In pledging to halve the US fiscal deficit over his second presidential term, George W. Bush has laid the emphasis on spending restraint.
During the campaign Mr Bush did not provide great detail on his pledge to cut the fiscal deficit. However, by ruling out tax increases, deficit reduction will rest on economic growth which will boost tax revenues and on curbing spending.
Mr Bush has pledged to freeze discretionary spending other than defence and homeland security. However, mandatory spending, including Social Security and Medicare, together with defence and security spending and interest payments, accounts for more than 80 per cent of federal spending.’
“What happens in [non-defence discretionary spending] is potentially important for political and symbolic reasons,” said David Greenlaw, chief fixed income economist at Morgan Stanley. “But the political battle will be over a relatively small number of dollars. It is not that important in terms of deficit reduction or in terms of the macroeconomic effects.”
During Mr Bush's first term, discretionary spending outside defence and homeland security rose at a rapid rate. Defence spending accounted for about a third of the increase in spending over the 2001-04 period. Entitlement programmes, including Social Security, Medicare, Medicaid and other mandatory spending, accounted for more than half of the increase. The non-partisan Congressional Budget Office, in its latest outlook, estimated that mandatory spending was likely to grow 1 percentage point faster than the economy each year over the next 10 years.
“President Bush has his work cut out for him because so much of the spending increases have built-in momentum,” said Mickey Levy, chief economist at Bank of America. Controlling non-defence discretionary spending will still be politically difficult, and will require the co-operation of the Republican-dominated House and Senate.
Highlighting the scale of the challenge, the Concord Coalition, a non-partisan group that advocates fiscal responsibility, points out that the rate of non-defence discretionary spending growth over the past 25 years has averaged 5.6 per cent per year.
During his first term, Mr Bush did not veto a spending bill. That may have to change now, however, if stringent spending limits are to be met, economists say.
The 2006 budget, which Mr Bush will present to Congress at the start of next year, will provide the first details on how spending will be controlled. Independent economists say it will provide an indication of how serious Mr Bush is about reducing fiscal discipline. The budget calculations, provided before the election, exclude the cost of the war in Iraq and Afghanistan.
Last year's budget also included only a one-year fix for the Alternative Minimum Tax. Budget analysts estimate a fix for the AMT is likely to cost more than $500bn (€388bn, £271bn) over the next 10 years, relative to the CBO baseline.
Mr Bush has said he would appoint a bipartisan commission to investigate tax reform, one of his priorities for the second term. But the president repeated yesterday that he would not raise taxes and has pledged to make permanent the tax cuts passed during his first term, which are set to expire between 2009-11, with implications for the fiscal deficit beyond the next term. It is beyond 2010 that the costs of Medicare and Social Security start to escalate.
