By David Clarke, CQ Staff

President Bush unveiled a budget Monday that calls on Congress to continue robust spending increases for defense but proposes cuts or minimal growth for a variety of domestic programs favored by Democrats.

The $3.1 trillion fiscal 2009 budget proposal represents Bush’s last chance to put his imprint on the nation’s fiscal landscape. But with Democrats controlling Congress and hoping to win the presidency in November, Bush’s budget proposals have little chance of being enacted.

Senate Majority Leader Harry Reid of Nevada said Bush would have minimal leverage this year to push his budget priorities. “The president really had us over a barrel last year on the appropriations bills because we did not want another continuing resolution,” Reid said. “But he doesn’t have us over a barrel this year, because either President Clinton or Obama will be the president in less than a year — and if we have to deal with a CR next year, we’ll deal with it,”

“We are not going to be held hostage by the unreasonableness of the White House,” Reid added.

At a minimum, however, Bush’s budget will serve to define the differences between the parties in the months leading up to the November elections. In particular, his proposal to allow only a 0.3 percent increase , far below inflation, in discretionary spending outside of the national security area is certain to trigger a partisan fight.

“My budget continues the pro-growth policies that have helped promote innovation and entrepreneurship,” Bush said in his budget message. “I will not jeopardize our country’s continued prosperity with a tax increase.”

Democrats had a decidedly different view.

“The president proposes more of the same failed fiscal policies he has embraced throughout his time in office — more deficit-financed war spending, more deficit-financed tax cuts tilted to benefit the wealthiest, and more borrowing from foreign nations like China and Japan,” said Senate Budget Chairman Kent Conrad , D-N.D. “The result can only be the same — a further explosion of debt and the undermining of our nation’s economic security.”

Republicans, however, lined up behind the president.

“The best way to ensure lasting health for the U.S. economy is to keep taxes low and spending in check so that U.S. businesses remain competitive and American families have more to invest,” said Senate Minority Leader Mitch McConnell , R-Ky.

Return Of Big Deficits

The president’s budget anticipates a return to the increased deficits that marked the first half of his presidency. The White House is projecting a deficit of $410 billion in fiscal 2008 and $407 billion in fiscal 2009. That follows three straight years of declining deficits. The fiscal 2007 figure was $162 billion, resulting from better-than-expected corporate tax revenues.

Those revenues are now declining because of the economic slowdown. The administration’s deficit projections assume that Congress will enact an economic stimulus package this year that will cost $145 billion total in fiscal 2008 and 2009.

Because both parties have agreed not to offset the stimulus measure, its cost — initially at least — will add to the deficit. The stimulus legislation (HR 5140), currently awaiting a Senate vote, could be sent to the president before Congress leaves for the Presidents Day recess on Feb. 15.

“We believe that this uptick is temporary and is also a manageable budget deficit, if we can keep taxes low, if we can keep the economy growing, and if we can keep spending in check,” White House Budget Director Jim Nussle said.

Democrats in both chambers will outline their fiscal 2009 budget proposals in early March and also are expected to show increased deficits before the budget heads back to balance.

The deficit reached a record high in dollar terms at $413 billion in fiscal 2004. That translated to 3.6 percent of gross domestic product (GDP), the best way of measuring the deficit according to economists. That was lower than during the 1980s, when the deficit peaked at 6 percent of GDP in fiscal 1983, during Ronald Reagan’s first term. The projected fiscal 2008 deficit would be 2.9 percent of GDP.

The president’s budget proposal shows the budget running a surplus of $48 billion by fiscal 2012. That assumes, however, that Congress enacts Bush’s proposal to trim the growth of Medicare and Medicaid by $195.7 billion over five years; that the wars in Iraq and Afghanistan are not funded beyond fiscal 2009; and that the alternative minimum tax (AMT) is allowed to hit more taxpayers after the 2008 tax year. These assumptions are unlikely to become reality.

Republicans called for Democrats to at least consider the proposed changes to Medicare and Medicaid as both parties agree that spending on the programs is on a path that cannot be sustained.

“Although his specific entitlement spending proposals are likely to be pilloried, he is to be credited with consistently attempting to curb the unsustainable growth of entitlement spending,” said. Sen. Judd Gregg of New Hampshire, the ranking Republican on the Budget Committee.

Also, as part of the president’s plan to balance the budget he assumes spending on non-defense and non-national security programs will not grow at all after peaking at $393 billion in fiscal 2010. This scenario is unlikely to play out regardless of which party controls Congress or the presidency during that period.

Discretionary Funding Proposals

Bush has requested $987.6 billion in non-emergency discretionary spending — the funding Congress must approve each year through the appropriations process — for fiscal 2009. That represents a 4.9 percent increase from the current year. More than half of the total, $515.4 billion would go to the Pentagon. That is a 7.5 percent increase, not including war funding, from what was provided for the current fiscal year.

