February 12, 2007
SPECIAL ISSUE: BUDGET WEEK RECAP

PRESIDENT'S FY'08 BUDGET:

A note on the numbers:  One of the quandaries we face in analyzing funding requests in the President's Budget is what to use as a starting point or "baseline."  There are two distinct ways of approaching this. The first way is to simply compare the dollars requested by the President for FY'08, with the dollars appropriated for FY'07. The second way is to compare the FY'08 request with the FY'07 appropriation adjusted for inflation.

For example, the National Institutes of Health received an FY'07 appropriation of $28.9 billion. The President has requested $28.7 billion for NIH for FY'08. The first approach, would say the President has proposed a $0.2 billion ($200 million) cut in NIH funding.

The second approach would adjust the FY'07 appropriation upward, to account for inflation, and use $29.443 billion as a starting point. Under this approach, the President's $28.7 billion request is seen as a $743 million cut in NIH funding. 

Both approaches have arguments in their favor, but the second approach (called a "current services baseline" ) is the more common because the adjustment for inflation informs policymakers how much funding is required to continue a program's services and operations at current levels (or put another way, to maintain its purchasing power).

We have chosen to use this "current services" approach in summarizing the President's FY'08 budget request. It is therefore important to realize that when we speak of FY'08 cuts in funding (budget authority) for a particular program, it is measured against FY'07 adjusted for inflation.

Also, note that FY'07 levels assume enactment of the pending FY'07 appropriations resolution (discussed below).

As the first step in the FY'08 congressional budget process , the President transmitted his FY'08 Budget to Capitol Hill on February 5th.

President's FY 2008 Budget

2012 "surplus" met with skepticism —The White House headline for the Budget was "balancing the budget over 5 years," reaching a $61 billion surplus in 2012.  However, as explained in our Budget Backgrounder, the surplus projection was met with skepticism by some.

Current year deficit —The Budget projects a current year FY'07 deficit of $244 billion (including the costs of a $100 billion FY'07 supplemental request for the war).  Excluding Social Security surpluses, the FY'07 projected deficit is $427 billion.  

Discretionary Spending Overview —Starting from FY'07 spending levels (adjusted upward for inflation to show the cost of continuing current services), the President's Budget calls for the following changes in discretionary (non-entitlement spending) in FY '08:
    --a $36.5 billion (7.8%) increase in "base" (non-war) defense spending;
    --a $2.8 billion (8.5%) increase in international spending; and
    --a $13 billion (3.2%) decrease in domestic discretionary spending.

By FY 2012, after adjusting current program spending upward to cover projected inflation, veterans programs would be cut 6%, health programs by 7.2%; education, training, employment and social services programs by 10.3%; natural resources and the environment by 15%; and community and regional development by 24.5%.

The Budget proposes reductions in or termination of 141 discretionary programs.

Program Terminations/Reductions

Tax Overview —The Budget calls on Congress to make the 2001 and 2003 tax cuts permanent (costing more than $2.2 trillion over 10 years according to CBO), to extend the Research & Experimentation tax credit, provide one year of Alternative Minimum Tax (AMT) relief, extend the Work Opportunity Credit for one year, and consolidate/expand tax favored retirement and other savings accounts.

Defense —The President's FY'08 defense request calls for a base (non-war) budget of $501.9 billion plus $141.8 billion for Iraq & Afghanistan. The latest request will bring total war funding to nearly $800 billion by FY'09 according to CBO. 

Health —There is widespread consensus that the U.S. faces a fiscal crisis with the baby boom retirement of the next decade leading to an explosion in Medicare, Medicaid, and Social Security expenditures. However, there is no consensus on how to reform the three major entitlement programs. In his Budget, the President proposes Medicare cuts amounting to $66 billion over 5 years ($252 billion over 10 years) and Medicaid cuts of $10.9 billion over 5 years ($28 billion over 10 years).  The Budget would also reauthorize the State Children's Health Insurance Program (SCHIP), but at levels some argue will not cover current funding shortfalls.

