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Summary and Analysis of the
President's 2005 Budget

A Budget Larded With Gimmicks
Obscures Real Size of Deficit

While the President's budget claims to cut the deficit in half over the next five years, this is a mirage. The deficit appears to shrink only because the budget omits the costs of significant items on his agenda and relies on unrealistic offsets. The budget uses a number of other techniques, including significant unspecified spending reductions, to obscure the true budgetary effects of the President's policies.

  • Five-Year Budget Hides Exploding Costs — Once again, the budget covers only five years, through 2009. In the President's first budget, the Administration embraced ten-year projections because the huge ten-year surplus projected at that time supposedly justified imprudent, back-loaded tax cuts. Now, with the return of large, chronic deficits, the Administration claims that ten-year forecasts cannot be trusted. Meanwhile, the budget includes policies with substantial long-term costs. For example, Lifetime Savings Accounts and Retirement Savings Accounts initially reduce the deficit somewhat, but their costs will grow steadily thereafter. And the real cost of the President's mission to the moon and Mars occurs beyond the five-year window.

  • Additional Tax Cuts Approach $1 Trillion — The President's budget makes his expiring tax cuts permanent at a cost of $131.6 billion over five years. Over ten years, however, these costs will total $936.3 billion, not including the additional debt service these tax cuts will trigger. Over 75 years, the cost of extending the tax cuts exceeds the combined shortfalls in Social Security and Medicare.

  • Budget Omits Costs of Iraq Conflict, Social Security Privatization, and Other Key Bush Policies — The President's budget omits significant policy costs. The budget fails to provide for ongoing military costs in Iraq and Afghanistan, even though the Administration concedes that U.S. involvement there is likely to continue beyond 2004. The President advocates allowing younger workers to redirect part of their Social Security payroll taxes into individual accounts — a first step toward privatizing Social Security. But the budget is silent on the transition costs of such a plan, estimated at $1 trillion over ten years. The budget also avoids long-term reform of the Alternative Minimum Tax (AMT), even though the AMT will soon force millions of middle-class families to pay more taxes, contrary to the original intent of the AMT. Instead, the budget provides only a short-term fix. CBO estimates the cost of reforming the AMT — if other expiring tax cuts were extended — at over $500 billion.

  • Budget Relies on Unrealistic Fees and Offsets — The budget assumes savings from user fees and offsets that Congress has rejected in the past, such as requiring certain veterans to pay enrollment fees for medical care, charging fees for meat safety inspections, and increasing patent fees.

 

 

  • Budget Enforcement Plan Ignores Half of the Budget — The budget supports the revival of discretionary spending caps, as well as a pay-as-you-go rule (PAYGO) to require that any legislation increasing direct spending must be offset by corresponding spending cuts. The President's plan is based on provisions of the Budget Enforcement Act of 1990 (BEA), which expired in 2002, with one important exception — the BEA PAYGO rule applied to tax cuts, too, and the Bush proposal does not.

  • Tightening the Vise on Domestic Funding Barely Affects the Deficit — In the name of cutting the deficit, the President's budget cuts domestic non-homeland security appropriations by 0.3 percent below the 2004 enacted level, and by 3.6 percent below the amount that CBO estimates is needed to maintain purchasing power at the 2004 level. This will do virtually nothing to reverse the growing deficit. This category of funding has been frozen in real terms since 2002, while the deficit mushroomed from $158 billion in 2002 to $521 billion in 2004.

  • Unspecified Cuts of $65 Billion Herald the Return of Reagan-era "Magic Asterisk" — The budget includes a refundable tax credit for the purchase of health insurance, which will cost $65.4 billion in increased spending for the refundable portion of the credit and $4.7 billion in reduced receipts through 2014. The budget also includes a "contingent offset" of $65 billion in reduced spending over ten years, but the budget is silent on what that offset might be. Rather than offer a genuine policy change to reduce spending by this amount, the budget merely states: "When the Congress moves legislation to implement the President's health care credit proposal, the Administration will work with the Congress to offset this additional spending." This approach is reminiscent of the first budget submitted by President Reagan, which achieved fiscal discipline — on paper — thanks to a $160.4 billion spending-cut item called "Additional savings to be proposed." That approach has since been known as "the magic asterisk."

  • The President Obscures Cost of Some Tax Cuts By Redefining Them As "Current Services"— The deficit effects of policy changes are conventionally measured against a "current services baseline," which is basically an estimate of what total federal spending and receipts would be under an extension of current law. The Budget Enforcement Act generally requires that a mandatory program spending over $50 million a year be assumed to continue in the baseline after the last year of spending explicitly authorized by law. Sunsetting tax provisions are assumed to expire in the baseline, with a few exceptions for certain dedicated excise taxes.

    The President's 2005 budget presentation departs from the usual practice by assuming, for purposes of the current services estimates, that certain expiring provisions of the 2001 and 2003 tax laws continue past their sunset date. The budget argues that this is justified because these provisions "were clearly not intended to be temporary." However, the sunset dates on these tax cuts were driven solely by the enormous price tag of the President's tax policies. Attempting now to hide the costs of extending these tax cuts in the baseline and treat them as inevitable obscures the fact that these tax cuts, and the resulting structural deficit that Republicans now use to justify a wide array of cuts to federal programs, were a matter of choice.