President Bush today (February 7) released his fiscal 2006 budget. This budget represents a forceful statement by the administration of its fiscal and policy plans for fiscal 2006 and the remainder of the President’s term in office.

Taking the broadest view, the budget is built on these basic principles:

• Funding for the War in Iraq and the War on Terror must be continued and will be accommodated at the necessary levels.
• The tax cuts enacted during the President’s first term should be made permanent.
• The Federal deficit in fiscal 2009 should be ½ what the administration projected it to be in fiscal 2004.
• Federal non-security domestic discretionary spending should be frozen.

In order to establish a baseline from which to make budget decisions, the administration began by settling on economic assumptions which would drive revenue and spending numbers in the budget. Among the key economic assumptions for the next five years are these:

• inflation (CPI increase) at 2.4%/year
• economic growth (GDP increase) at 3.2%/year
• civilian unemployment averaging 5.1%
• interest rates (10-year T-note) at 5.5%.

Starting with the budgeting principles noted above and plugging in these assumptions, the administration had before it a serious challenge. They needed to start on the path to the promised deficit reduction by focusing on a relatively small portion of the overall federal budget – non-security domestic discretionary spending. This category currently makes up less than 20% of total federal spending. Under the budget proposed today, spending on these programs would decrease in nominal terms by 1%. This is a proposal reminiscent of the Reagan administration’s efforts to rein-in domestic spending.

Among the reductions proposed by the President are these:

• A 1/3 cut in community and economic development programs and the consolidation of those programs under the management of the Department of Commerce.
• The elimination of operating subsidies for Amtrak.
• A 12.6% cut in bioterrorism preparedness funding.
• A 9% cut for the disease-fighting work of the Centers for Disease Control and a 6.5% cut in chronic disease prevention and health promotion at the Public Health Service.
• A 46% cut in law enforcement assistance grants to states.
• A $ 4.2 billion cut in a range of education programs, but with offsetting increases in other areas.
• Elimination of the Land and Water Conservation Fund state grant program.
• Elimination of the Railroad Rehabilitation and Improvement Financing program and the Next Generation High-speed Rail program.

Beyond the discretionary spending side of the budget, the administration also is looking to achieve savings in mandatory spending. The Medicaid program in particular would see its spending over the next ten years cut by $60 billion below the baseline level of current law.

The non-security domestic budget is not all about cuts, however. The administration proposes a new $1.5 billion high-school performance program and an increase of $304 million for a program to build new community health centers in rural areas.

The non-domestic and security side of the budget fares better, but still must face increases far below those advocates would have liked. Among the key programs, here is how the numbers come out:

• Homeland Security is up 7% to $342 billion.
• The State Department and International Assistance budget is up 18% to $ 13.3 billion.
• The Defense Department is up 5% to $419.3 billion.

It is important to note that the budget assumes that the $80 billion the administration is now requesting for the wars in Afghanistan and Iraq will be enacted. It does not, however assume any spending on those conflicts for fiscal 2006 and beyond. Those expenditures will have to be accounted for in future budget cutting exercises, if the goal of reducing the deficit by half is to be accomplished.

When all of these actions and the others called for in the Budget are tallied-up, the product is $2.57 trillion in spending and a deficit of $390 billion – this is down from the $427 billion deficit the administration now projects for the current fiscal year.

Reaction on Capitol Hill to this budget has been cautious. Democrats are largely critical of the administration’s proposals. Even some GOP members have cautioned that implementing some of the cuts will be very difficult. However, the administration has proven adept at getting – in general – the results they want and has shown flexibility on the details. It is in exploring the limits of that flexibility that Congress will be engaged over the next few months.

Please visit our analysis side to see detailed charts with projected spending on various programs of interest. We will have additional analysis for you in the days ahead.