Gilbert Brown is a retired World Bank economist, with a Masters of Theological Studies from Wesley Theological Seminary, and is also a former Visiting Associate (to the Washington Office) for Economic and Budget Policy.

By proposing $1.49 trillion dollars in new tax cuts over the next ten years — on top of the $1.35 trillion tax cut enacted in April 2001 — the FY 2004 budget that President Bush sent to Congress on February 3 raises fundamental fiscal, economic and social policy issues. Five major concerns are: (1) that it could lead to enormous future deficits which could trigger higher interest rates, inflation, even larger balance of payment deficits, and slow economic growth, (2) that it would worsen the budget crises facing state and local governments, thereby both reducing their funding for education, health care, transportation, and other services and needs and also forcing them to raise taxes, (3) that the large deficits will force huge cuts in “human investment” spending such as health, education, nutrition, child care and housing that particularly help lower income people, (4) that the tax cuts will not be evenly distributed among income levels, and (5) that the huge deficits will make it impossible for the government to meet its huge Social Security and Medicare commitments to retiring baby boomers.

In his proposal, Bush projected receipts of $1.9 trillion and outlays of $2.2 trillion for FY 2004, and forecasted a $307.4 billion deficit in FY 2004. In his budget, Bush reported that the federal deficit in FY 2002 was $158 billion, and projected a budget deficit of $304 billion in FY 2003. In addition, he forecast smaller budget deficits in future years, from $208 billion in FY 2005 to $190 billion in FY 2008.

The above data may not appear to justify the extent of the above concerns. The primary explanation is that the President’s proposals will have huge and expanding impact on revenues after 2008. In addition, spending levels in this and subsequent years will almost certainly be substantially higher than estimated. Furthermore, we have huge unfunded mandates to provide Social Security and Medicare benefits to those now paying payroll taxes.

Without the $2.84 trillion in revenues lost in the first ten years of the two tax cuts — which will reduce revenues by several times that much in the subsequent ten years, as well as add an additional interest cost on the federal debt of roughly $1 billion per decade — the Social Security deficit definitely would be manageable and the Medicare deficit would look much less challenging. The basic issue is not whether the American economy is capable of supporting these two public insurance programs, but whether we have the desire and will to do so.

Revenues
While the newly proposed budget contains 62 tax cuts, the most controversial are the $364 billion proposed elimination of individual income taxes on most corporate dividends and the plan for three new tax-sheltered savings and retirement plans that would ultimately end most taxation of personal income from interest and dividends and capital gains. By only forecasting budget figures for five years rather than the ten years that have been customary, the budget shows a $15 billion increase in revenue through 2008 as the result of setting up the new tax-free saving and retirement programs. Why? Because between now and 2008 they believe the government will gain more in taxes from people closing out their existing tax-sheltered accounts in order to put funds into the new ones, than would be lost on taxes from withdrawals from the new accounts. Since taxes paid by individuals on interest, dividends and capital gains now amount to about $160 billion per year, according to the Center for Tax Justice, losses thereafter would gradually become enormous.

Spending
The FY2004 budget shows an expected overall increase of 4% in total outlays over 2003. Mandatory spending, which is determined by existing legislation rather than current appropriations, is estimated to rise by 3.9%. If mandatory spending and net interest are lumped together, they grow by 4.5%. Discretionary spending, which is determined by annual appropriation bills, is projected to increase by 3.5%, though as noted above, actual spending is expected to grow by substantially more. While discretionary spending is budgeted to increase by $28 billion, defense is budgeted to rise $14 billion (3.7%), international affairs (primarily military, economic and humanitarian aid) by $5 billion, (24%), and veterans benefits and services by $2 billion (9%). That leaves a net $7 billion increase for all other discretionary spending, including homeland security.

Thus the outlook for other discretionary spending is bleak. While some are rising, most show little change or decreases. Large numbers of environmental, child care, and other programs, including pre-school, education, training and other social programs are being cut or proposed for termination. The Housing and Urban Development Program for Community Development Block Grants would be flat-funded. The Justice Department’s Juvenile Accountability Incentive Block Grant would be eliminated. Medicaid and the State Children’s Health Insurance Program (SCHIP) are to be merged into a single block grant to states, which are to be free to spend the SCHIP portion of the grant on any health need (including of adults). Federal controls over Medicaid would also be loosened, and one-third of present Medicaid patients could lose their coverage. To entice states to accept this plan, the block grants would represent an increase over present funding for the first several years, but then would be lowered in order for the federal government to recoup the increases.

The President received much praise for his announced $15 billion program over five years to combat AIDS in Africa. However, some of that is to be offset in other foreign aid expenditures.

The budget also includes $400 billion over 10 years for modernizing Medicare and providing prescription drug coverage for seniors. The President’s speech implied that the 80% of seniors in traditional Medicare would have to shift to private plans to get the drug benefit, and many members of Congress told him that would not be acceptable. The White House has yet to announce the specifics of their proposal.

Federal Deficits and Debt
It is not at all certain that the annual budget deficits will become smaller between 2004 and 2008, given expectations of higher spending than budgeted, and possibly lower revenues. But clearly deficits will become larger after that as revenue losses accelerate from such sources as the proposed new savings accounts (if they are approved by Congress), and from the full phasing in of the 2001 tax cut, including the scheduled termination of the inheritance tax in 2010. The Center for Budget and Public Policy estimates that the 2001 tax cuts alone will reduce revenues by $4 trillion over the 10 years beginning in 2012.

When President Bush assumed office, we had a projected budget surplus of $5.6 trillion over the next 10 years. When he offered his $1.3 trillion tax cut in 2001, he was confident that, even with the tax cut, the U.S. could increase essential spending and still have a comfortable surplus. In the post 9-11 world, after the collapse of the economic bubble, the White House forecasts record dollar amounts of debt for this year and next, and Bush is asking for another huge tax cut – that would have budget and deficit ramifications for years to come.

Whatever the sources of the deficit, it is clearly time to end tax cuts, including those cuts in the 2001 tax cut that have not yet been phased in. If the economy in fact needs a stimulus, that could be done much more effectively and quickly without causing continuing deficits in future years, by increasing spending on schools, teachers, health care, highways, homeland security and other “public goods.” In testimony before congressional committees in the second week of February, Federal Reserve Chairman Greenspan said he felt the economy was being held back now by uncertainty over war with Iraq, but would not need a stimulus. He expressed his concern that the proposed tax cuts and prospective future deficits might be risking run away deficits, inflation and reduced growth, and making it impossible to keep our commitments to those now paying Social Security and Medicare taxes.