Farm Bill —The Budget includes the President's proposals for reauthorizing farm programs including controversial proposals to cut the crop safety net and insurance programs by $15.5  billion over 10 years and redistribute the funds to other USDA programs.

Social Security —The Budget again includes the President's plan to divert up to one-third of workers' Social Security payroll contributions into individual accounts, but the start date has been shifted back to 2012 so that a budget surplus can be projected for that year. The plan, which failed to win support in 2005, would cause significant increases in deficits and debt.

FY'07 WAR SUPPLEMENTAL

Included in the President's FY '08 Budget transmittal is his FY'07 supplemental appropriations request for the "Global War on Terror" (Iraq and Afghanistan).  The $99.6 billion supplemental request includes $93.4 billion for the Dept. of Defense, and $6.2 billion for the Dept. of State and other agencies. The supplemental is in addition to the $70 billion already enacted by Congress for FY '07. 

FY'07 Supplemental

 With regard to timing, on February 8th, Senate Appropriations Chairman Byrd said "I have every expectation that the supplemental will be before the Senate next month." 

TUESDAY: KEY SENATE VOTE ON  '07 FUNDING RESOLUTION

Congress this week is expected to complete action on H.J.Res. 20, the FY'07 funding resolution, before the current continuing resolution (PL 109-83) expires on Thursday, February 15th.  The Federal government (with the exception of the Defense and Homeland Security Departments) has been operating under a "lowest level" formula continuing resolution (lowest of House-passed, Senate-passed or previous-year funding levels) since the start of the fiscal year on October 1, 2006.  The House passed a $463.5 billion funding resolution on January 31st that funds most programs at FY'06 levels with increases for selected priority programs (see the WBR Budget Alert). A cloture vote to limit debate is scheduled in the Senate for tomorrow, February 13. If the cloture vote fails, Senate Republicans will push to add more funding for base closure and realignment.

FY'08 BUDGET PROCESS: STEP-BY-STEP™

• Following release of the President's Budget on February 5th, the Democratic and Republican staffs of the House and Senate Budget Committees, each released an analysis of the Budget:

House Democratic analysis
House GOP analysis
Senate Democratic analysis
Senate GOP analysis

• OMB Director Rob Portman testified at the House Budget Committee on Feb. 6th and at Senate Budget Committee on Feb. 7th.

Director Portman's Testimony

• Treasury Secretary Paulson testified at the House Budget Committee on Feb. 7th and at Senate Budget Committee on Feb. 8th.   

Secretary Paulson's Testimony

• HHS Secretary Leavitt will testify at the Senate Budget Committee on Tuesday morning, Feb. 13th and at House Budget Committee that afternoon.  (Most hearings can now be viewed via live webcast by going to the respective committee websites.)

   

• During the remainder of February (except for the recess week of February 19th) the Budget Committees and other House and Senate Committees will continue to have hearings on the President's FY'08 Budget proposals with Cabinet Secretaries and other senior Administration officials  testifying.


• At the same time, House and Senate Committees will begin preparing their "views and estimates" on FY '08 Budget requirements for submission to their respective Budget Committees in March.  The House and Senate Budget Committee Chairmen will use the "views and estimates," as well as testimony from a wide variety of experts and stakeholders, in drafting their respective Budget Resolutions for committee consideration in March.

Budget Quote of the Week : "With the 2008 budget, the administration goes further than we have in the past to show the full cost of the war—Iraq, Afghanistan and the global war on terror, generally—for the rest of the President's term. We are providing our requests for the full cost of the war in both FY 2007 and 2008, and for the first time, including account-level detail and justifications." 

--OMB Director Rob Portman, 02/05/0.

BACKGROUNDER:  HIGHLIGHTS OF THE PRESIDENT'S FY'08 BUDGET