Hey, Big Spender ...

By Mike Allen, Matthew Cooper

The White House's Roosevelt Room is wired for PowerPoint presentations, and most officials also bring handouts when they brief George W. Bush and his inner circle. But Budget Director Josh Bolten, who has spent months walking the President through a problem that could dramatically affect his legacy, sticks to colorful charts on old-fashioned easels. The lights stay on, so nobody dozes off, and there's no paper to wander through. It's dense material, after all. "I keep everyone's attention focused on what I want them to focus on," Bolten said.

The President will need all the colorful charts he can muster. After five years of tax cuts and massive spending that brought back deficits and ensured that they will continue for years if not decades, Bush plans to use his State of the Union address on Jan. 31 to portray himself as, well, thrifty. He will talk about the need to rein in programs like Medicare, Medicaid and Social Security, and he'll tout the modest budget cuts that Congress passed at his request last year. His staff wants to make "restraining spending" a defining Bush characteristic, along with spreading democracy around the world and prosecuting the war on terrorism.

Why the change of heart? Bush has always shared the conservative aversion to big government programs, his aides insist. There are also short-term political points at stake. The Jack Abramoff lobbying scandal makes this an ideal time to go after what are known as earmarks--that is, spending placed in legislation, often without public review, for specific projects. That pork is a mainstay of the lobbying industry. And there is little money to spend anyway, so Bush might as well retool himself as a fearless budget cop. "Listen, we got a lot of people in Washington who preach fiscal discipline, and then they go on to vote against spending restraint," Bush told the Economic Club of Chicago just after New Year's.

But Bush himself has a huge credibility problem. The $236 billion Clinton surplus of 2000 has become a $400 billion annual deficit. Setting aside Social Security, about a quarter of what the government has spent since Bush became President has been borrowed. And estimates from the nonpartisan Congressional Budget Office (CBO) show that if his tax cuts are made permanent--as he is advocating--deficits will persist for at least 10 years.

Even Bush's supporters criticize his lack of fiscal restraint. They look with dismay at figures showing that the federal workforce of about 2.7 million is roughly the same size it was at the beginning of President Bill Clinton's second term. And they point out that Bush has not vetoed a single bill since taking office. "It's hard to veto something from a Congress dominated by your own party," says Murray Weidenbaum, who was chairman of the Council of Economic Advisers under President Ronald Reagan, "but Bush should have been tougher on the spending side. That's been a disappointment."

In Bush's defense, Bolten points to the economy the President inherited. "We ended up in our deficit situation because we had this burst bubble," he said during an interview in his office, which features a Norman Rockwell painting of a runaway train. "Revenues just disappeared, and this was well before the President's tax cuts." But when Bush came into office, the CBO was actually projecting surpluses for years to come, until the tax cuts hit and the deficit started growing. If the tax cuts don't expire, many economists say, the revenue gap will persist.

It's true that the President pushed through some tough budget cuts last year, notably the virtual elimination of popular programs like Clinton's community policing initiatives, which provided money to local government for nontraditional patrols. Bush's plans for 2007 will be slightly tougher still, and the prospect of those cuts has already led some Cabinet Secretaries to push back, hoping to preserve pet programs. A few Secretaries have tried to go behind Bolten's back to undo the potential damage. Instead of sticking to the White House's cumbersome appeals process, which involves meetings with officials of escalating rank, they pleaded for mercy when meeting with Bush on other issues. "The President consistently knocked back the end runs," Bolten recalled with relish. "He always outed them to me--usually, if possible, in their presence. He's willing to take some pretty tough political medicine to make the budget come out right, and he's spread that philosophy across the Cabinet, which is very helpful to me."

