Red Ink May Last a Decade

In his State of the Union speech Tuesday night, President Bush declared that he wants to boost expenditures on defense, homeland security, health care and education. . .and cut taxes again to boot.

How does he plan to pay for these and other proposals?

The answer in a nutshell is he doesn’t. Not in the next few years. And, according to a variety of analysts, likely not in the next decade.

“It’s beginning to look like the 1960s when we tried to have both guns and butter,” said Robert E. Litan, economic studies director with the centrist Brookings Institution in Washington. “The administration says, ‘We’re going to cut elsewhere in the budget,’ but I don’t see any strong evidence that’s going to happen.”

Bush’s position represents a substantial about-face for the president on the subjects of balanced budgets and surpluses, one that analysts say is only partly explained by the recession and the September terrorist attacks.

Only a year ago, Bush and many other politicians relied heavily on a projected 10-year, $5.6-trillion budget surplus to convince the nation it could afford big tax cuts and expensive new programs such as a prescription drug benefit for the elderly, and still eliminate the federal debt.

But with the latest estimates showing a $4-trillion drop in the surplus, senior administration officials have taken to ridiculing the very notion of making 10-year estimates and have suggested there is little need for Washington to run big surpluses.

“The fact is these numbers oscillate wildly and are of very, very little use,” Mitchell E. Daniels Jr., director of Bush’s Office of Management and Budget, told reporters last week.

Asked if the precipitous drop in the 10-year surplus estimate indicated that part of last year’s tax cut should be delayed or repealed, Daniels wryly suggested that that would be necessary only “if large surpluses are the very center of your universe; if they come ahead of fighting wars, defending the homeland or putting people to work.”

Social Security Could Be Tapped

In essence, analysts say Bush has made a two-pronged judgment about the budget.

The first is that the attacks and voters’ support for the war on terrorism give him ample political cover for changing his stand on key budget matters.

Only 12 months ago, for example, he was promising he would never touch the portion of the surplus being amassed by Social Security in anticipation of the baby boomers’ retirement. Now the White House’s own deficit estimates show that the president is ready to spend that and more for at least a few years.

Second, Bush appears to have concluded that only with deficits can he pull off the political trick of winning both short-term support from key congressional Democrats and the long-term backing of conservative Republicans.

Several of the president’s proposals Tuesday, especially those involving expanded education spending and extended jobless benefits, appeared specifically crafted to attract liberal lions such as Sen. Edward M. Kennedy (D-Mass.).

Others, such as expanded national service, reminded listeners of the kind of politically appealing but low-cost measure once favored by former President Clinton--what budget veteran Robert D. Reischauer described as “a big box with a small present inside where everybody admires the wrapping.”

But the presence of both kinds of proposals elicited barely a peep from conservative analysts, such as Heritage Foundation economist Daniel J.B. Mitchell.

“The president is not launching a big fight about the size of government,” Mitchell said. “I wish he would, but I understand why he’s not.”

Mitchell and other conservatives appear convinced that the return to deficits will serve the cause of small government by eventually forcing the kind of spending cuts that even their idol, Ronald Reagan, was unable to make.

White House officials from the president on down argue that the administration’s new budget plan will include serious spending cuts, including a $9-billion reduction in federal aid to state highway programs that would be especially painful for California.

But analysts said that what little is already known about the president’s plan demonstrates that these cuts will be overwhelmed by such increases as boosting defense spending by $48 billion, doubling homeland security expenditures and cutting taxes by an additional $90 billion this fiscal year and $54 billion next in order to rev up the economy.

“There will be budget cuts, but in the scheme of things they won’t be the right scale to pay for the new costs,” said Richard Kogan, a veteran analyst at the liberal Center on Budget and Policy Priorities.

The administration is scheduled to release on Monday its budget plan for the fiscal year that begins Oct. 1. But it has already said that it will run deficits for several years and has estimated their size.

Kogan said it appears that Bush expects to spend an extra $85 billion over the current budget this fiscal year and that his proposals for next fiscal year would cost an extra $66 billion. “If they were cutting programs to offset the new costs, you wouldn’t be getting these kinds of increases,” Kogan said.

Bush and White House officials such as Daniels have sought to portray the administration’s dip into deficits as a passing phase that will correct itself as the economy recovers and the nation absorbs the new costs of securing itself against terrorists.

Red Ink Indefinite With Tax Cut

The budget director predicted that Washington will be back in the black by fiscal 2005. Daniel Crippen, director of the Congressional Budget Office, said last week that the return of surpluses could come a year earlier, in 2004.

But analysts said there are reasons to believe the end of deficits will be more fiction than fact.

In congressional testimony, Crippen said the budget will be able to be considered in the black in 2004 only if the Social Security surplus, which Bush vowed last year not to touch, is included in the count. If the Social Security money is not counted, the budget won’t achieve a surplus until the end of the decade, and then just barely.

The surplus will not return to the size that it has run in recent years until 2011 and 2012, according to the CBO estimates. And even then, that’s only because the budget office assumes the 10-year, $1.35-trillion tax cut Bush advocated and Congress approved last year “sunsets” and goes out of existence. Bush last night called for making the tax cut permanent, which could extend the red ink indefinitely.

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Price Tag of Bush Proposals

Analysts can estimate the price tag of the president’s proposals by comparing what the White House says the deficit will be if the proposals are approved with congressional estimates of what it will be beforehand.

DEFICIT/SURPLUS (in billions)

Before After Price of

Fiscal Bush Bush Bush

Year proposals proposals proposals

2002 -$21 -$106 $85

2003 -$14 -80 $66

2004* +$54 -14 $68

2005* +$103 +61 $42

*The figures for these years are positive only because Social Security surpluses being built up for the baby boomers’ retirement mask a deficit in the operating budget. Absent these amounts, the Congressional Budget Office estimates that the figures for 2004 and 2005 would be -$141 billion and -$108 billion, even before the White House proposals.

Sources: Congressional Budget Office, Office of Management and Budget