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Budget deficits threaten political will to tackle other Bush initiatives

WASHINGTON—Vice President Dick Cheney once brushed aside fears that new tax cuts would increase the federal budget deficit and hurt the economy.

"Reagan proved deficits don't matter," Cheney reportedly said.

Now, with his new federal budget proposals, President Bush is about to test whether that's true. He projects that the deficit would shrink from $427 billion in fiscal 2005 to $207 billion in fiscal 2010 under his proposals.

Yet that's based on the questionable assumption that Congress will be more disciplined on spending than it's ever been. It also doesn't count the multi-trillion-dollar price tag that Bush envisions for overhauling Social Security and making permanent his now-expiring tax cuts.

If annual deficits continue to pile up at the current rate of about $400 billion a year, they could build political pressure that could threaten Bush's second-term ambitions—especially overhauling Social Security and making his first-term tax cuts permanent.

Economically, the impact of deficits is difficult to see. As a share of the overall economy, the total national debt is comparable to what it was during the booming late ྖs and would remain there through 2010 under Bush's budget.

Still, paying interest on the national debt could cost taxpayers more than one dollar out of every 10 the government spends by fiscal 2009—money that otherwise could be spent on such popular needs as roads, schools or the environment, paying down the debt or cutting taxes. For example, interest on the debt will cost taxpayers $211 billion in fiscal ག the Environmental Protection Agency would cost only $8.2 billion.

William Niskanen, chairman of the libertarian Cato Institute, said: "Interest payments on the federal debt increase at a 12 percent annual rate. This is the most rapidly increasing component of the federal budget and provides no current government services."

"It's Maalox time for Congress," said Steve Schier, a political scientist at Carleton College in Minnesota and author of a book on deficit politics. "Congress has talked the talk about spending but hasn't walked the walk. I don't know how the president's going to get them to do it this time. I'm sure there are lot of knees knocking right now in the Republican caucuses."

Bush largely had his way with the Republican-controlled Congress during his first term. But that was when he pushed for politically easy goals, such as cutting taxes.

Now, to restrain spending, he proposes to cut or abolish more than 150 federal programs, each with constituents and protectors in Congress. Last year, Bush proposed to cut 65 programs; Congress rolled some programs together but eliminated just four.

Bush has hardly been a taskmaster on spending. He didn't veto a single spending bill in his first term. Spending rose 29 percent during those four years. Much was attributed to the costs of war, but not all. For example, Bush signed into law the biggest expansion of Medicare since it was created in 1965, at the height of Lyndon Johnson's Great Society.

Even if Bush manages to hold spending in check enough to halve the deficit by 2009 as he promises, the costs of his biggest proposals won't show up until after that. Creating private investment accounts to supplement Social Security would cost some $2 trillion over 10 years once they're fully operating, according to the program's trustees. Making tax cuts now scheduled to expire at the end of 2010 permanent would cost the Treasury between $1.7 trillion and $3 trillion over the next 10 years, according to the Brookings Institution, a center-left think tank in Washington.

"It's like saying you're going to go on a diet until dinner," said William Gale, a Brookings economist.

While post-2009 costs weren't part of the five-year budget, they will figure into Congress' political calculations.

"It gets in the way of the president's agenda," said Carleton College's Schier. "With federal spending out of whack, restructuring Social Security, the biggest spending program, becomes riskier and becomes a tougher sell."

Moreover, Bush would focus restraint on only a sliver of overall spending—domestic programs outside of the military and homeland security, which make up only about 20 percent of the budget. He proposes to cut spending on those by 1 percent, while boosting spending on the military and homeland security.

In addition, some two-thirds of the budget is spent on entitlements—Social Security, Medicare, Medicaid and federal pensions, primarily—and Bush proposes only modest trims totaling $137 billion over 10 years there. Of that, $60 billion is targeted at Medicaid, primarily by tightening payments to state governments, which already are squeezed by the program's soaring costs.

Entitlements spending "is one of the biggest economic threats hanging over us," said Alison Fraser, a budget analyst at the Heritage Foundation, a conservative Washington think tank. "I'm not so concerned about the deficits in the short term. The real problem is spending in the long term."

Over 75 years, Fraser said, entitlement costs are projected to soar above available revenues by about $350,000 for every American, a cost that Fraser likened to "getting a mortgage with no house attached to it."

As for the impact of all this on the U.S. economy, whether Cheney was correct is unclear. Government debt equaled about 40 percent of the economy in the boom year of fiscal 1999; Bush projects it will equal about 39 percent of the economy in fiscal 2006. So long as capital markets channel enough cash into buying U.S. debt at low interest rates, it doesn't appear to be an urgent problem. But paying interest on the debt does cost taxpayers.

Finally, concern that U.S. budget and trade deficits are unsustainably high has driven down the value of the dollar against foreign currencies. Paying interest on the U.S. public debt—44 percent of it held by foreigners at the end of 2004—will grow to almost 11 percent of federal spending by 2009.

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(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20050207 USBUDGET deficit

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