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Press Release

Will the President’s Budget Bolster the Economy?


On Monday, President Bush sent his budget request to Congress. While not surprising, the budget is sobering. Beyond the tax cuts and initiatives outlined in last week’s State of the Union address, the new budget demonstrates the growing expanse of government and the urgent need for Medicare and Social Security reform. As the budget makes quite clear, if today’s deficits are disconcerting, the mounting liabilities of Social Security and Medicare are cataclysmic. The president outlines an ambitious agenda: “winning the war against terrorism, securing the homeland, and generating long-run economic growth,” all while tackling the excessive government spending and the looming fiscal crises of Social Security and Medicare.

The centerpiece of the budget is the president’s tax plan. The administration’s economic team has crafted a plan targeting long-run economic growth, relying on tax cuts to provide workers, investors, and entrepreneurs incentives that will bolster the economy through increased economic activity. The proposed changes are sweeping and would provide relief to taxpayers across the board. The administration estimates that on average, America’s 92 million taxpayers will see tax burdens reduced by an average of $1,100. The plan includes proposals that affect taxpayers at all levels of income: accelerating the rate reductions included in the 2001 tax bill, creating a new 10 percent tax bracket, eliminating the marriage penalty and increasing the child tax credit. The plan also eliminates the double taxation of dividends and increases the expensing limits for small businesses. These changes are an important step toward fundamental tax reform and they provide strong incentives for increased economic activity, including lower marginal tax rates and the elimination of some of the tax code’s many punitive provisions.

On the spending side, President Bush proposes $2.2 trillion in federal spending for 2004—up 4.2 percent over 2003. As a percent of the nation’s output, the administration’s spending package amounts to 19.7 percent of the gross domestic product (GDP). The proposed increase in discretionary spending is roughly 4 percent, a limited increase suggested by the administration to ensure that government growth does not outpace the income growth of the average American family.

While efforts to curb federal spending are laudable, the baseline used masks the surge in federal spending that has occurred over the last three years. In effect, the proposed limited increase starts from an unusually high spending level, establishing a baseline that may be out of step with most American families. As Chris Edwards of the Cato Institute notes, “With Bush’s budget plan for FY2004, real non-defense discretionary outlays will rise 18.0 percent in his first three years in office (FY2002-FY2004). That growth far exceeds the first three years of any recent presidential term….” While some may assert the spending increase was necessary to bolster defense and homeland security, Edwards notes that President Reagan, who embarked on a similar military buildup, offset the increased spending in defense by freezing non-defense discretionary outlays.

Concerns over the growth in federal spending are particularly important in light of the administration’s analysis of the federal government’s long-term liabilities. Both Social Security and Medicare pose real threats to the nation’s fiscal health, and the threats are compounding as the nation’s baby boom generation moves toward retirement. Together, Social Security and Medicare have a combined shortfall in 2002 of almost $18 trillion. Without fundamental reform, these programs pose an unsustainable burden to the U.S. economy. Both programs are in bad shape; already, the cost of Medicare far exceeds the taxes collected to fund the program, and by the year 2017, Social Security will be paying out more than it collects.

The president’s budget clearly outlines the costs of failing to reform these programs: “Total household wealth in the United States was $40.2 trillion in 2002. The combined Social Security and Medicare shortfall is nearly $18 trillion. This means that the federal government would have to confiscate almost half of all household wealth to have the resources necessary to close both these programs’ future financing gaps.”

(Click here for the full White House Report)

Alternatively, this money could be collected in taxes over time, which “would mean a permanent payroll tax increase to a rate of 22.4 percent, amounting to about $3,000 in additional taxes every year for every family.” To make matters worse, these taxes tend to be regressive, imposing a disproportionate impact on lower income families. Ironically, many in Congress who criticize the president’s plan as “tax cuts for the rich” are the same people steadfastly opposed to fundamental reforms of Social Security and Medicare.

President Bush has presented a budget committed to economic growth and fiscal reform, with mixed results. The growth package included in the budget provides a strong foundation for improved economic growth. The reductions in marginal tax rates are long overdue, and efforts to eliminate unfair taxes hold the promise of a more sweeping overhaul of the complex, and often-punitive federal tax code. With respect to fiscal reform, the budget falls short of its target. Federal spending may be curbed, but at a level that locks in the spending increases that have occurred in recent years. In light of the war on terrorism and mounting long-run fiscal liabilities, now is the time to ferret out all unnecessary and wasteful programs. Looking to the future, the budget’s unvarnished picture of the need for fundamental reforms to Social Security and Medicare is refreshing.

But this is only the first volley in the budget battle. Attention now moves to Congress, where support for tax cuts and fiscal restraint is not as ardent. Parochial interests and pet projects tend to fog the picture, and few in Congress are willing to expend political capital on the longer-term issues of Social Security and Medicare reform. The president has laid out some sensible guideposts for economic growth and raised the importance of fiscal constraint. It would be wise for voters to remind their elected representatives that these goals are, in fact, what should drive fiscal policy in Washington.