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WebMemo #659 on Federal Budget

February 8, 2005

President's Budget A Solid Step To Rein in Spending

By

President Bush's fiscal year 2006 budget proposal is a strong step towards getting the budget back under control. Budgets are about setting priorities, and President Bush prioritizes national security by providing the Defense Department with a 4 percent budget increase, while saving $20 billion by eliminating or vastly reducing nearly 150 outdated and wasteful programs. The President's next step should be to demand that Congress work within this budget framework or face vetoes on excess spending.

Click here for a summary of the President's FY 2006 budget proposal.

Positives

  1. Freezing non-defense discretionary spending. The President's budget holds non-defense discretionary even with last year in order to fund priorities like defense and homeland security. Tough decisions are necessary in order to rein in spending growth, and establishing budget priorities is a necessary component. Trade-offs must be made in this process, and non-priority programs should not receive additional budget increases. So President Bush proposes freezing this portion of the budget in 2006. Money saved from failed programs will fund spending increases for worthy programs.
     
  2. Eliminating or strongly reducing nearly 150 programs. Washington has been running many of the same outdated and wasteful programs for decades. It is time for lawmakers to modernize the budget and close down outdated agencies that consume tax dollars while providing few benefits. A case in point is the Advanced Technology Program (ATP), which has lavished hundreds of millions of dollars in subsidies on wealthy Fortune 500 companies. President Bush is wise to call for eliminating ATP and similarly unnecessary programs.
     
  3. Reforming farm subsidies. Farm subsidies are America's largest corporate welfare program, with two-thirds of all subsidies paid to just 10 percent of all farms and agribusinesses. President Bush's proposal to reduce subsidies and tighten subsidy limits for large agribusinesses will save $8 billion over the decade.[1]
     
  4. Making the tax cuts permanent. Tax revenues are now growing 9 percent annually in part because the 2001 and 2003 tax relief laws increased incentives to work, save, and invest. Uncertainty about whether the tax cuts will expire makes it difficult for entrepreneurs to plan future investments. Letting the tax cuts expire would harm businesses, families, and the economy, and history shows that any new revenues would likely be allocated to new spending rather than deficit reduction.

Challenges

  1. Medicare. Medicare spending is projected by leap $91 billion over the next two next years, from $290 billion to $381 billion. Such large increases, which chiefly result from the new Medicare drug benefit, are unsustainable. A positive first reform would be replacing the Medicare drug benefit with the drug discount card that is currently in place until 2006. This discount drug would assist needy seniors at a small fraction of the current drug benefit's cost.[2]
     
  2. Other entitlement costs. It will be nearly impossible to constrain future spending and trim the deficit unless entitlement spending is streamlined. While the fiscal year 2006 budget provides a strong second step by calling for the elimination of small, outdated programs, this momentum must be followed by reforms to Social Security, Medicare, and Medicaid.
     
  3. Exclusion of certain costs. The President's budget excludes the costs of future Iraq supplemental bills and adjusting the Alternative Minimum Tax. These necessary costs should be included in budget projections to provide a clearer picture of the budgetary challenges that lie ahead.

Conclusion

President Bush has proposed a lean budget that continues the process of reining in spending he started last year. While the President asks lawmakers to accept reforms in many of their favored programs, he leads by example by offering to reduce spending on some of his own favorite programs, like AmeriCorps. Many lawmakers have been very critical of recent spending and budget deficit trends. They now have the opportunity to step up to the plate and join the President in reducing runaway spending.

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

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