February 2, 2004

February 2, 2004 | WebMemo on Federal Budget

The President's 2005 Budget: A First Step

The President's budget takes a first step towards reining in federal spending. However, bolder steps are necessary to pass on a strong economy and sound fiscal foundation to the next generation.

 

A First Step

The President has evidently heard the growing concerns over increased federal spending and wants to do something about it. The commitment to fiscal restraint evident in his budget should be applauded and encouraged. Corralling the growth in spending is essential to ensuring the nation's fiscal health.

 

The President's budget would increase funding for priority programs in Homeland Security and Defense while essentially freezing spending in other most other discretionary programs. While the budget includes a large number of program terminations, they add up to only $4.9 billion. Promisingly, though, they include the elimination of some corporate welfare, specifically the Advanced Technology Program, which subsidizes business research for product development.

 

The budget also calls for making the Bush tax cuts permanent. That is critical. Businesses, investors, and individuals cannot be expected to make sound plans and grow the economy if tax policies are unsettled and uncertain. Maintaining pro-growth tax policies is vital to ensuring continued economic recovery and to providing a sound foundation for future expansion.

 

The Litmus Test

But for this first step to be taken seriously, it must be accompanied by decisive action. Americans must see more than just proposals and rhetoric. Resolve - and tough decisions - will be necessary if the administration is to get spending back under control and continue on its pro-growth agenda.

 

The President has a prime opportunity to set an aggressive tone for the budget debate this session by starting with the Transportation bill. His budget recommendation - even though too high - is still smaller than the massive alternatives being considered in the House and Senate. At the very least, the President should draw a line in the sand at this funding level - he must veto the bill if it has so much as one dime more. This is a critical litmus test that will send a strong signal of the administration's resolve. Failure to draw this line will undermine the President's credibility and doom future efforts to control spending.

 

Moreover, to translate this budget's priorities from proposals to accomplishments, the President must fight for every one of the terminations and program cuts included in the budget. If he is sent a bill that excludes these recommendations and does not cut other programs commensurately, he must be prepared to wield his veto.

 

Significant Fiscal Challenges Ahead

All this is just a first step. Looking forward, there are huge problems that must be tackled:

  • Medicare spending is spiraling out of control thanks to the exploding cost of the prescription drug bill;
  • Overseas military and reconstruction efforts   and the war on terror will no doubt require additional spending; and
  • Fiscal meltdown from Social Security, Medicare, and other entitlement program are just over a decade away. Postponing entitlement reform will be costly.

 

Bolder Steps Needed

Bolder steps are needed now to rein in spending and to prepare for the difficult policy and fiscal challenges posed by growth in entitlement spending. A good start would be an outright freeze on total discretionary spending. To fund the administration's defense and homeland security priorities while freezing total discretionary spending would require some $27 billion in cuts and reforms beyond the President's proposal.

 

Even with this, Washington must still come to grips with mandatory programs set to hemorrhage red ink with the retirement of the baby boomers. Reforms in Social Security, Medicare, and other programs are essential, and they must begin now. The Medicare prescription drug bill as currently written must not go into effect as slated in 2006. Congress must cut it back significantly and focus more limited resources on those most in need.

 

Budget Process Reforms

The President's budget includes a number of budget process reform proposals, such as a constitutionally viable line-item veto, discretionary spending caps, curbs on mandatory spending, and measures to control unfunded liabilities of entitlement programs.

 

These reforms too must be bolder. They must force Congress to consider the growth in the unfunded liabilities of entitlement programs when setting annual budget priorities, and they must provide the tools necessary to fully assess the costs and fiscal impact of proposals to reform entitlement spending.

 

There must be real process reform to constrain spending, reform that will change the dynamics in spending, eliminate incentives for bringing home the bacon, and reward members who want to constrain its growth. Some Members of Congress championing the need for comprehensive reform have put forward proposals, such as one by Rep. Paul Ryan (R-WI), Rep. Jeb Hensarling (R-TX), and some of their colleagues.

 

Difficult Choices

Putting spending back under control, so that it does not threaten the economy and burden our children, will require difficult but necessary choices. To leave a legacy of fiscal and economic soundness to the next generation tough steps are necessary. It's time for Congress and the President to take them.

About the Author

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

Related Issues: Federal Budget