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Increases, decreases, and deficits: The President's budget proposal. (Federal Focus).

"Once we have funded our national security and our homeland security, the final great priority of my budget is economic security for the American people," President George W. Bush declared in his State of the Union address. "To achieve these great national objectives--to win the war, protect the homeland, and revitalize our economy--our budget will run a deficit that will be small and short-term, so long as Congress restrains spending and acts in a fiscally responsible manner." (1)

With these words, President Bush acknowledged a return to fiscal imbalance and launched the first salvo in the fiscal 2003 budget battle. (2) Six days later, the president submitted his $2.12 trillion budget proposal to Congress, projecting deficits through 2004 before a return to balance in 2005 (Exhibit 1). The president's plan calls for $600 billion in additional tax cuts over 10 years, deep cuts in highway funding and job training programs, and significant spending increases for homeland security and defense. Most of the president's requested spending increases, however, target programs other than domestic security and defense. The National Taxpayers Union estimates that slightly more than half of the approximately $106 billion in proposed new spending for next year is unrelated to homeland security or national defense. (3)

In addition to a 12 percent increase in Pentagon spending and $38 billion for homeland defense, President Bush's budget includes plans to extend unemployment benefits and health care coverage for workers who have lost their jobs; fund the recently enacted education reform bill; expand Head Start and other early childhood education programs; build infrastructure; underwrite technological research into energy conservation and new energy sources; add a prescription drug benefit to Medicare; increase spending for veterans' health benefits; bolster compensation for military personnel; double the size of the Peace Corps; and expand Amen Corps under a new program called USA Freedom Corps.

If the past is any guide, this is just the beginning. Members of Congress have their own laundry lists of programs to fund. Over the last five years, Congress has consistently increased annual discretionary spending by at least 5 percent. As such, Congress is unlikely to accept the White House's proposal to limit non-defense, non-security spending increases to just 2 percent. Indeed, many of the proposed spending reductions included in the president's 2003 budget were either rejected last year or were added to appropriations over the president's objections. Thus, projected deficits of $106 billion, $80 billion, and $14 billion over the next three years could balloon to 1980s proportions.

Priority Setting: A Synopsis of the Proposed Budget

The president's proposed budget represents the crystallization of the administration's priorities within the constraints of political and economic reality. The sections that follow highlight some of the most significant proposed increases and decreases in funding and the potential ramifications thereof on state and local governments.

Homeland Security. The most significant proposed spending increase affecting state and local governments is in the area of homeland security. The proposed Department of Health and Human Services budget provides $4.3 billion for homeland security and public health programs. Additionally, the proposal would commit $865 million for state and local grants to improve public health emergency preparedness and to counter bioterrorism. Additional funding for state and local governments will likely be available through HHS for targeted assistance such as mental health and hospital capacity improvements.

The proposed $3.5 billion First Responder Initiative is designed to give state and local governments the flexibility to decide how to maximize the use of funds under four key areas: training ($1.1 billion), planning ($105 million), equipment ($2 billion), and preparedness exercises ($245 million). Although specific criteria on how these funds will be distributed to state and local governments are not yet available, the Office of Homeland Security has said that approximately 75 percent of the money will be distributed by state emergency managers to local governments. The states will distribute the remaining 25 percent at their discretion.

The president's budget includes nearly $4.7 billion for the newly created Transportation Security Administration to provide increased aviation and maritime security. An estimated $2.2 billion of 2003 costs would be offset by passenger and air carrier fees. The budget also would provide $5.7 billion in discretionary funding to the Coast Guard, including $406 million for increased port security. The costs of enhanced port security may be at least partially defrayed by a recommended commercial navigational user fee. The president's budget also includes $20 million to continue assessing and addressing the vulnerabilities of local drinking water systems.

Health Care. The 2003 budget would give states the option of providing Medicaid assistance at a 90 percent matching rate to fund access to prescription drugs for families between the poverty level and 150 percent of the poverty level. The proposal would require participating states to expand this assistance up to the poverty level at the regular matching rate before they would be eligible for the higher match. Also of interest to the states is the proposed four-year extension of funding for the State Children's Health Insurance Program that would preserve more than $3 billion in unexpended funds. The president's budget contains a number of other significant health care provisions, including a one-year extension of transitional Medicaid for families leaving welfare to work and changes to the Medicaid Drug Rebate Program that would save an estimated $290 million in fiscal 2003. One theme that runs throughout the health care budget is stricter enforcement of program integrity. This is evidenced by the $9 billio n reduction of Medicaid upper payment limits over 10 years, renewed scrutiny of Medicaid school-based health services, and $10 million in overall Medicaid and S-CHIP fraud and abuse oversight.

