": in effect, they would have to mortgage their future benefits in order to put money into their accounts.
Second, since private accounts would do nothing to improve Social Security's finances - something the administration has finally admitted - there would be large benefit cuts in addition to the clawback.
Jason Furman of the Center on Budget and Policy Priorities estimates that the guaranteed benefits left to an average worker born in 1990, after the clawback and the additional cuts, would be only 8 percent of that worker's prior earnings, compared with 35 percent today. This means that under Mr. Bush's plan, workers with private accounts that fared poorly would find themselves destitute.
Why expose workers to that much risk? Ideology. "Social Security is the soft underbelly of the welfare state," declares Stephen Moore of the Club for Growth and the Cato Institute. "If you can jab your spear through that, you can undermine the whole welfare state."
By the welfare state, Mr. Moore means Social Security, Medicare and Medicaid - social insurance programs whose purpose, above all, is to protect Americans against the extreme economic insecurity that prevailed before the New Deal. The hard right has never forgiven F.D.R. (and later L.B.J.) for his efforts to reduce that insecurity, and now that the right is running Washington, it's trying to turn the clock back to 1932.
Medicaid is also in the cross hairs. And if Mr. Bush can take down Social Security, Medicare will be next.
The attempt to "jab a spear" through Social Security complements the strategy of "starve the beast," long advocated by right-wing intellectuals: cut taxes, then use the resulting deficits as an excuse for cuts in social spending. The spearing doesn't seem to be going too well at the moment, but the starving was on full display in the budget released yesterday.
To put that budget into perspective, let's look at the causes of the federal budget deficit. In spite of the expense of the Iraq war, federal spending as a share of G.D.P. isn't high by historical standards - in fact, it's slightly below its average over the past 20 years. But federal revenue as a share of G.D.P. has plunged to levels not seen since the 1950's.
Almost all of this plunge came from a sharp decline in receipts from the personal income tax and the corporate profits tax. These are the taxes that fall primarily on people with high incomes - and in 2003 and 2004, their combined take as a share of G.D.P. was at its lowest level since 1942. On the other hand, the payroll tax, which is the main federal tax paid by middle-class and working-class Americans, remains at near-record levels.
You might think, given these facts, that a plan to reduce the deficit would include major efforts to increase revenue, starting with a rollback of recent huge tax cuts for the wealthy. In fact, the budget contains new upper-income tax breaks.
Any deficit reduction will come from spending cuts. Many of those cuts won't make it through Congress, but Mr. Bush may well succeed in imposing cuts in child care assistance and food stamps for low-income workers. He may also succeed in severely squeezing Medicaid - the only one of the three great social insurance programs specifically intended for the poor and near-poor, and therefore the most politically vulnerable.
All of this explains why it's foolish to imagine some sort of widely acceptable compromise with Mr. Bush about Social Security. Moderates and liberals want to preserve the America F.D.R. built. Mr. Bush and the ideological movement he leads, although they may use F.D.R.'s image in ads, want to destroy it.
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