March 24, 2004

March 24, 2004 | WebMemo on Federal Budget

Why Chairman Nussle's Budget is Superior to the Democrat Alternatives

The House of Representatives is scheduled to pass its FY 2005 budget resolution on March 25. Among the options being considered are House Budget Committee Chairman Jim Nussle's budget, which passed the House Budget Committee on March 17, and substitute amendments by Democrats associated with the Blue Dog Coalition, the Congressional Black Caucus, and the House Budget Committee. In terms of addressing the nation's top budgetary priorities, Nussel's budget is superior to the Democrat alternatives.

Priorities and Components

Budgets are about setting priorities. Most Americans would likely agree that the nation's top budgetary priorities are: 1) spending what is needed to protect the nation from terrorists and foreign threats; and 2) assuring that American have jobs and paycheck protection to afford necessities such as mortgage payments, groceries, insurance, and education. Therefore, a strong federal budget would

  1. Fully fund defense and homeland needs;
  2. Protect the tax relief necessary to create jobs, raise wages, and help Americans keep what they earn; and
  3. Restrain federal spending elsewhere, because runway federal spending threatens to push up taxes and harm the economy.

By this standard, Chairman Nussle's budget is superior to the Democrat alternatives. In explaining why, the above priorities are analyzed within the four main components of these budgets: discretionary spending, entitlement spending, tax relief, and budget process reform.[1]

  1. Holding the line on discretionary spending. Chairman Nussle's budget resolution provides $819 billion in discretionary budget authority in FY 2005-a 4.1 percent increase over 2004 levels. It fully funds the President's request of $402 billion for defense, allocates $31 billion for homeland security, and freezes other discretionary spending at $386 billion. Freezing non-security discretionary spending does not mean that none of these programs' budgets can be increased. Rather, it requires that lawmakers set priorities and balance each higher-priority spending increase with a lower-priority spending cut. Given the billions of dollars spent annually on wasteful, outmoded, and duplicative discretionary programs, those lower-priority cuts should not be difficult to identify.[2]

    The Democrat budgets seek higher spending levels. The Congressional Black Caucus budget calls for dozens of substantial discretionary spending increases, with savings found only in defense. The Budget Committee Democrat Alternative budget adds funding across several programs. Neither budget calls for setting priorities and eliminating wasteful and lower-priority programs.

  2. Reforming entitlements. Entitlements are a severe threat to the nation's long-term finances. In the absence of reform, the retirement of the baby boomers will bring on an increase in Social Security and Medicare costs sufficient to increase federal spending by 5 percent of GDP by 2030 (the current equivalent of $5,200 per household annually), and by 13 percent of GDP by 2050 (the current equivalent of $13,500 per household annually). The Medicare drug benefit, projected to cost $8.1 trillion through 2078, threatens to necessitate even steeper tax increases.[3]

    Chairman Nussle's budget recognizes that this entitlement crisis cannot be solved over night. While the nation works to reach consensus on this issue, his budget instructs authorizing committees to reduce waste, fraud, and abuse in entitlement programs by $13 billion over five years. Many of these savings can be found among the $85 billion in entitlement waste, fraud, and abuse that these committees identified last year at Nussle's request. While larger savings are needed, these reforms are a step in the right direction.

    By comparison, summaries of the Democrats' budget proposals were mostly silent on entitlement reforms.

  3. Averting tax increases. Unless Congress acts this year, millions of families will face large tax increases in 2004. The expanded child tax credit, the new 10 percent income tax bracket, and the elimination of the marriage penalty will all expire unless Congress acts. To prevent these and other tax increases totaling $138 billion over five years, Chairman Nussle's budget instructs Congress to write legislation extending these policies. It also provides an option for an additional $15 billion in new tax cuts in areas such as charitable choice.

    The Democrat budgets would raise taxes. The Blue Dog budget would immediately raise taxes on the top two income tax brackets and would subject the child tax credit, elimination of the marriage penalty, and the 10 percent tax bracket to PAYGO rules starting next year, likely leading to their expiration (see next section). The Budget Committee Democrat Alternative would also subject tax relief to PAYGO rules. Finally, the Congressional Black Caucus budget would rescind many of the tax cuts from 2001 and 2003.

  4. Repairing the federal budget process. It is nearly impossible to address runaway federal spending while using a federal budget process that was created 30 years ago to maximize federal spending and has been subject to three decades of abuse. With the "Spending Control Act of 2004," a companion to the budget resolution, Chairman Nussle proposes strong, enforceable caps on discretionary spending. It would also close loopholes for emergency spending and advanced appropriations. On the entitlement side, Chairman Nussle proposes a PAYGO requirement that all new entitlement expansions be balanced with equivalent entitlement reductions. While more needs to be done, these reforms would improve the budget process.

    The Blue Dog and Budget Committee Democrat Alternative budgets would apply PAYGO to tax cuts as well as mandatory spending. This means that any tax relief would need to be balanced with tax increases or entitlement cuts. It also means that increases in entitlement spending could be balanced with tax increases rather than savings from other federal programs.

    This policy would lead to tax increases. While current entitlement programs such as Social Security and Medicare run on autopilot and would not be subject to PAYGO, the 2001 and 2003 tax relief would be subject to this version of PAYGO and would likely expire. Merely retaining the tax relief that Americans now enjoy would, under PAYGO, require 60 votes in the Senate and a waiver in the House. To avoid this supermajority requirement, lawmakers seeking to prevent tax increases would have to either: A) raise other taxes; or B) reduce mandatory spending by a larger amount than has ever been enacted. Option A is still a net tax increase (raising one tax to avoid raising another), and option B is probably politically unrealistic. If the 2001 and 2003 tax cuts are allowed to expire, a married couple with two children and a combined income of $40,000 would see their annual income tax burden rise from $45 to $1,978.

Conclusion

Reining in runway federal spending, funding defense and homeland security, and protecting tax relief are important national priorities. Chairman Nussle's budget is superior to the Democrat budgets on all those standards.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Federal Budget

Show references in this report

1. As of March 24, none of the Democrat budgets are wholly available to the public. This analysis is based on online summaries provided by the House Rules Committee at http://www.house.gov/rules/108announce_bugres2.htm.

2. For specific spending cut recommendations, see Brian M. Riedl, How to Get Federal Spending Under Control, Heritage Foundation Backgrounder No. 1733, March 10, 2004, located at http://www.heritage.org/Research/Budget/bg1733.cfm.

3. See Robert E. Moffit, Ph.D., and Brian Riedl, Medicare's Deepening Financial Crisis: The High Price of Fiscal Irresponsibility, Heritage Foundation Backgrounder No. #1740, March 23, 2004, located at http://www.heritage.org/Research/HealthCare/bg1740.cfm.