Human Services. The 2003 budget includes a number of proposals related to the reauthorization of welfare reform. The Bush administration proposes to continue funding the Temporary Assistance for Needy Families block grant program at $16.5 billion each year. Continued funding also would be provided for supplemental grants, TANF high-performance bonuses, and a revised contingency fund. In addition, the Social Services Block Grant and the Child Care Development Fund would both be funded at 2002 levels.

Public Safety. Although the president's proposed budget significantly increases spending on national defense and homeland security, it imposes severe budget cuts on long-standing state and local government programs. The plan dramatically reduces local law enforcement funding, including the virtual elimination of support for local crime prevention programs. According to the budget proposal, the administration is "redirecting funds from outmoded, under-performing programs to new initiatives" under the Department of Justice. This shift includes a transfer of resources from the DOJ's Office of Domestic Preparedness to the Federal Emergency Management Agency as part of the aforementioned First Responder Initiative.

The budget also includes a proposal to combine the Byrne Grant and the Local Law Enforcement Block Grant programs under a new Justice Assistance Grant Program funded at $800 million--a $100 million decrease from the combined total for these two programs. The $565 million State Criminal Alien Assistance Program would be eliminated, while the Violence Against Women Act would receive level funding of $390 million, including $185 million in STOP grants to the states. Community Oriented Policing Services would receive $1.38 billion; however, $800 million is for the new Justice Assistance Grant program. Finally, the budget for the Juvenile Accountability Block Grants program would be cut by $35 million, while juvenile justice programs would lose $20 million.

Education and Workforce. The president's budget would increase funding for the U.S. Department of Education by $1.4 billion (2.8 percent) for a total of $50.3 billion in discretionary appropriations. This amount includes $1 billion increases for both Title I and the Individuals with Disabilities Education Act. The budget proposes a two-year extension of the expired work opportunity and welfare-to-work tax credits. It also includes the gradual reduction of the Federal Unemployment Tax Act payroll tax from .8 percent of the first $7,000 in wages to .2 percent. Under the U.S. Department of Labor, employment and job training programs are to be cut by $309.8 million. This proposal would reduce funding for employment and training services for adults by 5 percent, dislocated worker services by 10 percent and youth services by 11 percent.

Transportation. The 2003 budget proposal continues to fund highway, bridge, transit, and safety programs at the guaranteed levels specified in the Transportation Equity Act for the 21st Century. However, Federal Highway Administration funding would be reduced by $9.1 billion next year because of an adjustment mechanism called revenue aligned budget authority, which attributes highway receipts to highway spending. Formula grants for transit projects are proposed at $3.8 billion, the guaranteed level under TEA-21. The president's budget funds aviation programs at levels that are consistent with the Aviation Investment and Reform Act for the 21st Century: the Airport Improvement Program at $3.4 billion and Facilities and Equipment at $2.9 billion. The Federal Aviation Administration's operations are funded at $7.5 billion. Essential Air Service funding is proposed at $83 million, with funds derived from the Airport Improvement Program. Funding for the Small Community Air Service Program would be eliminated.

Housing and Community Development. The Community Development Block Grant program would be reformed under the proposed budget through a legislative change to reduce grants to the wealthiest 1 percent of eligible communities, defined as those with per capita income two times the national average. Anticipated savings of $16 million would be directed to specified communities located near the U.S.-Mexican border. The proposed budget eliminates Rural Housing and Economic Development grants and Round II Empowerment Zones grants. However, it includes 34,000 new housing vouchers and expands the Down Payment Assistance Initiative, which provides states with matching grants for down payment assistance to first-time home buyers.

Looking Ahead

Only a day after the president's budget was sent to Congress, one of the basic building blocks on which it was based--the assumption that Congress would adopt an economic stimulus package--turned out to be wrong. Neither Democrats nor Republicans could get the required 60 Senate votes to pass their respective packages, so the effort was dropped. This development made the numbers presented by the White House largely inaccurate for both fiscal 2002 and 2003, and allowed many in Congress to begin negotiating significant alternatives to what the president proposed.

