The Wall Street Journal-20080205-Politics - Economics- Path to Surplus Would Be Rocky- Hitting Target in 2012 Means Making Deep Cuts In Domestic- War Spending

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Politics & Economics: Path to Surplus Would Be Rocky; Hitting Target in 2012 Means Making Deep Cuts In Domestic, War Spending

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President Bush, in proposing a fiscal 2009 budget with a near-record deficit, insisted the government will run a surplus by 2012. But that outlook is based on scenarios considered unlikely by budget experts, congressional Democrats and even some Republicans.

War spending would have to drop to a fraction of its current level. Congress would have to make steep cuts in a raft of domestic programs, while cracking down on the growth of Medicare and Medicaid. And the economy, now slowing sharply, would have to rebound quickly to ensure that tax receipts cover an annual government tab topping $3 trillion.

Mr. Bush, in sending his budget to Congress, said the government would run deficits of $410 billion in 2008 and $407 billion in 2009, but post surpluses of $48 billion in 2012 and $29 billion in 2013. "Our formula for achieving a balanced budget is simple: Create the conditions for economic growth, keep taxes low, and spend taxpayer dollars wisely or not at all," he said.

The Bush budget calls for steep cuts or the elimination of 151 programs -- including ones in education, public housing and forest research -- for a savings of $18 billion. The goal: to keep growth in nonsecurity domestic discretionary spending to less than 1% next year.

While those proposed cuts should be applauded, "clearly in a world of $400 billion deficits it's not going to make a difference," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan Washington organization focused on fiscal-policy issues. "We know and have always known the real money is going to be found in entitlement spending."

On that front, Mr. Bush proposed his toughest curbs yet for Medicare, the federal health program for the elderly, and Medicaid, the state-federal health program for the poor and disabled. The proposed changes would save $208 billion over five years. But hospitals and health-care interests already are gearing up to fight the proposals.

The president's budget "is some bit of an academic exercise" because the president won't be around for most of 2009, said Sen. Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee.

Among the biggest omissions from the budget: full funding for the military conflicts in Iraq and Afghanistan. It includes just $70 billion, enough to conduct operations from Oct. 1, the start of the fiscal year, until just after the next president is inaugurated in January. (Those costs are separate from the $515.4 billion defense budget.) Administration officials concede that even drawing down troops could result in higher costs.

The budget also sidesteps the alternative minimum tax. That parallel tax system was designed in the 1960s to ensure that the wealthiest Americans didn't avoid paying taxes due to credits and deductions. Because the AMT isn't indexed to inflation, however, middle-class families increasingly have been hit by hefty tax bills. Congress has stepped in to make fixes each year, but the Bush budget doesn't include those costs in 2012.

"Far from proposing a plan to fix the budget, this administration proposes policies that worsen it, and with little compunction, leaves the consequences for the next administration and future generations to correct," said Rep. John Spratt (D., S.C.), chairman of the House Budget Committee.

The Bush proposal includes the $145 billion economic-stimulus package, which Congress is expected to pass this year. But it doesn't factor in the economic slowdown itself. The administration predicts the economy will expand 2.7% in 2008 -- the same projection it had in November, as the slowdown started.

The Blue Chip survey of economic forecasters put 2008 growth at 2.2%; the Congressional Budget Office, at 1.7%. Slower growth would mean lower tax receipts and higher deficits. The CBO projects a deficit of $219 billion in 2008 and a surplus of $87 billion in 2012, but notes those figures don't include the stimulus package, war funding or other changes of existing law.

Administration officials yesterday dismissed criticism that a balanced budget isn't credible. "Budgets are, frankly, one-year documents," White House Budget Director Jim Nussle said. "We project out five years, but they're one-year documents and they project what we believe is the path in order to get back to balance."

Still, Mr. Bush acknowledged he isn't defusing the long-term fiscal time bomb posed by expanding entitlement programs. He called on Congress to come up with solutions. "If we do not address this challenge, we will leave our children three bad options: huge tax increases, huge deficits or huge cuts in benefits," he said.