June 24, 2005, 8:38 a.m.
Back to the Blueprint
U.S. fiscal policy is turning in the direction President Bush first envisioned.

By J. Edward Carter

President George W. Bush’s first budget (“A Blueprint for New Beginnings”) outlined a sweeping vision for remaking U.S. fiscal policy. It was, as Bush described it, “a new vision for governing the Nation for a new generation.” But as we all know today, those plans were soon derailed as the Bush administration inherited an economy on the verge of recession and a world situation on the verge of upheaval. Four years and two wars later, U.S. fiscal policy is headed back in the direction President Bush first envisioned.

These days, all anyone seems to remember about that first budget was that it included a large tax cut. But reducing taxes was merely the beginning. Among other things, Bush’s first budget called for reducing federal outlays from 18 percent of gross domestic product (GDP) in fiscal year 2001 to 16.6 percent five years later. That would have reduced federal outlays as a share of GDP to the lowest level since fiscal year 1956. Think Eisenhower. Think small government.

President Bush’s original plan was to build upon the considerable progress made during the 1990s. All it required was holding the average real growth rate of federal spending at 1.2 percent a year through 2006. While that may seem ambitious in hindsight, it must not be forgotten that real federal outlays grew on average at roughly that same annual rate from fiscal year 1991 through 2000.

As outlined in his first budget, President Bush’s vision also included Social Security reform, Medicare reform (with a prescription-drug benefit), education reform, debt reduction, and a commitment to reduce funding for unjustified and duplicative federal programs.

And yes, President Bush’s vision included sizeable, across-the-board tax cuts. He first proposed those tax cuts in December 1999 as an “insurance policy” against recession. At the time, federal revenue equaled 20.9 percent of GDP — tying the record set during World War II. Bush’s first budget proposed to reduce that burden to 18.9 percent of GDP by fiscal year 2006.

It took Congress only 87 days to pass legislation giving the president most of the tax cuts he requested. Calling it “an important boost at an important time for our economy,” Bush signed the measure into law four years ago this month.

Indeed, it was an important time for the economy. Growth had slowed dramatically in mid-2000 and there was increasing concern that the economy could slip into recession. (It was later determined that the economy was already in recession when Congress approved the $1.3 trillion tax cut.)

With the future of the economy already in doubt, the horrific events of September 11 thrust the country into war and threatened to unnerve consumers and investors alike. To combat these threats to America’s livelihood, policymakers turned to the remedies of tax cuts and spending increases.

The combination of the recession and the tax cuts (not to mention the impact of the stock market implosion) sent federal revenue tumbling. For the first time since the early 1920s, federal revenue fell in nominal dollar terms for three consecutive years. Federal revenue bottomed out in fiscal year 2004 at 16.3 percent of GDP — far below the level Bush proposed in his first budget. Most economists agree, however, that the president’s tax cuts helped make the 2001 recession one of the shallowest on record.

As spending on national defense and homeland security climbed, federal outlays jumped from 18.5 percent (revised data) of GDP in fiscal year 2001 to 19.8 percent 2004. Although significant, the increase was hardly unprecedented. In fact, it only ranks as the 24th largest increase in federal outlays as a share of GDP for any three-year period since fiscal year 1930.

These developments pushed the federal budget back into deficit in fiscal year 2002. When the deficit peaked two years later at 3.6 percent of GDP, it was only the 22nd largest deficit as a share of GDP since 1930.

From all indications, reigning-in federal spending and shrinking the budget deficit continue to be two of the president’s top fiscal policy objectives. And the administration is making progress:

Discretionary spending for non-defense and non-homeland security programs is growing more slowly. As Joshua Bolten, the president’s budget director, pointed out earlier this year, “We succeeded in bringing down the rate of growth in non-security discretionary spending each year of the president’s first term. In the last budget year of the previous administration, non-security discretionary spending grew by 15 percent. In 2005, such spending will rise only about 1 percent.”

President Bush is aggressively seeking to prune deadwood from the federal budget. The president’s fiscal year 2006 budget proposed more than 150 reductions, reforms, and terminations in discretionary programs for an annual savings of $17.2 billion.

The president’s “Management Agenda” is producing visible savings. For example, according to a 2004 report from the Office of Management and Budget, “Agencies spent $88 million in out-of-pocket costs in FY 2003 to study their commercial activities. These same agencies project that the more than 660 assessments completed last year will yield $1.1 billion in savings over the next three years.”

As the unemployment rate has fallen, so too has spending on unemployment compensation. The federal government is expected to spend $38 billion on unemployment compensation this fiscal year, down from $57 billion two years ago.

Federal revenue is surging. According to the Congressional Budget Office, “Receipts for the first eight months of this fiscal year were $183 billion, or 15.4 percent, higher than those in the comparable period in 2004.” Corporate income-tax receipts were 48 percent higher. Accordingly, the budget deficit is likely to be much smaller this year than was forecast just four months ago.

War and recession may have disrupted the president’s timetable for remaking U.S. fiscal policy, but the vision underlying that first budget still guides fiscal policy today.

— J. Edward Carter is an economist in Washington, D.C.

*   *   *

YOU’RE NOT A SUBSCRIBER TO NATIONAL REVIEW? Sign up right now! It’s easy: Subscribe to National Review here, or to the digital version of the magazine here. You can even order a subscription as a gift: print or digital!