Bush sets $2.3 trillion budget


WASHINGTON - President Bush will propose a $2.3 trillion budget tomorrow that backs away from some of the major spending and tax initiatives he supported in previous years, administration officials say.

Constrained by large budget deficits and political realities, the officials said they would retreat on some of their ideas and oppose others that are favored by Republicans in Congress.

Instead, Bush will try to lock in some of his previous victories. He will press Congress to permanently extend most of the tax cuts adopted in the past three years, which are scheduled to expire over the next seven years. He says the tax cuts foster economic growth, which helps create jobs. But many Democrats say the tax cuts are fiscally reckless and widen the gap between rich and poor.

To get his budget through Congress, the president will face formidable challenges from Senate Democrats who oppose making his tax cuts permanent, from conservative Republicans who want to further reduce spending, and from lawmakers in both parties who shudder at the prospect of cutting funds for favored domestic programs in an election year.

"We had a very hard time passing a budget resolution last year," a senior Republican Senate aide said. "Things are no better this year - they're worse."

Administration officials said Bush would not insist on his earlier proposal to overhaul Medicaid, would not push for a large expansion of retirement savings accounts, and would not back the tax incentives for energy production that he supported last year.

Bush will also oppose extending a temporary tax break that greatly accelerates the rate at which businesses can depreciate new equipment, they said. The tax provision was enacted in 2002 to stimulate the economy, and manufacturers want to retain it.

The White House is also gearing up to oppose Republican highway spending plans that far exceed what Bush wants.

Under fire from Republicans who are alarmed at the growth of the federal budget in recent years, Bush called for new limits on spending yesterday.

"To assure that Congress observes spending discipline, now and in the future, I propose making spending limits the law," Bush said in his weekly radio address. "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."

Bush did not say who would set the limits or how they would be enforced.

Although Congress has often approved measures that exceeded Bush's spending requests, fiscal conservatives have complained that he has never vetoed a spending bill.

Congress has repeatedly tried to impose fiscal discipline on itself. Under a 1990 law, for example, it established limits on certain types of federal spending. The law also required Congress to pay for any tax cuts or legislative changes that increased the cost of entitlement programs such as Medicare and Social Security. Congress allowed these measures to expire in 2002.

Bush is saying he will virtually freeze many domestic programs, with an increase of less than 1 percent for discretionary spending outside of the military and homeland security.

He is proposing an increase of 7 percent for the military, including 13 percent more for missile defense systems; an increase of nearly 10 percent for homeland security; and an increase of 11 percent for the FBI.

Those spending increases and Bush's determination to make his tax cuts permanent will limit his maneuvering room in other areas.

Bush pushed Congress hard last year to approve a sweeping energy bill and ultimately said he would accept legislation that included at least $23 billion in corporate tax breaks intended to increase energy production.

But the bill is stalled in Congress, and White House officials are proposing a more modest energy package this year that omits many of the tax breaks sought by oil and gas producers.

Red Cavaney, president of the American Petroleum Institute, said support for those tax breaks waned after Congress approved a major expansion of Medicare that was supposed to cost $400 billion over 10 years. The Bush administration said recently that the expansion would cost at least $530 billion.

After the Medicare bill was approved, Cavaney said, "people started to pay closer attention to everything that might put the economic recovery at risk, including the deficit."

White House officials also plan to oppose an extension of a tax break that allows businesses to take an immediate write-off for half the cost of their investment in many kinds of equipment.

Bush pushed the provision as a temporary measure to stimulate investment, and it is scheduled to expire at the end of this year. Manufacturing companies and many Republicans in Congress want to keep the tax break for several more years. But administration officials are resisting because it is projected to cost $285 billion over five years.

This provision "was always intended to be temporary, to give the economy a boost when it needed it most," a White House official said Friday.

In another quiet retreat, Bush is backing away from his proposal for the expansion of retirement savings accounts, which would eventually allow people to shelter most of their investment income from taxes. The proposal will again be in the budget, but administration officials said they did not expect to push the idea this year.

The proposal faces objections from Democrats, influential Republicans and many in the financial services industry.

White House officials predict that the budget deficit will climb to more than $500 billion this year, from $375 billion last year. Some conservative Republicans are so angry about the soaring deficits that they have begun to threaten rebellion if Bush does not rein in spending.

For their part, Democrats excoriate Bush for having pushed through tax cuts that total more than $1.7 trillion over 10 years. If the cuts are made permanent, the Congressional Budget Office said last week, the cost would be an additional $1.2 trillion over 10 years.

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