A `Lean Budget' From Bush Cuts Mainly at Home --- Trims in Domestic Spending, Growth in Defense Promise Scant Change in Deficit
By John D. McKinnon and Jackie Calmes
8 February 2005
The Wall Street Journal

WASHINGTON -- President Bush proposed the broadest domestic spending cuts since the Reagan era in a fiscal 2006 budget that seeks to begin making good on conservatives' longstanding vow to shrink the size of government.
Mr. Bush sent Congress a $2.568 trillion spending plan that aims to rein in the record budget deficit by reducing spending on popular health and education programs, corporate subsidies, community development, police hiring grants, Amtrak, and home-heating assistance. That's an overall increase of $89 billion over the current year, driven by wartime increases of 5% for defense and 3% for homeland security, as well as health-care inflation. But even within the Pentagon's swelling allocation, Mr. Bush would cut production of a new submarine fleet and retire an aircraft carrier early as part of $55 billion in reductions from planned Navy and Air Force spending.
The president faced criticism from across the political spectrum as soon as the fat cream-and-blue budget books were released yesterday morning. Agencies and interest groups complained he went too far, and deficit hawks in both parties complained he didn't go far enough or targeted too narrow a slice of the federal spending pie. The document failed to account for supplemental Iraq war spending or costs associated with the administration's proposed Social Security overhaul; in projecting shrinking deficits beyond 2006, it skimped on details of how that would be accomplished.
"The president's budget is a hoax on the American people," said House Democratic leader Nancy Pelosi. Democratic Sen. Hillary Rodham Clinton of New York, a potential 2008 presidential contender, accused the president of putting "our fiscal direction on an unsustainable course."
Controversy over the budget holds the potential for sidetracking other elements of the administration's agenda, most notably Mr. Bush's ambitious plans to overhaul Social Security and revamp the tax code. By the president's own reckoning, he has a limited second-term window for action before Washington begins treating him as a lame duck.
But Mr. Bush expressed confidence that, after winning re-election last November with the full Republican control of Congress Mr. Reagan never enjoyed, he would ultimately win support for a "lean budget" that "eliminates redundancy" and "focuses on results." After a cabinet meeting, he told reporters, "I think we'll get a pretty good response."
Mr. Bush has had some success already in curbing several areas of domestic spending, even as the federal deficit widened to a projected record $427 billion in the current fiscal year, which ends Sept. 30. The omnibus 2005 spending bill Congress passed and the president signed last fall held nonsecurity discretionary spending to an increase of less than 1% from the previous year.
Now, however, Mr. Bush is asking lawmakers to cut more deeply into domestic programs benefiting children, the poor and other vulnerable groups. Discretionary spending on nonsecurity areas would actually fall by almost 1% in dollar terms -- an even larger cut once inflation is taken into account. Skeptics believe that Mr. Bush will hit a wall of resistance in Congress to cuts that size, from both Republicans and Democrats who face the voters in November 2006.
At the same time, some conservatives who applaud such cuts caution that they aren't enough to substantially shrink the deficit without deeper reductions in defense and entitlement programs, which account for most of the dollars Washington spends. The president projects budget deficits exceeding $200 billion even in 2009, after his second term expires.
"This is not a serious budget if the objective is to reduce the deficit and constrain budget growth," said William Niskanen, the former Reagan adviser who is chairman of the libertarian Cato Institute. Because of the fierce pork-barrel politics attached to many of the programs Mr. Bush is targeting, Mr. Niskanen added, "it's unlikely that he's going to be able to get the constraint that he's proposed and hoped for."
Others were more upbeat. "I'm impressed," said Brian Riedl of the Heritage Foundation, which like Cato favors a smaller federal government. "Substantially more needs to be done on the entitlement side, but the debate now is where to cut, not where to increase, and that's a good sign. . . . I believe the White House is starting with the low-hanging fruit, the wasteful and outdated programs that are not worth taxpayer dollars. Once that's accomplished, hopefully that momentum will translate into larger reforms of larger programs, such as Social Security, Medicare and Medicaid."
