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Experts skeptical about plans for balanced federal budget

WASHINGTON—On Monday, President Bush will propose a fiscal 2008 federal budget that he says will get the nation out of the red by 2012, but budget experts warn that it's likely to be based on unrealistic assumptions that won't yield a balanced budget.

Watch for trap doors in his numbers on tax cuts, war costs and spending reductions. Experience suggests that all three are likely to be unrealistic. Moreover, even if Bush managed to steer the budget toward balance in 2012, the long-term challenge of financing the baby-boomers' retirement costs threatens to plunge the budget back into deficits that grow worse exponentially each year.

"This means that the deficit figures in the budget will need to be taken with a grain of salt," said Robert Greenstein, the executive director of the liberal Center for Budget and Policy Priorities and a former top official in the Clinton administration's budget office.

On Monday, for example, Bush is expected to assume that his previous tax cuts will become permanent. They're set to expire in 2010. Democrats, who control Congress, are eyeing the repeal of some of them for the wealthy as a way to raise revenue. Assuming that Congress will make them all permanent is dubious and undermines the credibility of the president's long-term budget outlook.

Bush is also likely to propose again a one-year patch to the "alternative minimum" tax, which threatens to punish ever more millions of middle-class Americans each year. In previous years, Bush's budget has promised to end the AMT in the indefinite future as part of a sweeping revenue-neutral tax-code overhaul. If he does that again Monday, experts say, that too will undermine the credibility of his balanced-budget pledge.

"If the president is not going to unveil a tax-reform agenda, it's probably better to account for the AMT costs through 2012," said Brian Riedl, the chief budget analyst for the Heritage Foundation, a conservative public-policy center.

Then there are the wars. To say the least, they make balancing the budget difficult.

So far, Iraq and Afghanistan have cost U.S. taxpayers $477 billion, according to the House Budget Committee. Of that, $379 billion went to Iraq.

On Monday Bush will announce that he'll seek $100 billion more to pay for the both wars through Sept. 30, the end of fiscal 2007. He's also expected to seek another $145 billion for war spending in fiscal 2008 and $50 billion more for fiscal 2009. Total cost: $772 billion.

Most experts think the U.S. military will be involved in Iraq and Afghanistan beyond 2008.

The Vietnam War cost $536 billion, after adjusting for inflation.

The president also is expected to propose sharp cuts in virtually all spending that isn't defense-related or automatic, such as Social Security. Championing fiscal discipline is new for Bush; he and the Republican-led Congress increased government spending by 45 percent from fiscal year 2001 to 2006.

Nevertheless, the president's spending-cut proposals this year could put Democrats on the defensive to protect their favored programs from reductions without being framed as big spenders.

"If the president draws a line in the sand . . . the Democrats will be under pressure not to bust that total," Riedl said.

Bush even will propose squeezing Medicaid costs by at least $6 billion and Medicare by $66 billion, freezing some Medicare payments to health-care providers.

"Typically what they've done is hit the providers pretty hard, and in a way that's unlikely to be achieved," said Sen. Kent Conrad, D-N.D., the new chairman of the Senate Budget Committee. "And so the larger problem, frankly, is the things they leave out. The real war costs, and the real costs of fixing the alternative minimum tax. It becomes a deceptive budget, one that appears to accomplish certain goals but really doesn't."

Bush also may try to trim other so-called "entitlement" programs.

"I think he will propose modest savings in entitlement programs as a way of putting down some markers," said Tim Penny, a former Democratic congressman from Minnesota who earned a reputation for trying to curtail deficits.

The president this week proposed eliminating $10 billion in farm subsidies. He'd do it by limiting subsidies for farmers with incomes over $200,000.

The budget deficit was $248 billion in fiscal 2006, which ended Sept. 30. The Congressional Budget Office projects that it will be $200 billion for fiscal 2008, which begins Oct. 1.

The deficit is the amount of spending that exceeds revenues. The difference must be financed through debt. Since fiscal 2001, America's debt has grown from $5.8 trillion to a projected $9 trillion this year.

The interest on that debt—$406.9 billion in fiscal 2006—is a huge drain of taxpayers' money and is growing fast each year. The interest cost taxpayers $25 billion more last year than Medicare did, money that might otherwise be spent on roads, schools and health care.

The CBO said the budget could be balanced by 2011 if Bush's tax cuts expired in 2010 and if the "alternative minimum tax" weren't scrapped and were allowed instead to hit many more millions of middle-income Americans. Together those tax hikes would bring in about $3 trillion more in revenues over the next 10 years. That would send the budget into surplus and begin to shrink the national debt.

America's biggest budget challenges lie just beyond the 2012 horizon. The first wave of baby boomers—some 76 million Americans born from 1946 to 1964—reaches retirement age in 2011. They'll strain the nation's health-care and retirement spending as never before.

Federal spending on Medicare and Medicaid is projected to grow at an annual pace of 7 to 8 percent in 2008 and several years after that, roughly twice as fast as the CBO thinks the U.S. economy will grow. So each year after 2011, spending on boomers will consume a larger slice of the budget pie.

"The long-term picture facing the federal government is not pretty," Peter Orszag, the new CBO chief, said in recent testimony before the Senate Budget Committee.

For a new report from the federal Government Accountability Office about the fiscal challenges that the nation faces, go to http://www.gao.gov/new.items/d07362sp.pdf.

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(c) 2007, McClatchy-Tribune Information Services.

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