Bush's budget woes.

On February 2, President Bush submitted his $2.4 trillion budget for fiscal year 2005 to Congress, calling for members to hold the line on spending. Though calling for fiscal responsibility, the president's budget will increase the size of the federal budget deficit to $521 billion in the current fiscal year. If Congress follows the plan laid out by the president, it must cut many popular spending programs and limit overall increases in discretionary spending to less than 1 percent. The budget does not include additional dollars, up to an additional $50 billion, which the president will request from Congress later in the year to fund military operations in Iraq and Afghanistan.

While budget chief Joshua Bolton defends the president's plan--which he says over the next five years will cut the deficit roughly in half--Congressional Democrats have criticized the president harshly for fiscal irresponsibility. Customarily, the president submits a budget that projects deficits for 10 years, but President Bush's budget only looks five years into the future. This is because most of the tax cuts passed in 2001 begin to weigh heavily on budget forecasts beginning in 2010.

The president is gambling big that revenues to the federal Treasury will ultimately increase as individuals realize more income derived from previous tax cuts. In that vein, the budget calls for Congress to make permanent earlier cuts to personal income taxes that expire in 2011, at a cost of close to $990 billion over the next 10 years.

Some Congressional Republicans--who have in the past supported the president's spending priorities--have already begun to question the president's judgment in this important election year. Many state budgets have been severely impacted by the not-too-distant downturn in the economy and rely on important federal spending to balance their budgets. However, the president's budget allows for cuts in federal highway and transit spending which, in turn, is forcing affected states--which, unlike the federal government, often have balanced budget requirements--to turn to alternative sources of revenue.

Several state legislatures are considering, or have already considered, measures that would raise taxes on businesses, "sin taxes" and gasoline, and Maryland is considering the introduction of slot machines at racetracks as a way to avoid raising taxes elsewhere.

In turn, individuals will see less and less of the increase in their paychecks from the cuts in federal personal income tax enacted in 2001 as states stealthily reach into their pocketbooks. And because most voters look at whether they are better off now than they were four years ago when deciding how to vote in national elections, the president may have a tough re-election ahead of him. Furthermore, the financial condition of the states could cause a backlash against Congressional Republicans, causing them to lose their slim majorities in both houses.

New Medicare Legislation at Risk?

For these reasons, there will be efforts from members of the president's own party to strip or pare down the Medicare legislation passed last December. Members of Congress were told when they voted for the legislation that the Medicare bill would cost $400 billion over the next 10 years, but recent estimates by the Office of Management and the Budget (OMB) have raised that figure to $500 billion. Because the bill's effects are not scheduled to be felt until 2006, and half a trillion dollars is an easy target for Congress to slash, the program is sure to be targeted, causing further woes at the polls in November. If America's senior citizens--the country's largest voting block--see their promised benefit slashed by Republicans, some are sure to turn against the party.

As the nation's CEO once again plays the nation's CFO, he may need to use his veto pen for the first time in his presidency to hold down spending. Administration officials have hinted that President Bush might veto spending bills that burst the caps laid out in the budget, but they have stopped short of actually threatening a veto.

Whatever the outcome of this year's budget battle, this year's budget will be the biggest test of the president's ability to unite Congress behind his financial vision. Because of the nation's precarious fiscal condition and nervous politicians, the shape and size of this budget will likely shape the size of victories in November.

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Bob Shepler ([e-mail]) is Director of Federal Affairs. He is based in FEI's Washington, D.C., office.