Bush to Propose Major Defense Spending Cuts

President Bush has decided to propose major new cuts in defense spending in next year’s federal budget but is still considering how the proceeds should be used, senior Administration officials said Tuesday.

Bush, who is weighing a variety of proposals to stimulate the economy as he prepares for his State of the Union address Jan. 28, will decide by next week whether the windfall savings from the Pentagon budget--the so-called peace dividend--should finance a broad-based tax cut for the middle class or be applied to reducing the federal budget deficit.

Administration officials refused to comment on the size of the proposed cuts.

But Republican and Democratic sources said Bush is expected to propose between 4% and 5%--or between $50 billion and $70 billion--in cuts in defense spending over the next five years--over and above those he has previously announced.

Administration officials also said the President already has decided that any recession-fighting proposals contained in his budget cannot be financed by expanding the federal deficit, which is at a record level.

Although he does plan to shift billions of dollars out of defense, Bush has decided to abide by the overall spending ceilings imposed on the federal government by the 1990 budget agreement, sources said.

As a result, the President’s budget plan is likely to contain more modest economic stimulus initiatives than those being advanced by some Democrats in Congress.

Senior Administration officials cautioned Tuesday that, despite a series of reports over the last few weeks suggesting that he has already determined the details of his economic growth package, Bush has still not made many of the fundamental decisions that will largely determine the contours of his economic policy for the election year.

In fact, despite weeks of intensive work on proposals by his aides, led by new White House Chief of Staff Samuel K. Skinner, the shape of the Administration’s economic growth package hinges on two key decisions Bush is expected to make next week: what to do with the peace dividend, and how much emphasis Bush wants to place on health care in his economic growth package.

One Administration official said Tuesday that there is a “60-40” chance that Bush will decide to use the peace dividend to help finance a middle-class tax cut, rather than to reduce the deficit. The cut likely would come in the form of a temporary tax credit of several hundred dollars per child for middle-class families, although a separate plan to provide a $2,000 tax credit for first-time home buyers is also being considered.

With Bush gearing up for reelection in the midst of a recession, Administration officials agree, it will be difficult for Bush not to earmark the money for such a stimulative tax cut rather than for deficit reduction. Yet key Administration officials--most notably Budget Director Richard G. Darman--are still urging Bush to apply the savings to deficit reduction, arguing that a short-term tax cut will do little to help the economy and will leave the deficit problem unresolved.

Congressional sources also warn that Bush will find it difficult to finance a big and immediate tax cut purely from defense cuts, since those savings will only come over a period of several years.

“I just don’t think you can finance a middle-class tax cut only from defense,” noted one congressional budget analyst, who asked not to be named.

In addition to the issue of what to do with the defense savings, Bush also must decide whether to make health care reform a key element of his upcoming economic package. If he does, Bush is then likely to propose a tax credit to help Americans buy health insurance.

But critics argue that Bush’s health care tax credit would not address the problems facing the roughly 35 million Americans who have no medical coverage, most of whom work at relatively low-wage jobs and would be unlikely to spend additional tax savings on insurance.

Still, Bush’s potential proposal would be his first attempt to show that the Administration is concerned about health care and that he is unwilling to let the Democrats monopolize the issue in the presidential campaign.

Today, the rising cost of medical care has become a central problem for the middle class, even among those who still have coverage. Democrats exploited the health care issue successfully in the recent special Senate election in Pennsylvania, and the leading Democratic presidential candidates already have turned it into a key issue in their primary campaigns.

The President plans to push again for a capital gains tax cut. And he will again make a controversial claim in his budget proposal that the tax cut will actually raise federal tax revenues by convincing people to cash in their investments.

Democratic critics of a capital gains tax cut have argued repeatedly that the measure only benefits the rich and dispute Republican arguments that it can pay for itself. Bush has pushed for a capital gains tax cut in each of his previous budget proposals and has lost each time.

Bush seems certain to urge an expansion of the benefits available to average Americans from their individual retirement accounts, to allow penalty-free withdrawals for such things as home purchases by first-time buyers and for parents trying to pay college tuition for their children.