The President’s FY 2005 Budget: First Impressions

I. Introduction

On February 2, the Bush Administration released its budget proposals for fiscal years 2005-2009. This paper provides initial analysis of the Budget, with the following main conclusions:

The 2005 budget continues the Administration’s pattern of seeking large, regressive tax cuts, seemingly under any and all circumstances. The Administration’s continued insistence on long-term tax cuts not only fails to help resolve the nation’s fiscal problems, but makes those problems worse. It is also contradictory to the approach taken by prior Republican and Democratic Administrations alike when faced with unexpectedly adverse fiscal situations.

• · The principal tax proposal in the budget is to make almost all of the recently-enacted tax cuts “permanent.” Such a policy would be expensive, regressive, and according to many economists (including the current Director of the Congressional Budget Office), would ultimately prove harmful to economic growth. Furthermore, it would not resolve the fundamental source of fiscal uncertainty — how the fiscal gap will be closed—but rather exacerbate that uncertainty by making long-term deficits larger.

  · Another set of proposals, to greatly expand tax-favored saving accounts, would also be expensive in the long run, and would be both regressive and unlikely to generate positive effects on national saving or economic growth.

The Administration proposes substantial increases in spending on defense and homeland security, and essentially a nominal freeze over 5 years for non-defense discretionary spending. Outside of defense, homeland security, and international affairs, the budget reduces real per capita discretionary spending by about 15 percent.

On paper, the budget meets the Administration’s goal of cutting the deficit in half as a share of GDP by 2009. This is a meaningless victory, however. First, the same objective is achieved under the official baseline without any policy changes. Second, given its proposals to cut taxes and raise defense spending, the Administration reaches the goal only because the budget omits several factors that should be included in any reasonable and responsible projection — including a fix for the alternative minimum tax, and spending on the Iraq and Afghanistan wars after September 30 — and imposes heroic assumptions about the reductions possible in domestic discretionary spending outside homeland security. Third, the President proposes massive new tax cuts that would take place after 2009, thus swelling the deficit again. Fourth, cutting the deficit in half by 2009 is neither necessary nor sufficient to address the nation’s long-term budget problems. The budget implicitly acknowledges this, noting that under the Administration’s proposals, “long-term projections show the budget is on an unsustainable path.”

The President’s proposals for budget reform aim to restrict spending increases, but place no constraints on tax cuts. This would be unlikely to be effective, since it would encourage the shifting of spending programs to the tax side of the budget. In addition, it fails to address the fact the budget deficit has soared because revenues have plummeted, not because spending has exploded.

The absence of a serious proposal to deal with the AMT is both striking and irresponsible. Under the President’s budget proposals, there would be 30 million taxpayers on the AMT in 2009 and 44 million in 2014. Despite the fact that only a tenth as many face the AMT currently, the National Taxpayer Advocate has already declared the AMT to be the most important problem facing taxpayers. Although the AMT problem is the product of bi-partisan neglect, the Bush Administration bears special responsibility for dealing with the AMT because the tax cuts it has championed have made the problem far worse.

At this stage, the fiscal legacy to date of the Bush Administration seems clear. Its policies have made the medium- and long-term fiscal situation far worse. While policies that raised short-term deficits may have been justified in previous years as the necessary response to economic adversity, it was possible to stimulate the economy through alternative policies that likely would have been both less expensive and more effective than the paths chosen. Second, the Administration continues to propose permanent new tax cuts. Third, perusal of the budget documents makes it clear that — three years into its term — the Administration still does not actually have a plan to deal with medium- and long-term fiscal problems.

Section II provides a brief overview of the tax and spending proposals. Section III discusses the President’s goal of cutting the deficit in half by 2009. Section IV examines the budget reform proposals. Section V provides a broader perspective on fiscal policy to date in the Bush Administration.