Bush also requested $75.8 billion in emergency funding — which is supposed to be for one-time costs. Of that amount, $70 billion is targeted for the war in Iraq and terrorism-fighting activities, with the remainder going toward hurricane relief for the Gulf Coast. That brings the total proposed discretionary spending requested for fiscal 2008 to more than $1 trillion.

Domestic Spending Squeeze

Overall, the president in his fiscal 2009 proposal is calling for $549.6 billion in non-emergency discretionary spending for defense and other national security programs, which is 8.2 percent more than for fiscal 2008. He is seeking only a 0.3 percent increase for the rest of the discretionary budget.

The president proposes cutting the discretionary budget for the Health and Human Services Department by 2.5 percent to $70.4 billion; the Justice Department budget by 12.3 percent to $20.3 billion; and the Transportation Department budget by 26.6 percent to $11.5 billion. These figures include emergency spending provided to these agencies in fiscal 2008.

Yet some domestic agencies would receive budget increases under Bush’s proposal. The Education Department’s budget would rise by 3.5 percent to $59.2 billion, and Energy Department funding would increase by 4.7 percent to $25 billion. These figures also include emergency spending provided to these agencies in fiscal 2008.

Veterans programs would receive a 3.8 percent increase to $44.8 billion when including $3.7 billion in emergency spending approved for fiscal 2008.

Democrats are expected to counter Bush’s priorities and instead push this year for more domestic funding for the National Institutes of Health, local law enforcement grants and programs that fund infrastructure projects ranging from bridge repairs to sewer construction.

Bush proved last year that he can use his veto power to force Congress to adhere to his top-line figure on discretionary funding that is provided through the appropriations process. But unlike last year, Democrats can wait out Bush and postpone completion of the fiscal 2009 spending bills until after the next president takes office.

“My gut tells me that for the average politician in this town, whether it’s the president’s budget or Congress’ budget, it will be looked upon as a holding pattern and let’s wait to next year,” said G. William Hoagland, a longtime GOP budget aide who now works for Cigna as a vice president for public policy.

The president is asking Congress to eliminate or reduce 151 programs to save $18 billion in discretionary spending in fiscal 2009. The White House argues that these programs are redundant or ineffective. But many have strong support on the Hill and are unlikely to be touched.

As he did last year, the president is calling on Congress to end funding for the Agriculture Department’s Commodity Supplemental Food Program, a nutrition program for pregnant women, children and the elderly. The White House says such aid is already provided through food stamps and other programs. Bush made the same request last year and Congress boosted funding for the program by $32.5 million.

Tax and Revenue Debate

One flash point in the budget debate is sure to be how to account for the expiration of the 2001 and 2003 tax cuts (PL 107-16, PL 108-27). The president’s budget plan assumes they will be extended beyond 2010, when most of the tax cuts expire, at a cost of $635.1 billion over five years and $2.1 trillion over 10 years.

“Last year, Democratic leaders put forth a budget that proposed the largest tax increase in American history, and after watching some $250 billion in tax hikes pass the House in 2007, I fear that this was just the tip of the iceberg,” said House Minority Leader John A. Boehner , R-Ohio. “Instead of criticizing the President’s budget, congressional Democrats would be well-served to join the President and Republicans in funding our nation’s priorities while protecting middle-class families and small businesses from a massive tax hike in 2010.”

Congress adopted a fiscal 2008 budget resolution (S Con Res 21) in May that assumed revenue increases from the expiration of most of these tax cuts, leading Republicans to maintain that Democrats were planning big tax increases.

Conrad and House Budget Committee Chairman John M. Spratt Jr. , D-S.C., said their plan allowed for extending the tax cuts as long as they were offset by tax increases or spending cuts elsewhere in the budget — a difficult task.

With budget experts of all stripes warning that spending on entitlement programs such as Medicare, Medicaid and Social Security is increasing at an alarming rate because of the rising cost of health care and the aging of the population, Bush has proposed trimming the growth of Medicare by $178.2 billion over five years and Medicaid by $17.4 billion during the same period.

But these proposals stand little chance of being considered by Congress in an election year. “Most of these cuts affect critical needs and are unlikely to generate sufficient support to become law,” Spratt said. “Even if they did become law, they are more than offset by this budget’s tax cuts and increased defense spending, making the deficits grow even larger.”

Last year Bush proposed trimming spending growth on Medicare by $66 billion and Medicaid by $12 billion over five years. Congress did not act on those proposals.

Spending on entitlement programs, which are automatically funded unless Congress steps in to make changes in the underlying eligibility and benefit standards, makes up about two-thirds of the budget. In all, the president proposed slowing mandatory spending by $208.2 billion over five years.

Liriel Higa contributed to this story.

First posted Feb. 4, 2008 10:46 a.m.