An Effort to Show Conservatives and Foreign Investors a Tough Deficit Stance
February 8, 2005
NEWS ANALYSIS
By ELISABETH BUMILLER
nytimes.com
WASHINGTON, Feb. 7 - President Bush's $2.57 trillion budget is intended to demonstrate to three critical groups - conservatives at home, Wall Street and financial markets overseas - that he has become serious about reducing the nation's record deficit. The question is whether the groups will view it that way or see it as a collection of politically motivated cuts that Congress will almost certainly reverse.
On Monday, a White House public relations offensive emphasized that Mr. Bush was cutting or eliminating 150 programs in his 2006 spending plan. But some economists and Wall Street financiers said they were underwhelmed by the pain and predicted that the president's budget would not impress conservatives or the international markets.
"I don't think this approach will look very credible," said C. Fred Bergsten, the president of the nonpartisan Institute for International Economics and a Treasury official in the Carter administration who is a critic of the Bush administration's management of the dollar.
"What the markets look for is the current level of the deficit, but even more than that, the trajectory," Mr. Bergsten said. "The message here is that the underlying trend, contrary to the administration's assertions, is a steady increase in the deficit."
Similarly, some prominent conservatives said that the 2006 budget showed Mr. Bush to be a "big-government conservative" who was not interested in limiting the size of Washington's bureaucracy and that the political reality was that many of the cuts to popular programs would be restored by Congress in the budget battles that are likely to rage on Capitol Hill for the rest of the year.
"They're billing it as a new and tougher budget stance, and I don't think that's right," said Chris Edwards, the director of tax policy at the libertarian Cato Institute. "Last year, they came out with 130 programs they said they were going to terminate and cut. And basically nothing happened."
Some conservative critics pointed out that Mr. Bush's budget did not cut military or domestic security spending, and that the net cuts in his domestic budget were only $2 billion to $3 billion out of a total of $389 billion in programs.
Administration officials themselves acknowledged that the budget would not significantly cut the $427 billion deficit in the near term, and that their calculations did not include any money beyond the $81 billion to be requested this month to cover expenses this year for the wars in Iraq and Afghanistan or the initial cost of Mr. Bush's plan to overhaul Social Security.
Mr. Edwards added that Mr. Bush appeared to be sending a mixed message. "He says he's going to be tough, that Congress has to restrain itself, but in two pages right at the front of the budget, he's got a laundry list of new initiatives," Mr. Edwards said, singling out $1.5 billion for an expansion of the No Child Left Behind education law mandating testing in third through eighth grades.
Some conservatives also said it was unclear if Mr. Bush would veto any bills should Congress restore his cuts. They noted that Mr. Bush is the first president since James Garfield never to have vetoed a bill, spending or otherwise, and that Garfield, who was assassinated in office in 1881, was president for only six months.
"I've thought that long before now, they could have found some bill, any bill, that they could strategically veto just to make a point," said Bruce Bartlett, an economist at the National Center for Policy Analysis and a Treasury official in the Reagan administration who is often critical of Mr. Bush.
Although conservative critics have long annoyed the White House with complaints about what they call the president's free spending, economists said the administration was far more concerned about the effects of the deficit on foreign investment in the United States.
The fear is that foreigners will grow less confident in investing in American capital markets, in part because of their concerns over the deficit. Those concerns could force the United States to increase interest rates to attract foreign investors, which could slow down American economic growth.
The United States is increasingly dependent on foreign investors to keep its economy afloat, and borrows $3 billion daily from the rest of the world to help offset its annual deficit. Foreigners now hold more than 43 percent of Treasury bonds, compared with a little more than 18 percent a decade ago.
"If you're looking at this from abroad, you're saying to yourself that over the last three years, there has been an absence of any budget discipline in Washington," said Robert D. Hormats, the vice chairman of Goldman Sachs International in New York who was an economic or trade official in several administrations. "Now this is a chance to rebuild foreign confidence that there is some sense of fiscal restraint. And that's really the great challenge: can you do that?"
Government officials say they are optimistic that the president's budget will impress foreign investors with its discipline, and have already sounded that message in Europe. Alan Greenspan, the chairman of the Federal Reserve, said last Friday in London that the Bush administration was indeed serious about reducing the deficit.
"The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume," Mr. Greenspan told a gathering of finance ministers and central bank governors from the leading industrialized nations. His remarks inspired a strengthening of the dollar.
Mr. Bush recently acknowledged that the deficit had made foreign investors and other nations nervous about investing in the United States and said that he intended to do something about it. In December, the president told reporters after a meeting with Prime Minister Silvio Berlusconi of Italy in the Oval Office that he took seriously Mr. Berlusconi's concerns about the declining dollar.
"The best thing that we can do from the executive branch of government in America is to work with Congress to deal with our deficits," Mr. Bush said.
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