Radio Address by the President to the Nation, 01-31-04

THE PRESIDENT: Good morning. This coming week, my administration will release our proposed budget for fiscal year 2005. In that detailed blueprint for government spending, Americans will see my priorities clearly at work. We will devote the resources necessary to win the war on terror and protect our homeland. We'll provide compassionate help to seniors, to schoolchildren, and to Americans in need of job training. And we will be responsible with the people's money by cutting the deficit in half over five years.

With troops currently on the ground fighting our enemies, my budget increases defense spending by 7 percent, money that will go the pay for equipment, ammunition, and troop housing. We'll keep our military strong and ready for every challenge that may come. Since I took office, we have increased pay for our men and women in uniform by 21 percent. Next year, I propose raising their pay by another 3.5 percent. Our troops put their lives on the line to defend America, and we owe them our best in return.

Given the continued terrorist threat against the American people, my budget nearly triples homeland security spending over 2001 levels, including an increase of nearly 10 percent next year, to $30.5 billion. This money will help tighten security at our borders, airports and seaports, and improve our defenses against biological attack.

I'm proposing to raise the budget for the FBI by 11 percent, including a $357-million increase in spending on counterterrorism activities. America will not let its guard down in our war on terror.

My budget also focuses on our priorities at home. This year, we'll begin moving towards prescription drug coverage under Medicare by providing drug discount cards to seniors. We'll also help lower-income seniors this year and next with up to $600 in direct assistance for drug costs.

We're devoting additional resources to our schools, to help them meet the higher expectations set by the No Child Left Behind Act. My budget calls for a 49-percent increase over 2001 spending on our public schools. There will be additional money for early reading programs for schools in low-income areas, and for enhanced Pell Grant scholarships for students who complete a rigorous curriculum.

My budget also asks Congress to fund my Jobs for the 21st Century initiative, which will help young people and adults gain the skills they need to fill the new jobs in our changing economy. This initiative will help high school students who are falling behind in reading and math by supporting better teaching methods. And with the support of Congress, we will provide new funding to America's fine community colleges, to help them teach the skills our changing economy demands.

We're meeting these priorities within a responsible budget. Under my plan, overall discretionary spending will grow at less than 4 percent. And non-security-related spending would rise less than 1 percent, the smallest such proposed increase in 12 years. By exercising spending discipline in Washington, D.C., we will reduce the deficit and meet our most basic priorities.

To assure that Congress observes spending discipline, now and in the future, I propose making spending limits the law. This simple step would mean that every additional dollar the Congress wants to spend in excess of spending limits must be matched by a dollar in spending cuts elsewhere. Budget limits must mean something, and not just serve as vague guidelines to be routinely violated. This single change in the procedures of the Congress would bring further spending restraint to Washington.

Americans expect government to meet its most basic responsibilities -- protecting citizens from harm, and promoting prosperity and compassion at home. Americans also expect our government to live within spending limits. My 2005 budget is designed to meet both of these goals, using tax dollars wisely and by focusing resources where they are most needed.

"To assure that Congress observes spending discipline, now and in the future, I propose making spending limits the law. This simple step would mean that every additional dollar the Congress wants to spend in excess of spending limits must be matched by a dollar in spending cuts elsewhere. Budget limits must mean something, and not just serve as vague guidelines to be routinely violated. This single change in the procedures of the Congress would bring further spending restraint to Washington." -President Bush, 1/30/04

This is BIG. Very big.

Why this is very big has to do with the history of Gramm-Rudman, deficit locks, lock-boxes and other 'tricks and techniques' the Congress has used to keep itself from overspending.

The Congress has for years tried "fiscal discipline" the way an obsessive dieter tries. It seems too hard to simply pass smaller budgets up or down, so Congress uses limits that force extraordinary measures to be used to go outside those "deficit" numbers. Congress would put in place triggers that prevented anything htat made the deficit worse. These were put in place in past tax increases so that we wouldnt merely tax-and-spend ourselves to death. But they had the consequence of making it harder to cut taxes. So, for example, Clinton could complain about a republican tax proposal as a 'risky scheme' that busted the deficit.

One of the untold stories of the 'spending spree' of the last few years is that - once the deficit touched zero - those limits were removed. It's like the dieter who found out the freezer full of ice cream was now open. In the last year, Bush's 4% discretionary budget increase proposal was met, and then exceeded, with a 9% increase.

At the same time, it was not in Bush's interest to push for 'deficit controls', since his tax cuts would fall victim to the strange deficit calculus. But spending and taxation are 2 different things of course, and should be treated differently.

With Bush's tax cuts, we are pushing the limits of tax reduction. Taxation collects 16% of GDP for the Government, but we are spending close to 20% of GDP. Something has to give.

The Limits of Tax Reform.

