- The Washington Times - Monday, February 2, 2004

After spending increases averaging more than $150 billion per year over the past three years, President Bush yesterday unveiled what appears to be a relatively austere budget proposal for fiscal 2005. The administration plans to increase total federal spending next year by $81 billion, which represents a 3.5 percent increase. Unlike the $161 billion (7.5 percent) increase in spending planned for fiscal 2004, which includes $87 billion in supplemental funding to finance military and reconstruction operations in Iraq and Afghanistan, the 2005 budget proposal included virtually no funds for continuing these operations beyond the end of fiscal 2004. Instead, the administration reportedly will be requesting supplemental funding for Iraq and Afghanistan sometime following the November elections. The fiscal 2005 blueprint also included a significant increase in the projected 2004 deficit, which is now expected to total $521 billion.

The administration has pledged to reduce the deficit by half within five years. The projected deficit for 2009 is $237 billion. More than half of this deficit-reduction progress is initially scheduled to take place in 2005. The 2005 deficit is expected to decline from 2004’s $521 billion to $364 billion. (That figure would, of course, rise by the forthcoming Iraq/Afghanistan supplemental.)

The outlay side of the budget ledger includes discretionary spending (which is subject to annual congressional appropriations) and mandatory spending for interest expenses and entitlements, such as Social Security, Medicare and Medicaid. Discretionary funding ($818 billion in 2005) accounts for about one-third of total spending.

It is on the domestic discretionary front, which excludes defense and homeland-security spending, that the administration finally appears to be making some progress in long-overdue spending restraint. After increasing by 15 percent in 2001, increases in domestic discretionary spending have successively ratcheted down to 6 percent (2002), 5.4 percent (2003) and 4 percent (2004). For 2005, Mr. Bush has pledged to hold the overall domestic discretionary spending increase to 0.5 percent, allowing it to rise by only $2 billion from $384 billion. To enforce this pledge, he may finally have to unsheath his veto pen.

With total spending projected to increase and with the deficit expected to decline, the administration is clearly forecasting a revenue windfall. Indeed, revenues are projected to surge by $238 billion, or 13.2 percent. This might be a bit too optimistic. After all, the expected economic growth rate for calendar 2005 is 3.6 percent, which matches the growth rate in the recently completed 2003 fiscal year. However, total revenues in 2003 actually declined by nearly 4 percent. Yes, the timing of tax cuts contributed to this revenue shortfall. But the administration is proposing to maintain the same tax rates and tax credits and deductions in 2005 (and permanently thereafter) that were enacted in 2001 and 2003. In addition, among other tax cuts, the administration is also proposing nearly $10 billion in relief from the alternative minimum tax for 2005.

At this point, it is difficult to tell which is the larger budget wild card: the forthcoming Iraq/Afghanistan supplemental or the revenue estimate. Both factors are crucial to the extent to which the deficit can decline.

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