There’s a Sense of Deja Vu as Bush Prepares Budget

Big tax cuts. Big increases in defense spending. And the return of federal budget deficits that squeeze the rest of government.

Suddenly the battle over the budget that President Bush will release Monday is beginning to look a lot like the 1980s.

Through the presidencies of Ronald Reagan and George Bush, the current president’s father, the interaction of tax cuts, a major defense buildup and budget deficits dominated the domestic agenda and provoked intense conflict between and within the parties.

Now, on a smaller scale, the same ingredients are being reassembled as Bush pursues a rapid wartime increase in defense spending, looks to expand his sweeping tax cut and warns of a return to deficits for at least the next few years--and much longer than that if Social Security revenue is excluded from the ledger.

“It really feels like it is a deja vu all over again,” said Tom Kahn, the Democratic staff director on the House Budget Committee. “We have seen this movie before, and here we are back to it again. I think it is hauntingly similar.”

Economically, the current situation differs in some important ways from the 1980s. The overall deficits now aren’t projected to grow nearly as large as in the Reagan years.

That’s partly because the country today is in a stronger position to handle new fiscal pressures than in the 1980s: Bush inherited a significant surplus, while the budget was already in deficit when Reagan took office. And the Social Security system still is generating surpluses, which partially offset the rapidly growing deficits in the government’s general operating account.

“We start in a very much better place,” said Rudolph G. Penner, a former director of the Congressional Budget Office.

But politically, the dynamic still could look very similar. Just as in the 1980s, tax cuts and the expanding defense budget could leave little room for the other priorities many Democrats want to emphasize.

“The implications are that the president will succeed in freezing the Democratic Party agenda while he advances his own,” said Will Marshall, executive director of the Progressive Policy Institute, a centrist Democratic think tank.

The key political difference is that under Reagan the fight to eliminate deficits was led largely by Republican fiscal conservatives, such as Sens. Bob Dole of Kansas and Warren B. Rudman of New Hampshire. Today, most GOP officeholders, from Bush on down, are placing a much higher priority on cutting taxes than avoiding the return of deficits.

“I don’t think that same consensus [on reducing deficits] is there in the Republican Party,” said Rudman, now the co-chairman of the Concord Coalition, a deficit watchdog group.

That shift inside the GOP assures that any attempt to control the emerging deficits will be a highly contentious fight--and less likely to succeed. “I think we are maybe a couple of years away from [action on the deficit],” Rudman said.

Reagan’s 1981 budget plan--which cut tax rates and began a rapid defense buildup--shaped the political agenda for the rest of that decade. The large federal deficits that immediately followed became Washington’s central domestic focus.

Dole and his allies pursued a series of measures to reduce the deficit that culminated in the 1990 budget summit, where then-President Bush agreed to raise taxes, abandoning his famed campaign pledge not to do so. Budget agreements between President Clinton and Congress in 1993 and 1997, combined with rapid economic growth, eliminated the deficit and produced surpluses from 1998 through 2001.

Now, with the budget battered by war, recession and the initial effect of the 10-year, $1.35-trillion tax cut that became law in June, the administration projects deficits in the unified budget--which includes Social Security and the government’s general operating funds--of $106 billion this year, $80 billion in 2003 and $14 billion in 2004. Setting aside the funds in Social Security, the Congressional Budget Office projects deficits at least through the rest of this decade.

The weak economy and unavoidable demands of war explain a significant part of the change. But Bush’s policy changes approach the magnitude of Reagan’s. Peter R. Orszag of the nonpartisan Brookings Institution in Washington has calculated that if Bush’s tax cut is made permanent--as the president has proposed--it would cost the government an amount equal to around 2% of the gross national product. That’s roughly the same cost as the 1981 Reagan tax cut.

It’s more difficult to compare the size of Bush’s defense buildup because the administration hasn’t signaled its long-term plans. But it could approach Reagan’s effort.

If Bush wins the $48-billion increase he proposed for 2003, defense spending could grow to as much as 3.7% of the economy, up from 2.9% when he took office, according to Richard Kogan of the Center on Budget and Policy Priorities, a liberal policy analysis group. That would mean that, as a share of the economy, defense spending under Bush would rise in just two years about three-fifths as much as it did through the first six years of the Reagan buildup.

Against the backdrop of Sept. 11, that increase isn’t likely to face as much congressional resistance as Reagan’s did. And if the greater defense spending is approved, Democrats looking for money for more domestic initiatives--or a greater effort to pay down the national debt--ultimately may have no choice but to challenge the Bush tax cut, many in the party believe.

“Clearly [the budget framework] puts the Democrats in the hole, which is why they cannot accept as a fait accompli the tax strategy Bush has laid out,” Marshall said.

Privately, some top congressional Democrats say any concerted party attempt to reduce Bush’s tax cut still could be years away. It may take that long, one senior Democratic senator said, to make a case that deficits are a threat to other public priorities.

On the GOP side, some conservatives believe the impending deficits should force spending cuts and reforms “throughout government.” But for now, Bush has displayed none of Reagan’s early-term enthusiasm for attempting major cuts in domestic programs; to the contrary, he is courting Democrats with proposals to spend more on education, prescription drugs and health care, though not as much as most Democrats want.

The threshold debate remains the same as in the 1980s: Whether the benefits of eliminating the deficit are worth the policy and political costs. Many conservatives note that the projected deficits are much smaller, as a share of the economy, than deficits under Reagan.

But the deficits are smaller today partly because the Social Security accounts temporarily are running a huge surplus before the baby boom generation begins retiring in large numbers this decade. Until this year, both political parties had earmarked those surpluses mostly for paying down the national debt.

Now the budget picture has deteriorated so rapidly that the CBO projects the government will have to tap those excess Social Security funds to pay for other operations through 2011 if the tax cut is made permanent. Because of that, the CBO says the government will pay off much less of the national debt than Bush proposed a year ago. And the CBO calculates the higher debt will increase federal interest costs over its earlier estimates by a resounding $1 trillion during the next decade, which could leave less money to meet the growing cost of Social Security and Medicare.

As a result, some Democrats insist the new deficits may carry a larger economic cost because they are coming so close to the baby boom generation’s retirement surge. “The worst dynamic that’s being created,” said Gene Sperling, Clinton’s White House economic advisor, “is that the draining of long-term [surpluses is] going to make any Social Security or Medicare reform much more painful.”

That would follow the 1980s pattern as well. The longer the budget deficits persisted, the more politically painful it became to deal with them. Just ask Bush’s father--who lost the presidency two years after approving his deficit reduction package--and Clinton, who lost control of Congress the year after signing his.