Bush Budget Foresees Record Deficits

WASHINGTON -- President Bush asked Americans on Monday to embrace a Ronald Reagan-style, $2.2-trillion budget that sends the nation’s finances deep into deficit by slashing taxes and boosting outlays for national security.

Bush’s 2004 budget, filling 2,859 pages in five volumes, makes plain how rapidly the fiscal outlook has morphed from black to red: Two years ago, the White House said its policies would help produce a $1.5-trillion surplus over the five years ending in 2008. It now expects a $1.1-trillion shortfall over the same period, not counting the cost of a possible war in Iraq.

Bush acknowledged that his new budget would contribute to several years of deficits, but he said the need to stimulate the economy, expand the war on terrorism and enhance homeland security has temporarily trumped the virtues of fiscal restraint.

“A recession and a war we did not choose have led to the return of deficits,” Bush said in his budget message to Congress. “We will not always get to choose which battles we fight. It is, however, our duty to fight them.”

Democrats were quick to attack the president’s priorities. Rep. John M. Spratt Jr. of South Carolina, ranking Democrat on the House Budget Committee, called it “the most fiscally damaging budget in U.S. history.” Members of both parties predicted it would be revised substantially on its way through Congress.

If enacted, Bush’s budget would allocate most of its new money to defense and homeland security. It would finance a few signature initiatives in other areas, including the first prescription drug benefit under Medicare and expanded campaigns to combat AIDS in America and Africa.

But it would tighten the purse strings of most domestic programs, cutting some and holding others to increases below the rate of inflation.

It also would produce record deficits of $304 billion this year and $307 billion in 2004, and increase the national debt held by the public to $5 trillion in 2008 from $3.5 trillion today. Two years go, the White House said it could pay down the debt to $1.4 trillion by 2008, giving the government more flexibility to finance the baby boomers’ retirements.

NASA would receive $469 million in new funds, a 3% increase. (Its budget was finalized before Saturday’s shuttle Columbia disaster; the White House said it could not predict how that would affect the space agency’s funding.)

White House budget director Mitchell E. Daniels Jr. said balancing the budget is not beyond reach if objectives change. “We can do it. We’re not that far away,” he said. “But it’s the president’s job to balance priorities.”

Even the latest cost estimates may be understated. Bush’s budget makes no allowances for the expense of waging war in Iraq or the cost of rebuilding that country afterward. It also leaves out the cost of military operations in Afghanistan or future tax changes already endorsed by Bush and regarded as inevitable by many Republicans and Democrats.

The budget faces an uncertain future on Capitol Hill, despite Republican control of both houses. Some of the president’s proposals, such as making corporate dividends tax-free, have generated little enthusiasm even within GOP ranks.

Senate Budget Committee Chairman Don Nickles (R-Okla.) called Bush’s budget “an excellent starting point,” and expressed hope Congress would hold total discretionary spending increases to 4% as Bush is requesting. Other Republicans suggested that might not be politically doable.

Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) said the budget “charts a straightforward course for peace and prosperity for America.” But he has expressed reservations about Bush’s Medicare proposal, and said his tax cuts could not pass the Senate in their current form.

Congressional Democrats assailed the president for running up the deficit to historic levels, with no concrete plan for bringing the government’s books back into balance.

“In the face of the worst fiscal reversal in U.S. history and a declining economy, the administration’s only response is to propose more of the same failed policies,” said Sen. Kent Conrad of North Dakota, ranking Democrat on the Senate Budget Committee.

At the same time, Democrats complained that Bush was proposing to shortchange important domestic programs.

“This budget is a rip-off for the rich that starves our schools, health care and even homeland security,” said Sen. Edward M. Kennedy (D-Mass.).

Its centerpiece is a package of new tax cuts that the budget documents said would total $1.3 trillion over 10 years. That includes more than $600 billion by eliminating the double taxation of dividends and accelerating the effective date of previously approved tax cuts. Much of the rest would result from making permanent Bush’s first big tax cut initiative -- a $1.35-trillion package that Bush pushed through Congress in 2001 but which is scheduled to expire in 2010.

Other elements of the new package of cuts would expand the child-care credit, eliminate the “marriage penalty” that causes some two-wage-earner households to pay higher taxes than single filers with the same income, let individuals place up to $15,000 a year in new tax-sheltered accounts, and let small businesses take bigger deductions for new equipment.

The White House says 92 million taxpayers would receive cuts averaging $1,083 this year if the package passes. Critics say the package is heavily skewed in favor of the wealthy. According to one analysis, households in the middle fifth of the income spectrum would receive an average $289 tax cut this year, while the top 1% would receive an average $30,127 reduction.

Independent analysts say the cost of the new tax cuts to the treasury will be even higher than the administration forecast on Monday. The liberal Center for Budget and Policy Priorities puts the total at $2.3 trillion.