Two realities are overshadowing the forthcoming budget debate: midterm elections and the war against terrorism. In this election year, members of Congress, regardless of party affiliation, will be reluctant to cut spending that benefits their states and districts. By proposing a return to deficit spending, the president may have opened the floodgates to additional spending that could erode long-term surplus projections. Although Congress will likely approve the president's spending increases for defense and homeland security, it is doubtful that lawmakers will limit the growth of other discretionary spending to just 2 percent. Given that the president's stated agenda centers around the nation's war on terrorism, he is unlikely to expend time and political capital to fight increases and alterations in spending over and above his budget requests. Thus, the legacy of the 2003 budget debate may be the return of systemic and long-term deficits.
Exhibit 1


(fiscal years, in billions)

 Estimated Proposed
 2002 2003 2004 2005 2006

Budget Authority $2,085.0 $2,162.9 $2,210.2 $2,309.7 $2,414.7
Revenues $1,946.1 $2,048.1 $2,175.4 $2,338.0 $2,455.3
Outlays $2,052.3 $2,128.2 $2,189.1 $2,276.9 $2,369.1

Balance ($106.2) ($80.1) ($13.7) $61.1 $86.2


Budget Authority $2,529.0
Revenues $2,571.7
Outlays $2,467.7

Balance $104.0

Source: Fiscal Year 2003 Budget Proposal, Office of Management and
Exhibit 2


Outlay Estimates from the 2003 Budget Proposal (in millions)

Program 2002 2003 2004 2005

Medicaid $144,926 $160,070 $172,755 $188,064
Federal Correctional 4,320 6,211 6,250 6,240
Elementary, Secondary, 27,044 32,194 34,772 35,975
Vocational Education
Medicare 226,395 234,361 244,314 261,280
Federal Law Enforcement 15,288 15,566 18,466 18,858
National Defense 347,986 379,012 393,802 413,527
Social Security 459,662 475,925 495,696 519,708
International Development 7,713 8,596 8,842 8,883
Energy Conservation 831 897 912 927
Food and Nutrition 38,838 40,932 41,859 42,507
Higher Education 16,767 18,394 17,817 18,330
Science, Basic Research 7,765 8,093 8,271 8,539
Space Flight, Research 13,994 14,075 14,508 14,987
Housing Assistance 32,085 32,875 33,758 34,244
Pollution Control 7,958 8,227 8,246 8,269
Air Transportation 18,932 17,973 17,371 17,736
International Security 7,548 6,660 6,748 6,999
Ground Transportation 37,630 36,757 33,747 32,857
Training and Employment 8,147 8,009 7,522 6,989
Farm Income Stabilization 24,578 19,887 18,474 16,861

 % Change
Program 2006 2007 2002-07

Medicaid $205,371 $224,784 55.1%
Federal Correctional 6,359 6,509 50.7%
Elementary, Secondary, 37,011 38,085 40.8%
Vocational Education
Medicare 281,774 305,780 35.1%
Federal Law Enforcement 19,241 19,664 28.6%
National Defense 428,549 442,473 27.2%
Social Security 546,171 575,289 25.2%
International Development 9,152 9,545 23.8%
Energy Conservation 948 970 16.7%
Food and Nutrition 43,474 45,016 15.9%
Higher Education 18,849 19,389 15.6%
Science, Basic Research 8,650 8,851 14.0%
Space Flight, Research 15,360 15,744 12.5%
Housing Assistance 35,087 34,615 7.9%
Pollution Control 8,321 8,261 3.8%
Air Transportation 18,299 18,703 -1.2%
International Security 7,222 7,301 -3.3%
Ground Transportation 33,076 34,203 -9.1%
Training and Employment 6,675 6,583 -19.2%
Farm Income Stabilization 15,918 15,671 -36.2%


(1.) President George W. Bush, State of the Union Address, January 29, 2002 (

(2.) To review President Bush's FY03 Budget proposal, visit

(3.) National Taxpayers Union, "State of Union Proposals Could Add $106.6 Billion/Yr. to Taxpayer's Tab,"

DANIEL C. DESIMONE is the assistant director of GFOA's Federal Liaison Center in Washington, D.C.
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Author:Desimone, Daniel C.
Publication:Government Finance Review
Article Type:Brief Article
Geographic Code:1USA
Date:Apr 1, 2002
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