Financial Times Editorial - Bush' budgetary gambit

Financial Times Editorial - Bush' budgetary gambit
Copyright The Financial Times Limited 2007
Published: February 6 2007 02:00 | Last updated: February 6 2007 02:00



In the chess game that is the US budgetary process the executive has the advantage of moving first. Yesterday President George W. Bush proposed a moderately credible 2008 budget, but one dominated by his own political agenda. Congress, now under Democratic control, will push back, but both sides must remember their stated goal: a balanced budget by 2012.

The most striking figure in the budget - $145bn - is to pay for the wars in Iraq and Afghanistan in 2008. But it is cuts to other spending programmes, and the absence of tax increases, that will form the budgetary battleground. The president wants real terms cuts to non-defence discretionary spending and intends to slow expenditure growth on the Medicare health programme.

The Democrats will question the credibility of Mr Bush's figures. They show a balanced budget in 2012 only because no costs for Iraq and Afghanistan are included beyond 2009, and no relief from the alternative minimum tax (AMT) beyond 2008. It would be hard to cut spending on transport, the environment and welfare benefits every year until 2012. But the real argument is over the political choices that the budgetary numbers imply.

Congress can reasonably argue that paying for defence by sacrificing every other public priority does not make sense. It takes savage cuts to relatively small programmes such as transport to make much difference to the overall budget. Such cuts are likely to be counterproductive as well as unpopular and it is unlikely that even Mr Bush expects them to go through.

The Democrats will be on weaker ground if they oppose the president's Medicare proposals. Slower growth in healthcare spending will help to stabilise the budget in the long term. Higher prescription charges for the wealthy and lower payments to hospitals are both sensible fiscal measures.

But the only way to make the numbers add up will be a compromise on taxation. Mr Bush's plans assume that the tax cuts he made in 2001 and 2003 - on income, capital gains, dividends and inheritances - will be made permanent after 2010. The Democrats, on the other hand, will push for reform to the AMT, a parallel income tax that is beginning to affect middle-class Americans.

With the nation still embroiled in a costly war in Iraq, Mr Bush will have to accept the need for higher taxation. It does not make sense to collect every extra cent with the AMT and it follows that the president's tax cuts cannot be maintained in full. The Democrats, meanwhile, must not try to hang on to every spending programme.

The danger is that it proves easier to keep spending and keep the tax cuts. That would leave the US with a permanent fiscal deficit that would, at some stage, have nasty economic consequences. The endgame should be a sensible compromise: higher tax revenue, lower spending and the balanced budget that America badly needs.