Government can only tax for money - the fruits of labor. It then uses this to support the unproductive, unlucky or incapable in various forms; or to use it on social schemes that are not supported voluntarily. Inevitably, labor and capital are attacked in this process. For disobeying a crime, you can get fined by the Government some thousands of dollars; for the offense of making $100,000, the Government fine can reach tens of thousands. The result of this attack is a reduction in the effective standard of living of the productive of our society.

The cost and price of Government are not the same, as when you are shopping in a supermarket. Government cant put a price tag on its programs, unless it chose to simply enact a 'head tax' or a 'poll tax'. That idea is a non-starter (just look at how the great Prime Minister Margaret Thatcher met her political end). So the Government entities can raise money only by putting a tax RATE on economic activity or wealth to extract the monies needed (from sales, income, imports, inheritance, payrolls, capital gains, etc.) In other words, the Government "price tag" has a "%" sign on it, not a dollar sign.

That rate of taxation is the price we pay, but the amount paid in total is dependent on the economic activity itself, activity shaped by among other things, the taxation rates themselves. This circular effect makes it possible for Government to wholly mis-price itself as a good, creating very high tax rates (prices) on some kinds of economic activity, that do more to distort behavior than to raise revenues. "Sin taxes" do this, and so do "protectionist" import tarriff at high rates. But so do, to a lesser extent, even seemingly low rates of taxation. A 20% rate on capital gains may not seem like much, but it is enough for an investor, on the margin, to avoid selling one investment for the time being. The result is a less liquid market for investments, which harms the efficiency of the capital markets. It is possible that overall tax revenue is harmed more by the inefficiency than is gained by the tax itself. Notably, both times capital gains tax rates were lowered (1978 and 1997), capital gains revenues increased in the year afterwards. There was a notable response to taxation rate changes.

We can reduce the PRICE of Government with more effective taxation systems that reduce the economic burden of taxation. Some propose alternatives to our multi-rate progressive income tax, from a flat income tax to forms of national sales tax to a more VAT-like tax. This is all well and good, but at some point the price of Government cannot be lowered any more: The cost of Government - the amount the Government actually spends each year - is a floor underneath which any attempt to reduce the price through tax rejiggering will simply fail. We can raise import taxes and cut payroll taxes and help domestic manufacturers. We can keep tax rates low, improve the economy and not mind a deficit gap that will be repaid in the future.

It's the Spending, Stupid

The limits of tax reform are the limits of Government size. Tax reform alone wont cut the cost of the Federal Goverment, and Government expenditures demand a tax bite or a debt burden (paid in future taxes) corresponding to that cost. Is there any doubt that a society that allowed 50% of its GDP to be controlled and spent by the Government (eg as in France or Sweden) would by definition have a burdensome tax system?

The Liberal solution to the dilemma is to roll back tax reform and tax reduction, and to balance the Government's unbalanced checkbook on the backs of taxpayers with higher tax rates and a higher price tag for Government. This neglects the minor detail that jobs, businesses, economic growth, and taxpayers' standard of living would all be harmed in the process.

The problem is that deficits are caused ultimately by Government spending, and in particular by spending programs that race ahead faster than economic growth. The spending is inherently unsustainable. To tax your way out of deficits is an impossibility, as history has proven time and time again, tax increases depress economic activity - this lowers revenue, undoing the whole purpose of the tax hike, but even worse, creating added burdens on the public sector (unemployment, welfare, etc.).

So fiscal discipline without spending discipline is a contradiction.

The Two Paths

Which leaves us back to the present moment. Bush in 2001, 2002, and 2003 pushed through significant tax cuts. Tax rate cuts takes us far, but only so far. The tax cuts helped us climb out of recession, and to some extent 'pay for themselves' over the long run by increasing job and productivity growth. But they do cut revenues somewhat, and Bush until now did NOT call for commensurate reductions in spending that would ensure those tax cuts were 'deficit neutral'. And since the congressional controls on deficit spending that used to be there (Gramm-Rudman) were removed, a predictable 'tax-and-borrow' policy took hold. The predictable result of higher spending without higher revenues resulted - a growing Federal fiscal deficit. This is not sustainable.

What is sustainable is one of two choices: 1) Hold down spending to cap the deficit, or 2) undo the tax cuts. The Democrats have made quite clear their choice. Kerry, Dean and others want to increase taxes. As we have pointed out, this by itself without spending restraint will solve nothing - it may merely send USA back into a sluggish economic malaise and leave us even worse off.

And Bush? With this declaration, Bush has made his choice as well: Lower taxes, lower growth in spending. A big difference.

Bush recently called for making his tax cuts permanent. The return of some measure of control on spending, as opposed to simply the deficit, will go a long towards creating a more 'conservative-friendly' level of fiscal discipline, that puts the appropriately attention where it belongs. "It's the spending, stupid". The better path for America is lower taxes and less spending, and Bush with this declaration is no signing up for a more consistently fiscal conservative approach.

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