Still unclear is whether Mr. Bush will be able to achieve his pledge to halve the budget deficit within five years. The budget plan projects that he will succeed both as a proportion of gross domestic product, and in dollar terms. But a preface to the budget says the government "might" have to borrow to pay current Social Security benefits if Mr. Bush's plan for letting workers direct payroll taxes to private accounts becomes law.
Yet the storm over yesterday's proposed spending cuts itself may help the administration achieve its goal of persuading financial markets of the president's commitment to fiscal responsibility. Mr. Bush himself will deliver that message today in a speech to the Detroit Economic Club. Budget director Josh Bolten and other advisers also are fanning out to reassure markets, in hopes of staving off a spike in interest rates.
"I look forward to explaining to the American people why we made some of the requests that we made in our budget," Mr. Bush said yesterday. "I fully understand that sometimes it's hard to eliminate a program that sounds good."
Democrats wasted little time in attacking the administration's credibility. "The administration has failed to offer a credible plan to cut the deficit in half, as the president promised," said Rep. John Spratt of South Carolina, the ranking Democrat on the House Budget Committee. "On the contrary, the administration's response to these growing fiscal problems is to propose costly and misguided initiatives on Social Security and taxes that drive the deficit even higher. This budget continues the wrong choices and misplaced priorities that have created record deficits and rising debt over the last four years."
At more than $2.5 trillion, Mr. Bush's budget for 2006 is hardly spartan. But it does propose the most significant cuts in domestic spending since the Reagan administration, budget officials said.
Overall, annual appropriations outside of security spending would be cut by about 1%. The budget would cut the annual allocations for 13 of the 24 major federal agency budgets, in actual dollar terms. While some security-related spending would continue to climb, even the Defense Department would get less for 2006 than the president himself envisioned last year. The defense budget would increase by about 4.8%, after a proposed 7% increase last year. Last year's budget envisioned an increase of more than 5%.
The changes were likely to touch off resistance not just among lawmakers and lobbyists, but among Republican governors and state legislators, as well as mayors, educators and law-enforcement officials.
Among the losers:
Education programs would take a $528 million cut, their first since 1995. To finance a proposal for new high-school accountability standards, the budget would eliminate 48 programs, including a $1.2 billion vocational-education program. Mr. Bush would also reduce help for homeless children to enroll in public schools, advocates said. Many of the programs "have great names and have laudable goals," but aren't performing, said White House budget director Josh Bolten, adding that "we're taking that money and shifting it over to programs where we think we are going to get better performance."
The budget would consolidate 18 community-development programs into one, and ship them to the Department of Commerce. Commerce officials said part of the plan was to reduce duplication and redundancy in grants to states and communities and to target needy communities more closely. The U.S. Conference of Mayors criticized the shift.
Several million upper-middle-class taxpayers would lose protection from the Alternative Minimum Tax, which hits those who have accumulated tax breaks beyond a certain threshold. To save an estimated $25 billion, the budget omits the exemption Congress has passed in recent years for many of those affected, though administration officials say they'll address the issue in tax-reform deliberations.
Some farmers would find subsidy payments reduced from proposed changes that would save almost $6 billion over 10 years. Mr. Bush wants to cap subsidies at $250,000 a year per farmer, from the current $360,000. Senate Appropriations Chairman Thad Cochran, a Mississippi Republican, expressed reservations.
The Environmental Protection Agency would lose $326 million for clean-air, clean-water and Superfund programs. Acting EPA administrator Steve Johnson said the cuts won't endanger "core programs."
Companies would face paying $15 billion more over five years in premiums to the troubled federal insurer of private pension plans. Under the proposals, the Pension Benefit Guaranty Corp. would increase basic annual premiums to $30 per worker from $19.
Within the Commerce Department, Mr. Bush proposes to cut a popular industry-aid program by more than 50%. He would set spending on the Manufacturing Extension Partnership at $47 million, down from more than $110 million committed in fiscal 2005. The program, created by President Reagan in 1988, funds assistance centers designed to make small manufacturers more business-savvy.
