Taxes & Spending

The 2008 Bush Budget: Big Numbers But Some Reasons to Cheer

In the aggregate, President Bush’s new budget for Fiscal Year 2008 is far too big. But there is a lot of good news for taxpayers in the details of the President’s fiscal blueprint.

The total price tag of the Bush budget is $2.9 trillion. In part, this enormous amount is a legacy of the spending explosion that’s taken place in the federal government during the first six years of Bush’s Presidency. During this time, spending has risen by almost $1 trillion, climbing from 18.5% of GDP in 2001 to a projected 20.2% of GDP in 2007. While much of that is attributable to the war in Iraq, more than a third of that increase is due to non-defense spending.

Beyond the bloated aggregates, Bush’s budget does contain some good proposals and the President’s larger overarching goal of budget balance with no tax increases has the potential to be a politically-winning message for his allies on Capitol Hill.

In terms of revenues, the President’s budget makes permanent his first term tax cuts, which are currently scheduled to expire in 2010. OMB’s budget numbers disprove claims that Bush’s tax cuts have starved the Treasury of needed revenue: adjusting for inflation, during the current fiscal year, Washington will collect 27% more money than just ten years ago. Washington may have many problems, but lack of revenue is not among them.

The President takes some good steps on entitlement programs. Overall, Bush seeks to trim mandatory spending by $96 billion over five years. Most importantly, Bush proposes slowing Medicare spending by variety of means, including trimming benefits going to wealthier Americans. Bush’s proposals would lower Medicare’s unfunded liabilities by $8 trillion, which is good progress on a very intractable problem. The Bush Medicare proposals are already being attacked by some Congressional Democrats, who offer no alternative ideas on reducing the $39 trillion in unfunded liabilities over the next 75 years for Social Security and Medicare (translation: they’d leave future generations with enormous tax increases).

Bush has a number of other laudable entitlement changes, including ending farm subsidies to those earning over $200,000 a year and a proposal to establish personal accounts for Social Security, although not until 2012.

Bush’s budget contains some firm spending restraint in domestic discretionary spending that is eminently sensible policy-wise, but may not be politically achievable. Bush calls for nondefense discretionary spending to be cut by 15% in real terms by 2012. Of course, this year’s spending represents a huge increase versus the beginning of the Bush Presidency (federal education spending has basically doubled since Bill Clinton left office), so any restraint that does get enacted into law is just a reduction in the excesses of the last six years.

Bush’s defense spending proposals will deservedly receive careful scrutiny. But it would be a mistake to argue that over recent decades the federal government has grown because of defense spending. Relative to GDP, defense spending is less than half the size it was 40 years ago. As defense spending has tumbled, federal non-defense spending has filled in the gap left behind (see chart). This trend of the federal budget increasingly becoming dominated by non-defense spending will only be exacerbated in coming years as the Baby Boom generation retires, which reinforces the virtue of Bush’s entitlement spending proposals.



Overall, President Bush’s budget moves the federal government in the right direction on a number of specific areas. Already under attack by Congressional Democrats, the next question will be how hard Bush defends his budget. As the Congressional budget process swings into action, if the House and Senate start ramping up the spending numbers, this would be an excellent time for the President to break out his little-used veto pen.

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