The Bush Budget

There are few surprises in President Bush’s 2005 budget. The main contours follow the same pattern as his past budgets, with more tax cuts oriented toward the wealthy and increased spending on the military and homeland security. The result of this pattern of taxation and spending is large deficits that will prove unsustainable in the not-very-distant future.

At first glance, increases in military spending in the Bush budget do not appear very large. The budget proposes that military spending increase to $467 billion in 2009 from $433 billion in the 2004 budget, with spending actually declining slightly to $429 billion in 2005. However, the proposed spending does not include any appropriations for the occupations of Iraq and Afghanistan. Bush intends to request this money in a supplemental appropriation bill after the November election. Based on last year’s $87 billion supplemental appropriation, it is likely that total military spending will be in excess of $500 billion, or more than 4 percent of GDP, for the foreseeable future.

Remarkably, this increase in the military budget has been accomplished with virtually no debate. In the last years of the Clinton administration, military spending fell to 3 percent of GDP. While some hawks demanded a substantially higher military budget, this was a minority position in both political parties. Now it seems likely that the country will be spending 4 percent of GDP on the military regardless of the outcome of the 2004 election. In fact, if the $40 billion in proposed spending on homeland security is included, total spending on defense in 2005 is likely to be close to 5 percent of GDP.

Military spending is almost the only category that will see a substantial increase in the Bush budget. The 3 percent proposed increase in education spending is just about enough to maintain current service levels — after taking account of inflation and a growing school population — but far too little to cover the costs of the mandates in the No Child Left Behind Act.

Most other categories will see cuts or increases that are too small to maintain current service levels. The budget proposes that appropriations for the broad non-defense discretionary category, which includes almost everything except Social Security, Medicare and Medicaid, are to be increased by just 0.5 percent above the 2004 levels. Given that an increase of about 3 percent is needed to maintain current levels, most government programs will have to be cut back.

What will this mean? For example, it means that fewer low-income families will get subsidized childcare and fewer children will be in Head Start. Cutbacks to a wide variety of state programs will be needed. While the impact of the 2005 cuts may not be that large, the budget proposes continued cuts over its five-year planning horizon, so that in many programs real service levels will be reduced by more than 10 percent.

To lock in such cuts, Bush is proposing new rules that would require super-majorities to increase spending beyond these targeted levels without offsetting cuts in other areas of spending. There is no comparable restriction on tax cuts, however.

The budget contains several other tricks, in addition to the exclusion of war-related spending. Adjusting for these tricks adds $100 to $200 billion to the annual deficits projected in Bush’s budget. While the current deficit is not a problem, in the context of continued economic weakness, the government cannot run deficits of 4percent to5 percent of GDP indefinitely. In the not very distant future, it will be necessary to institute substantial tax increases.

To see how out of line the tax situation has become, it is worth putting aside the designated revenue streams, such as Social Security and Medicare taxes, and federal workers’ contributions for their retirement. The taxes that support general expenditures (primarily individual and corporate income taxes) are projected to equal 9 percent of GDP in 2005. By contrast, the programs that are supposed to be supported by general revenue equal more than 14 percent of GDP. In other words, income taxes would have to be increased by more than half in order to cover these expenses. Of course some borrowing is fine, but income taxes would still have to rise by at least 25 percent to reach a sustainable budget.

Obviously, Republicans will fight any tax increases vigorously, but there is not very much to cut from the budget after the military and interest payments are pulled out. There will be many Republicans, and probably also many Democrats, who will look to make cuts to Social Security and Medicare to help bring deficits down to size. Since these programs are financed by separate taxes — which by all accounts leave them well-funded for several decades into the future — there is no reason that they should be on the chopping block. But truth in budgeting does not seem to be a concern of either party at present.