Fiscal Policy, Tax Cuts, Deficits, and Government Spending

The Bush administration is counting on tax cuts as one of their strategies to move the government out of the current deficit spending position caused by the war on terrorism and the war in Iraq. The fiscal policy proposed by the Bush administration includes extending the tax breaks of 2001 and 2003 permanently and reinstating the Balanced Budget and Emergency Deficit Control Act of 1985 in a modified version.

The theory behind the strategy is that putting more money into the hands of the American people will result in three likely outcomes. The tax benefits can either be spent, saved, or invested. Any or all of these three activities are consider to be expansionary and should result in overall economic growth for the American economy and more tax revenues for government.

In a bill adopted by the House Budget Committee and strongly supported by President Bush, a reinstatement of what was previously called the Balanced Budget and Emergency Deficit Control Act of 1985 would not require new government spending or tax cuts to be offset by savings in other areas of the budget as was stipulated in the original bill. This revised bill would essentially set the stage for extending the Bush tax cuts.

In this election year, the fight will not be easy. The bill, as written, is on a collision course with the Senate, which recently passed a budget resolution that would require a 60-vote majority to make President Bush's tax cuts permanent. This resolution passed after four Republican senators broke rank and voted with the Democrats.

If Republican leaders succeed in passing the extended tax cuts and the new bill proposed in the house, most analysts agree that the burden of reducing the deficit could fall on domestic discretionary programs such as housing vouchers for low-income families and public housing, grants to local police and fire departments and block grants for child care assistance.

The political lines have been drawn and the classic confrontation on the size of government has begun. If Mr. Bush gets everything he wants, the nonpartisan Congressional Budget Office has estimated that federal spending would climb to $2.7 trillion in 2009 from $2.3 trillion in 2004. Thus, the question remaining to be answered is whether the Bush tax cuts will result in additional tax revenue for government to offset the expected growth in spending.

(Updated May, 2004)