Administration officials said they expect the proposals for cuts and eliminations to be similar to those of last year, when Bush asked for $16 billion in savings in 154 programs and Congress wound up passing $6 billion in savings in 89 programs. Bolten said that he "started this conversation with the President toward the end of the summer" and that Bush began by calling for stable or increased funding for priorities like the military. "On the other things, every step along the way, he directed a tight budget," Bolten said. "Toward the middle of the process, I came to him with some areas where we were going to need to take some cuts in programs that are politically popular. In almost every instance, he said, 'Yes, go ahead and do it.' We had in the room the President's legislative, political and communications advisers, some of whom periodically disagreed. But in almost every case, he backed up my recommendation to take a hard line on some of the spending that was not at the top of the priority list."

In his State of the Union speech, Bush is expected to propose no expensive new initiatives and focus instead on midsize ideas like promoting more rigorous education in basic math and science. But he will suggest changes that won't necessarily save the government money--like expanding Health Savings Accounts, which allow individuals to save for health care in tax-free, 401(k)-style accounts. And when you hear about Katrina and the wars in Iraq and Afghanistan, don't assume their final cost figures will be spelled out in the budget Bush is sending to Congress six days after the address. Those will appear in so-called supplemental requests for money, adding further to the deficit.

Yet Bush hopes to earn his credentials as a fiscal disciplinarian when he talks about the long-term challenges posed by the exploding cost of entitlement programs, which together take up half the budget and are immune to White House or congressional tinkering. He wants to use his remaining years in office to persuade Congress to make transformational, money-saving changes in those programs, especially Medicare.

"We need to cut the rate of growth of those programs," Bolten said. No amount of tax increases or spending cuts in the regular budget would be enough to cover the looming costs of baby-boomer retirees, he said. "Medicare must be put on a path toward a more market-oriented system," Bolten said. "We're ultimately going to have to look at whether the system needs to be more means-tested," referring to differences in benefits depending on income.

Leon Panetta, a Democrat who was Budget Director under Clinton and is a former chairman of the House Budget Committee, chuckled when he heard about Bush's plan to project an image of restraint. "What the hell's he using for numbers to map that out?" Panetta asked over the phone from Seaside, Calif., where he runs the Panetta Institute, a nonpartisan center for the study of public policy. "He has put us in a deep hole that's going to be very tough to get out of."

The federal debt has risen from $5.7 trillion when Bush took office to more than $8 trillion today. According to the U.S. Comptroller General, there is already some $40 trillion in unfunded liabilities--promised payments that current revenue streams won't be able to cover--in the Medicare and Social Security systems. Of that, $8 trillion comes from Bush's prescription-drug plan alone--a figure that is equal to all the national debt that has been accumulating since the time of George Washington.

But Bush never promised the U.S. another Ronald Reagan. That President went to Washington declaring that government was the problem and vowing to do away with whole agencies. Bush pointedly never called for eliminating traditional conservative targets like the Department of Education. "Those efforts typically aren't successful, and they weren't at the core of animating this President's view of conservatism," Bolten said. Instead, Bush's "compassionate conservative" philosophy called for more limited but still robust government, including creating an office for faith-based initiatives and backing the No Child Left Behind law.

When Reagan and President George H.W. Bush saw their deficits spinning out of control, they both raised taxes. But this President has adamantly refused to rescind any of his tax cuts. He wants to make permanent many cuts that are due to expire--such as the estate tax and the 15% rate on capital gains.

Democrats and many economists feel that that's a guarantee of more deficits. But Bush insists that failure to extend tax cuts--which he calls a tax increase--won't cure the deficit because it will slow down a fragile economy. "In my judgment," Bush told a crowd of business people at a moving-van lot in northern Virginia last week, "the best way to solve the deficit is to grow the economy--not run up your taxes." But the reality is that with the help of his tax cuts, Bush has already piled on more than a trillion dollars to the national debt.

Prodded by congressional Republicans, Clinton gave the nation diminishing deficits and even a surplus. That allowed Bush, then the Texas Governor, to call for deep tax cuts, with the signature campaign line that "it's the people's money." But he knew the danger. Announcing his tax-cutting plan to the Greater Des Moines Chamber of Commerce in 1999, he warned, "What is risky is when politicians are given charge of a surplus."

With reporting by Jeremy Caplan