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Monday, February 07, 2005

Bush's Deficit Plan Is All in the Math

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Bush's Deficit Plan Is All in the Math

Mon Feb 7, 7:55 AM ET

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By Joel Havemann Times Staff Writer

WASHINGTON — The budget President Bush (news - web sites) will present to Congress today will show the federal deficit cut in half by the time he leaves office in four years.

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At least technically it will.

Achieving that goal relies on where the budget math starts and stops, how things get counted and what gets left out.

When Bush took office in 2001, the nation had experienced a four-year string of budget surpluses. That changed quickly as the economy slowed, tax rates were cut and spending in the war on terrorism skyrocketed.

By July 2003, the president was urging Congress in his weekly radio address "to make spending discipline a priority, so that we can cut the deficit in half over the next five years."

In his State of the Union address Wednesday, Bush said his fiscal 2006 budget, which he will unveil today, "stays on track to cut the deficit in half by 2009."

But students of the budget say that the president will find it nearly impossible to steer the government along the course that the budget will map out between now and 2009.

"It doesn't quite compute," said Isabel V. Sawhill, director of economic studies at the Brookings Institution think tank, who foresees a shortfall slightly larger in 2009 than now.

It is the 2004 deficit that Bush is promising to cut in half, but he's not starting with the actual 2004 deficit of $412 billion.

Instead, his benchmark is the projected $521-billion deficit that his Office of Management and Budget estimated a year ago, when the fiscal year was four months old. Using half of that figure, Bush's goal is to reach a deficit of $260.5 billion.

If Bush were to start with the actual 2004 figure, his goal would be a deficit of $206 billion — $54.5 billion more.

There are more twists. Bush proposes to cut the deficit in half not in dollars but as a share of the economy. If the economy grows, as is projected, then the deficit will decline as a share of the economy even if it does not shrink by a single dollar.

The 2004 deficit was 4.5% of the economy. So in fiscal 2009 it must be 2.2% or less. That is exactly the average share of the last 43 years, according to the Congressional Budget Office (news - web sites).

Finally, the budget that the president will send to Congress will, like his past budgets, omit some major deficit-raising items.

It will, as Vice President Dick Cheney (news - web sites) said on "Fox News Sunday," be "the tightest budget that has been submitted since we got here." It will hold the growth in domestic programs whose spending levels are set in annual appropriations bills to less than inflation.

But these programs, because they exclude defense and giant benefit programs such as Social Security (news - web sites), account for about $1 of every $5 the government spends.

Most of the cost of the Iraq (news - web sites) and Afghanistan (news - web sites) wars will not be included in the budget. Instead, it will be sent to Congress as a supplemental budget request for 2006, just as the administration recently announced an $80-billion supplemental request for the current fiscal year.

Nor will the cost of introducing private investment accounts to Social Security — $754 billion over the first 10 years alone — be found in the budget, according to administration officials.

That cost will be borrowed, Cheney said, calling the figure a "manageable amount" in terms of dealing with the deficit. He acknowledged that it would also be necessary to borrow "trillions more" after the first decade, but he argued that the private accounts eventually would greatly enhance Social Security recipients' retirement income.

On the tax side, the budget is not expected to show the effect of its proposal to curb the alternative minimum tax, which is likely to win congressional approval.

This tax, designed to hit wealthy individuals who shelter much of their income from taxes, has been snaring a growing number of taxpayers whose income has merely grown with inflation. Preventing the alternative minimum tax's reach from growing would add $44 billion to the deficit that today's budget will project for 2009, the CBO said.

Even if the administration succeeded in getting the actual 2009 deficit to half of its 2004 size, analysts at the Center on Budget and Policy Priorities expect it to rocket back upward shortly thereafter. They point out that the first wave of the baby boom generation would reach the full retirement age of 66 in 2012, sending federal retirement and healthcare costs soaring.

"The 2.2% deficits won't be sustainable for long," predicted Richard Kogan, a senior fellow at the center.

The problem, watchdog groups say, is that the government's spending habits and penchant for cutting taxes do not match the administration's budget-restraint rhetoric.

"This administration has a schizophrenic fiscal policy," said Robert L. Bixby, executive director of the Concord Coalition, which lobbies for smaller deficits. "It has a big-government spending policy and a small-government revenue policy."

Bush's tax cuts, whatever their economic merit, have taken their toll on government income. Tax revenue fell in each of Bush's first three years in office, though this year it is projected to rise to a record level.

But as a share of the nation's economic output, tax payments to the government fell to 16.3% last year, the lowest level since 1959. And in 1959, the government was not paying for Medicare (which cost $297 billion in 2004), Medicaid ($176 billion), food stamps ($29 billion) or the space program ($15 billion).

Spending, meanwhile, was lower than its 25-year average by about 1 percentage point. But at 19.8% of the economy it was $412 billion greater than revenue — a record deficit.

Faced with growing deficits, more conservatives are abandoning the doctrine that the government should run surpluses or hold deficits to a minimum.

"The deficit is merely the uninteresting difference between two very interesting numbers," said Grover Norquist, president of the conservative advocacy group Americans for Tax Reform and an informal advisor to the White House and Republican lawmakers.

Norquist's organization is dedicated to restraining both spending and revenue. Spending is the key, Norquist said. Whether financed by tax revenue or borrowing, it drains money from the private economy.

"The fundamental difference between the two parties," he said, "is how big the government should be."

Norquist's argument has become sufficiently popular that it has spurred formal rebuttal from deficit hawks. Brookings Institution scholars Sawhill and Alice M. Rivlin write in a recent book for the Washington policy research organization that "deficits matter a lot" and "better policies are possible and urgently needed."

Deficits, Sawhill and Rivlin argue, drain money from the economy that could otherwise be used for private investment, thus inhibiting economic growth and forcing interest rates upward. Deficits force the government to set aside a growing share of tax revenue for the payment of interest on the national debt, and "they impose enormous burdens on future generations."

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