The hardest-hit Justice Department programs, cut by more than $1 billion, were the Community Oriented Policing Services (COPS) Program and the Justice Assistance Grant. The president of the International Association of Chiefs of Police complained that the "This administration talks about homeland security but then guts funding for . . . programs that help secure our homeland."
At the same time, the administration noted that it is boosting funding for some priorities. Those included an expensive reorganization of the Army and an increase in the number of active Army combat brigades; more money for unmanned military vehicles; an expanded Millennium Challenge Account to allocate foreign assistance based on sound governance principles; more targeted efforts to reduce vulnerability of ports, chemical facilities and other high-profile targets; $10 billion in tax incentives to create new Opportunity Zones for areas making the transition to emerging industries; more money for home-purchase down-payment assistance for low-income families; increased funding for special education and schools in low-income communities; a number of initiatives to expand health-care coverage, including a new Cover the Kids program to encourage Medicaid enrollment; and more money for homelessness programs.
At least some of the programs that the administration touted as receiving increases were actually taking cuts overall, as with the community-development program.
And overall, the budget volumes this year contained fewer of the bright new ideas for government spending than some past volumes. Instead, the main budget book often dwelled on all the ways the government is saving money. One picture of a huge earth mover ran with the caption "The Rocky Flats cleanup will be completed by the end of 2006 at a savings of over $28 billion from DOE's 1995 estimate." Another highlight box bragged that the Department of Housing and Urban Development has reduced inaccurate rental-assistance payments by 50%, or $1.6 billion.
The administration also was seeking substantial cuts in so-called mandatory spending, the two-thirds of the budget that has grown four times more rapidly in the past 40 years than the spending that Congress appropriates annually. Thanks to squeezes in agriculture subsidies, Medicaid, unemployment insurance overpayments and even foster care, the budget would eliminate about $123 billion in spending over 10 years. The administration also proposes to raise fees in a number of areas, including medical fees for some higher-income veterans and a drug co-payment increase.
In all, receipts would rise to $2.18 trillion in 2006 from a projected $2.05 trillion in 2005, while outlays would increase to $2.57 trillion from $2.48 trillion. The deficit would narrow to about $390 billion from an expected $427 billion in the current fiscal year, which began Oct. 1. That represents about 3% of the nation's economy, compared with about 3.5% for the 2005 deficit, although critics say the real 2006 deficit is likely to be larger, after war costs and other changes are included.
The year's budget writing will be complicated by the parallel debate over Social Security. While Mr. Bush last week acknowledged that private accounts, by themselves, wouldn't help Social Security's long-term financial outlook, now the Social Security Administration's chief actuary has informed the White House that its plan would hasten to 2012 from 2018 the date when Social Security will begin taking in less in payroll-tax revenues than it is paying out in benefits.
The actuary, Stephen Goss, wrote White House adviser Charles Blahous that the costs to Social Security of workers diverting some payroll taxes to their personal accounts will exceed the amounts by which the government would reduce payments from the accounts to retired workers or their survivors to offset the initial payroll-tax diversion. "Annual cash-flow deficits (negative annual balances) appear in 2012, or six years earlier than under current law," Mr. Goss wrote.
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Where It Comes From, Where It Goes

A breakdown of where the federal government expects to get its money in
fiscal 2006, and how President Bush wants to dole it out. Figures in
billions, unless noted:

RECEIPTS

Total: $2.18 trillion

Individual Income Taxes .................. $966.88
Social Insurance and Retirement Receipts . $818.83
Corporation Income Taxes ................. $220.26
Excise Taxes ............................. $75.57
Other .................................... $96.02

OUTLAYS

Total: $2.57 trillion

Human resources (education, health, Social Security, etc.) . $1,675.59
Defense .................................................... $447.40
Net interest ............................................... $211.08
Physical resources (energy, environment, housing, etc.) .... $129.87
Other ...................................................... $103.68

Source: Office of Management and Budget