The Cutting Edge™ - March 2004

Public Policy

Déjà Vu All Over Again
By John Satagaj, WMMA® Legislative Counsel, (email@jsatlaw.com)

It took us quite a while to dig ourselves out of the federal deficit hole we found ourselves in during the mid to late 1980's. We were only able to breathe the rare, purified air of surplus budgeting for a short while. Now we find ourselves back in the valley of deficit spending.

The President has delivered to Congress his proposed budget for fiscal year 2005. While there are hundreds of pages of initiatives, the initial attention has been focused on two items: the fact that it is not a balanced budget and it calls for the permanent extension of various tax cuts.

The budget proposes a 3.9-percent increase in overall discretionary spending for 2005. This includes a 7.1-percent increase in spending authority for defense, 9.7 percent for homeland security, and 0.5 percent—or below the rate of inflation—outside these areas. The budget includes a deficit of $364 billion in 2005, but this projection does not include expected but undetermined additional costs arising from ongoing military operations in Iraq, extending beyond 2004. The President has pledged to cut the size of the annual deficit in half within five years, down from $521 billion this year to less than $300 billion in 2009.

As we predicted, the Medicare prescription drug subsidy law is already making its mark on the budget, and not in a good way. The ink is hardly dry on the new Medicare law, and the budget concedes what we had been predicting well before passage of the bill – the $400 billion price tag on the legislation was obsolete the day it was proposed. The President's budget pegs the new projected cost at $539 billion.

The President's proposal includes making permanent the tax cuts enacted in 2001 and 2003, which is essential for promoting economic growth and higher levels of income in the future. The other proposals, also intended to strengthen the American economy, affect a wide range of areas including encouraging saving, investing in health care, providing incentives for charitable giving, strengthening education, encouraging telecommuting, increasing housing opportunities, protecting the environment, and increasing energy production and promoting energy conservation, as well as simplifying the tax laws. Additionally, included are proposals to strengthen the employer-based pension system, close loopholes and improve tax compliance, improve tax administration, as well as proposals related to highway reauthorization and proposals to extend expiring tax provisions. In fiscal year 2005, to extend and/or make permanent some of the 2001 and 2003 tax cuts would total just under $12 billion. The real debate, however, regarding the tax cuts, is the long-term impact. Those same cuts would have a total projected revenue lost of just over $1 trillion over ten years. Advocates, including the President, argue that the economic prosperity associated with the cuts will ultimate reduce the deficit. The opponents argue that making the cuts permanent saddles the government with a long-term revenue constraint when there are many other needs, from health care to education, which are going unaddressed.

One of my favorite fiscal watchdog groups, the Concord Coalition, didn't mince words on the subject. “The Administration’s goal of cutting the deficit in half by 2009 is better than having no deficit reduction goal at all, but it ignores the full magnitude of the fiscal challenges we face. Even if the policies in this budget succeed in halving the deficit by 2009, deficits will shoot up again after that due to rising entitlement costs and the permanent extension of expiring tax cuts. This fiscally irresponsible combination produces an exploding cigar effect timed to go off just when the baby boomers begin to receive Social Security and Medicare at the end of the decade. Given the known demographic challenges, and the fiscal hole we’re now in, a longer outlook and a more ambitious deficit reduction goal – preferably getting back to a balanced budget – would be far better,” said Concord Coalition Executive Director Robert L. Bixby.

This being both a presidential and congressional election year, I do not have any hope that anything will be done to hold spending in check. In fact, if I had to put down a bet right now, I would bet Congress will not even finish its budget work for this fiscal year before the November elections. I am already expecting a lame duck session to clean up the loose ends – again.