For years, government has been about singling out winners for favored treatment in spending and tax policy. That era is about to end — and the change could be painful. The budget surpluses of...

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WASHINGTON — For years, government has been about singling out winners for favored treatment in spending and tax policy. That era is about to end — and the change could be painful.

The budget surpluses of 1998-2001 enabled Washington to make new money available for favored causes such as homeland security, medical research and prescription drugs under Medicare. The government also slashed taxes for a variety of groups, including two-earner couples and the wealthy.

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But now the surpluses have turned into record deficits. President Bush is not about to take back his tax cuts, but in setting spending levels in the budget he will deliver to Congress early in the new year, he will single out a loser — perhaps several — for every winner.

To Congress’ deficit hawks, it’s about time.

“It sounds as if the White House is serious about it now,” said Rep. Jeff Flake, R-Ariz. “We can only hope that’s the case. It’s going to take some presidential leadership, vetoing some bills.”

Bush’s budget writers have not made all their decisions, and those they have made are closely held. But it is expected that, to help Bush keep his promise of cutting the deficit in half over five years, the budget will “maintain strict discipline,” as the president said at a news conference last week.

Arguing that the costs are only vaguely known, budget writers might decide not to include the outlays needed to cover the additional costs of the war in Iraq or the transition to proposed private Social Security accounts.

Medicare and Medicaid appear vulnerable to cuts. Under current law, doctors will absorb a 5 percent reduction in their government reimbursement for treating Medicare patients as of Jan. 1, 2006.

Doctors barely headed off 4.5 percent cuts scheduled for 2004 and 2005 when Congress, in the bill establishing the Medicare prescription-drug benefit, replaced those cuts with 1.5 percent increases.

Dr. John Nelson, president of the American Medical Association, said Medicare’s hospital benefits had remained untouched while doctors’ reimbursements constantly were threatened. “The appearance is that the government is trying to solve Medicare’s financial problems on the backs of the nation’s doctors,” he said.

The ultimate losers, he said, would be the elderly who are insured by Medicare.

Meanwhile, some members of Congress expect Bush to try again to give states less money for Medicaid — the joint federal-state program of health insurance for the poor — but more flexibility to spend it, a bargain that the Senate blocked last year.

The National Governors Association says state budgets are under siege even without more federal Medicaid cuts. The association’s chairman and vice chairman, Govs. Mark Warner, D-Va., and Mike Huckabee, R-Ark., said last week in a letter to congressional leaders that it was “unacceptable in any deficit-reduction strategy to simply shift federal costs to states … “

The Office of Management and Budget is measuring progress in Bush’s pledge to cut the deficit not in its absolute size but rather in its size relative to the national economy. Thus, it says, Bush must cut the deficit from 4.5 percent of U.S. economic output — its level in fiscal 2004 as estimated a year ago — to 2.25 percent in fiscal 2009.

A quick tour of the government-spending landscape shows a terrain inhospitable to budget cutters.

Very roughly, federal outlays can be divided into five equal pieces. One piece is Social Security, which has been politically off-limits to budget cutters since 1983. A second contains Medicare and Medicaid, which also have resisted cuts.

The government’s other income-support programs — food stamps, unemployment compensation and others — go in the third piece, as do interest payments on the debt. Interest payments are outside Congress’ control, and the other income-support programs are politically as well as technically difficult to adjust.

The other two pieces of the budget are easier to manipulate in the short term. But one of them consists of defense and homeland security, where the Bush administration has until recently shown no tendency to skimp.

So, most of the pressure to cut spending lands on the final fifth of the budget — the so-called domestic discretionary programs. These consist of a wide variety of projects, such as an abandoned-mine reclamation fund and a zero-down mortgage program run by the Department of Housing and Urban Development. Even entirely eliminating this category of spending would not have balanced the 2004 budget.

“If they don’t put entitlements or tax cuts on the table, they’ll get nowhere,” said Bob Bixby, chairman of the Concord Coalition, a budget watchdog group.

This much Bush has made clear: He will not raise taxes in order to keep his promise to cut the deficit. He has said he has two major tax goals for his second term: making the temporary tax cuts of his first term permanent, and simplifying the tax code.

Bush’s tax cuts have contributed to a sharp reduction in revenue as a share of the U.S. economy. In fiscal 2004, which ended in September, the government took 16.2 percent of the nation’s economic output, its lowest level since 1959.

To Robert Reischauer, president of the Urban Institute, a Washington research organization, that is untenable in the long term. “It’s not reasonable to ask for all the government services we have now at the price we were paying nearly 50 years ago, when we had no NASA, no HUD, no EPA, no Medicare or Medicaid or food stamps,” Reischauer said, referring to the National Aeronautics and Space Administration, the Housing and Urban Development Department and the Environmental Protection Agency.

Robert Greenstein, director of the liberal Center for Budget and Policy Priorities, says Bush’s 2006 budget will be as interesting for what it excludes as for what it includes.

The president has made Social Security and tax reform his top second-term domestic priorities. The cost of the wars in Iraq and Afghanistan is one of the forces driving spending ever upward.

“Yet the budget may well leave out several trillion in borrowing to finance private accounts in Social Security, omit the costs of tax reform and postpone for later a decision on how much to seek for the wars,” Greenstein said.

Los Angeles Times staff writers

Janet Hook, Ricardo Alonso-Zaldivar and Maura Reynolds contributed

to this story.