Bush Team Prepares to Swing Budget Ax

For years, government has been about singling out winners for favored treatment in spending and tax policy. That era is about to end -- and the change could be painful.

The budget surpluses of 1998 to 2001 enabled Washington to make funds available for such favored causes as domestic security, medical research and prescription drugs under Medicare. The government also slashed taxes for a variety of groups, including two-earner couples and the wealthy.

But the surpluses have turned into record deficits. President Bush is not about to take back his tax cuts, but in setting spending levels in the budget that he will deliver to Congress in the new year, he will single out a loser -- perhaps several -- for every winner.

To Congress’ deficit hawks, it’s about time.

“It sounds as if the White House is serious about it now,” said Rep. Jeff Flake (R-Ariz.). “We can only hope that’s the case. It’s going to take some presidential leadership vetoing some bills.”

Bush’s budget writers have not made all their decisions, and those that they have made are closely held.

But it is widely expected that, to help Bush keep his promise of cutting the deficit in half over five years, the budget will “maintain strict discipline,” as the president said at a news conference last week.

Arguing that the costs are only vaguely known, budget writers may also decide not to include the outlays needed to cover the additional costs of the war in Iraq or the transition to proposed private Social Security accounts.

Interest groups know which programs are vulnerable to cuts -- and are circling the wagons around them.

Medicare and Medicaid are prominent on Bush’s likely hit list.

Doctors who serve Medicare patients are already threatened. Under current law, they will absorb a 5% reduction in their government reimbursement for treating Medicare beneficiaries as of Jan. 1, 2006.

Doctors barely headed off 4.5% cuts scheduled for 2004 and 2005 when Congress, in the bill establishing the Medicare prescription drug benefit, replaced those cuts with 1.5% increases.

Now they are trying again to defend their reimbursement rates.

Dr. John C. Nelson, a Salt Lake City obstetrician-gynecologist who is president of the American Medical Assn., said the AMA had met with members of Congress and Mark McClellan, the head of the Medicare program.

Nelson said Medicare’s hospital benefits had remained untouched while doctors’ reimbursements were constantly threatened.

“The appearance is that the government is trying to solve Medicare’s financial problems on the backs of the nation’s doctors,” he said.

The ultimate losers, he said, would be the elderly insured by Medicare. Before Congress reversed the cuts scheduled for 2004 and 2005, he said, a survey showed that 24% of family doctors would stop taking new Medicare patients if the cuts held up.

Arguing that budget cuts harm the general public, not just the immediate recipients of federal aid, is a common lobbying technique.

Medicaid supporters -- the nation’s governors and antipoverty advocates -- are using it in an effort to head off an expected proposal to scale back the federal share of the joint federal-state program of health insurance for the poor.

Ron Pollack, executive director of Families USA, said cuts were threatening Medicaid’s ability to “rise to the occasion when the economy goes sour and more people lose their health insurance.”

Some members of Congress expect Bush to try again to give states less Medicaid money but more flexibility to spend it, a bargain the Senate blocked last year.

The National Governors Assn. says state budgets are under siege even without more federal Medicaid cuts. The association’s chairman and vice chairman, Govs. Mark R. Warner of Virginia and Mike Huckabee of Arkansas, said last week in a letter to congressional leaders that it was “unacceptable in any deficit reduction strategy to simply shift federal costs to states, as Medicaid continues to impose severe strains on state budgets.”

Californians are poised for another fight over a federal program that provides aid to states -- including $120 million to California -- that jail large numbers of illegal immigrants, according to Tim Ransdell, director of the California Institute for Federal Policy Research.

Bush has tried to eliminate the program before and is expected to try again in this budget. Although Congress has kept the program alive, it is less than half the size it once was.

The Office of Management and Budget is measuring progress in Bush’s pledge to cut the deficit not in its absolute size but in its size relative to the national economy.

Thus, the budget office says, Bush must cut the deficit from 4.5% of U.S. economic output -- its level in fiscal year 2004 as estimated a year ago -- to 2.25% in fiscal year 2009.

A quick tour of the government spending landscape shows a terrain inhospitable to budget cutters.

Roughly, federal outlays can be divided into five equal pieces. One slice is Social Security, which has been politically off-limits to budget cutters since 1983. A second contains Medicare and Medicaid, which also have resisted cuts.

The government’s other support programs -- food stamps, unemployment compensation and others -- go in a third piece, as do interest payments on the debt. Interest payments are outside Congress’ control, and other support programs are politically as well as technically difficult to adjust.

The other two pieces of the budget are easier to manipulate in the short term. One of them consists of defense and domestic security, where the Bush administration has until recently shown no tendency to skimp.

So most of the pressure to cut spending lands on the final fifth of the budget -- the so-called domestic discretionary programs. These consist of a wide variety of projects, such as an abandoned mine reclamation fund and a zero-down mortgage program run by the Department of Housing and Urban Development.

Even eliminating this category of spending would not have balanced the 2004 budget.

“If they don’t put entitlements or tax cuts on the table, they’ll get nowhere,” said Robert Bixby, executive director of the Concord Coalition, a budget watchdog group. “No matter how tight the spending is in the areas they’re willing to clamp down on, they’re not going to get very far.”

This much Bush has made clear over and over again: He will not raise taxes in order to keep his promise to cut the deficit. He has said he has two major tax goals for his second term: making the temporary tax cuts of his first term permanent, and simplifying the tax code.

Bush’s tax cuts have contributed to a sharp reduction in revenue as a share of the U.S. economy. In fiscal year 2004, which ended in September, the government took 16.2% of the nation’s economic output, its lowest level since 1959.

To Robert Reischauer, president of the Urban Institute, a nonpartisan economic and social policy organization based in Washington, that is untenable in the long term.

“It’s not reasonable to ask for all the government services we have now at the price we were paying nearly 50 years ago, when we had no NASA, no HUD, no EPA, no Medicare or Medicaid or food stamps,” Reischauer said, referring to the National Aeronautics and Space Administration, the Housing and Urban Development Department and the Environmental Protection Agency.

For all the cutbacks and hold-downs expected in Bush’s budget, Robert Greenstein, executive director of the Center on Budget and Policy Priorities, believes Bush’s 2006 document will be as interesting for what it excludes as for what it includes.

The president has made Social Security and tax reform his top second-term domestic priorities. The cost of the wars in Iraq and Afghanistan is one of the forces driving spending upward.

“Yet the budget may well leave out several trillion in borrowing to finance private accounts in Social Security, omit the costs of tax reform and postpone for later a decision on how much to seek for the wars,” Greenstein said.

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Times staff writers Janet Hook, Ricardo Alonso-Zaldivar and Maura Reynolds contributed to this report.