Add to that the $1.35-trillion cost of the 2001 reductions when fully implemented over 10 years, and Bush may top Reagan’s record as the most aggressive tax-cutter to ever occupy the White House. According to the budget center, Reagan’s 1981 and 1982 tax initiatives amounted to 2.1% of gross domestic product when fully implemented. Bush’s 2001 cuts, plus the new ones he wants Congress to approve, would add up to 2.4% of GDP, the center estimates.

“I view it as much more damaging than Reagan,” said the center’s executive director, Robert Greenstein, who noted that Reagan showed more willingness than Bush to scale back his tax cuts when the budgetary outlook began to darken. “The current crew says let’s dig the hole even deeper.”

The Pentagon would receive $380 billion under Bush’s budget, up 4.2%. Although the $15.3-billion increase for 2004 is comparatively modest, the administration is seeking $20 billion in annual increases in following years as part of a buildup that would boost military spending to $484 billion by 2009.

That steep a climb would take the defense budget to levels exceeding those at the height of the Cold War, and help pay for a raft of costly weapon systems and programs.

Next year’s budget includes higher spending on elite Special Operations forces and unmanned spy planes to fight the war on terrorism. It would boost troop pay, build seven warships, keep funds flowing into two new multibillion-dollar jet fighter programs and increase spending on missile defense testing and deployment by as much as $9.1 billion.

But it does not include the costs of military operations in Afghanistan, which are running about $1.5 billion a month, or money that may be needed for a potential war in Iraq and its aftermath. Pentagon officials said they could not estimate those costs at this time, and would ask for funds in supplemental budget requests.

Bush’s budget shows the new Department of Homeland Security receiving one of the biggest percentage increases: a 7.4% hike to $36.2 billion. But all is not what it seems. A full third of the department’s budget authority is for non-homeland security functions of 22 formerly separate agencies.

The budget proposes making fundamental changes in some of the nation’s largest entitlement programs, offering new benefits or money in exchange for cost-saving actions down the road.

It would give states an extra $3.3 billion next year for Medicaid, the health-care program for low-income Americans. It also would give them almost complete authority to run their programs, enabling them to eliminate some benefits and charge co-payments and deductibles for others.

For states that chose to participate in the voluntary program, the bill would come due toward the end of the 10-year arrangement: Federal payments would drop by the same $12.7 billion they increased over the first seven years.

The budget allocates $400 billion to modernize Medicare, including the first prescription drug coverage for the program’s 41 million participants. But it suggests that beneficiaries would need to join an HMO or other managed-care program to take full advantage of the new benefit, an idea that is already under fire on Capitol Hill.

Bush said his budget would ensure that government spending does not grow at a faster rate than a typical household’s, and he asked Congress to show the same restraint.

“I proposed that discretionary federal spending increase by no more than 4% this year,” he said in a speech Monday at the National Institutes of Health in Bethesda, Md.

“That’s about as much as family income is expected to grow. It seems like a reasonable benchmark for our federal budget.”

But with most of the new money going to defense and homeland security, many programs would receive what amounts to standstill budgets. And a few would be targeted for major cuts.

For example, Bush proposed to eliminate the Hope VI program, which was designed to demolish, replace and rehabilitate the nation’s most derelict public housing.

“It seems to be part of an overall pattern that indicates that their long-term plan is to starve public housing,” said Sheila Crowley, president of the Low Income Housing Coalition.

The combination of Bush’s big tax cuts, defense and homeland security buildups, the recession, the stock market crash and a sluggish recovery have produced one of the sharpest swings of the fiscal pendulum ever recorded.

In dollar terms, the projected Bush deficits would be the biggest ever. But in relation to the economy, they are smaller than the Reagan-era deficits. This year’s expected shortfall is equal to about 2.8% of gross domestic product, compared with a record high of 6% in 1983.

The fiscal squeeze would appear worse if Social Security funds were placed off-limits, as Bush and many members of Congress once promised to do, instead of being used to finance other government spending. This year’s non-Social Security deficit would be $468 billion, and the six-year shortfall would be $2.6 trillion.

“The deficits aren’t quite as big in relation to the economy,” said Alice Rivlin, former director of the Congressional Budget Office and the White House budget office during the Clinton administration. But with baby boomers nearing retirement, “they’re more dangerous because of the timing.”

Bush’s new fiscal plan provides revenue and spending estimates for the next five years only, in contrast to the 10-year forecasts contained in previous budgets.

The White House says it is shortening the time frame because “out-year” estimates have proved to be highly erratic. But critics say the switch is designed to conceal the long-term cost of Bush’s tax cuts and other deficit-building initiatives.

*

Times staff writers Ronald Brownstein, James Gerstenzang, Janet Hook, Vicki Kemper, Esther Schrader, Elizabeth Shogren and Richard Simon contributed to this report.