President Bush submitted his 2007 budget proposal to Congress on Monday. The $2.8 trillion plan includes increases in defense spending, provisions to make existing tax cuts permanent and reductions in entitlement programs such as Medicare and Medicaid. Two guests discuss what the budget says about the administration's priorities.

Background

Discussion

GWEN IFILL: The 2007 budget the president sent to Capitol Hill this morning was about more than dollars and cents; it was about the Bush administration's priorities.

The $2.8 trillion blueprint proposes increased spending for defense and homeland security and limiting the growth of large entitlement programs like Medicare and Medicaid. The proposal would reduce growth in Medicare by $36 billion over five years.

Also among the president's priorities: $1.4 trillion in tax cuts over the next ten years and $91 billion to pay for tax-free health savings accounts.

Missing from the plan: A price tag for anticipated spending in the continuing wars in Iraq and Afghanistan. Last week, officials said they would request $120 billion in additional funding for a single year's fighting.

Budget director Josh Bolten said today the president can achieve his priorities while still meeting his stated goal to cut the $423 billion deficit in half by 2009.

JOSHUA BOLTEN: No plausible amount of spending cuts in discretionary accounts or tax increases could possibly solve this problem.

The president has shown a willingness to take on these future unfunded obligations and to propose long-term reforms.

GWEN IFILL: The budget plan proposes eliminating or scaling back 141 domestic programs, nearly a third of them in education.

Democrats were immediately critical of the president's plan.

SEN. KENT CONRAD: This budget is utterly detached from any financial reality. That is just as clear as it can be. I mean, this is - this is not sustainable, and what flows from this is not sustainable.

GWEN IFILL: The budget blueprint would also, among other things, slice discretionary spending for nine out of 15 cabinet agencies.

GWEN IFILL: The president's budget message has become an annual ritual, but not one without real-life consequence.

Here to put some of today's numbers-crunching into context are two veterans of Washington's budget wars. Douglas Holtz-Eakin was the director of the Congressional Budget Office from 2003 until 2005. He also headed President Bush's Council of Economic Advisers from 2001 to 2003. He's now at the Council on Foreign Relations.

And Alice Rivlin is the former director of the White House Office of Management and Budget during the Clinton years. She was also the vice chair of the Federal Reserve Board of Governors. She's now at the Brookings Institution.

Welcome to you both.

So, Douglas Holtz-Eakin, starting with you, what does the president's budget, this thing we dig through every year, what does it tell us about his priorities?

DOUGLAS HOLTZ-EAKIN: I think the president and Josh Bolten in his remarks were very clear about the priorities: No. 1, let's equip the troops to fight both the existing battles in Iraq and Afghanistan and also what is necessary in the future; No. 2 , keep taxes where they are now. Don't let them go up as they're scheduled to; and number three, we're going to begin -- and I just mean begin -- the process of addressing Medicare, which is the most pressing of our budget needs.

If you take that as the package, by definition what's left is a very tight, non-security, discretionary spending, and those priorities are laid out. And they're right there in the budget.

GWEN IFILL: Let's talk about what we call in Washington speak entitlements, Medicare and Medicaid, that he just referred to. Is that the Achilles heel of any budget plan, Alice Rivlin?

ALICE RIVLIN: In the long run, yes. Over the next few years, Medicare and Medicaid, the two big spending programs for health care will drive the federal budget. That's partly because we're all getting older and we're all using more medical care. But it is mainly because the cost of medical care, spending per person, per patient, per anything, is going up. And when you combine the aging with the increase in the cost per person, you get very, very big numbers in a very few years.

GWEN IFILL: Last year when this budget came to Capitol Hill, Medicare wasn't discussed much at all. This year we're talking about at least some reduction in the growth of spending. Is that significant?

DOUGLAS HOLTZ-EAKIN: I think it's symbolically very important. In this budget is a three-pronged attack on what Alice has laid out as clearly our most pressing budget issue over the long term.

No. 1 are the particular proposals the president has put in the budget will go up now to the Congress and we'll see how they fare in the legislative process. No. 2, there's a trigger in this budget that suggests if Medicare gets too big it will automatically start to grow slower in the future; that's a second tactic. And No. 3, the president mentioned in the state of the union an entitlement commission, which would be potentially ground for new ideas to address this.

So the important thing is that this budget talks about and engages with the Congress on the most important budget issue.

GWEN IFILL: One of the big issues that most Americans would think would be a big part of this budget is the cost of the war, Alice Rivlin. Yet, that doesn't seem exactly to be there -- at least not in this articulation of the budget.

ALICE RIVLIN: It isn't all there. We know that there are going to be supplementary appropriations this coming year, probably the year after that. We don't know how big they're going to be or how long they're going to be. But you can already see the cost of the war in this budget. The defense budget is going up.

GWEN IFILL: Does that drive the deficit? We're talking I think the number is $423 billion is the latest prediction about what the deficit would be, up from what -- $318 billion last year. That's not heading down but up.

ALICE RIVLIN: It's not headed in the right direction. And much of the increase is attributable to disasters of one sort or another -- the war and the spending for Katrina and the other natural disasters.

GWEN IFILL: How important is the idea that there is a deficit? There's some debate about whether Americans are just used to deficits and don't care about them, or whether it's even budgeted for properly in a budget like this.

DOUGLAS HOLTZ-EAKIN: I think the deficit is important. The notion somehow that deficits are irrelevant or don't matter is clearly not correct. They matter differently for the economy. At times when the economy is weak, the deficit is actually not damaging; it can even be helpful.

This economy is back to nearly full employment. It's recovered nicely from the recession. And going forward, the impact of the deficit will be to lower national saving, and that lowers our ability to have a big economic pie to meet all the pressing needs of the baby boomers and their children in the years to come, so deficits do matter, and the degree to which we come to terms with it, particularly large ones that come with the health care bills, the better.

GWEN IFILL: Now, the president has said that he wants -- he still maintains he wants to cut the deficit in half by 2009. And he lays out a prescription in this document that shows how he might be able to do it. Yet, he also says he wants to continue these tax cuts, make them permanent. And he also, as you just pointed out, there's a lot of money still to be spent on wars on which we don't know if there's an end date. Do you think it's possible to meet that goal of halving the deficit by 2009?

ALICE RIVLIN: I think it's very unlikely, but I think it is a misleading goal.

GWEN IFILL: In what way?

ALICE RIVLIN: Because when you say I'm going to cut the deficit in half by 2009, then what the hearer hears, I think, is, "we're halfway home."

But we're not halfway home because in the next few years after 2009, the deficit will get much bigger unless we do something now. That's when the tax cuts, which are extended, begin to affect the deficit and it's when this entitlement spending for Medicare and Medicaid begins to affect the deficit.

So whether he can cut the deficit in half by 2009, which I doubt, doesn't matter. What matters is we're not facing up to the long-run future of the budget, which is clearly unsustainable.

We have got to do some very big things both with Medicare and Medicaid and with the tax system if we're going to close this deficit looming ahead of us.

GWEN IFILL: Do you doubt it as well? Or do you believe it's even important?

DOUGLAS HOLTZ-EAKIN: I think what you're hearing in the capitol today is a squabble about how we get from here to our really big problem. We shouldn't squabble about how we get from here to our big problem. We should have a discussion about the really big problem. That's where the political rubber will hit the road: Social Security, Medicare, Medicaid.

Once you've solved those pressing issues, you can figure out what kind of a tax system will actually pay that bill, and that's a very different discussion than fighting about now to 2009.

GWEN IFILL: But does it build in -- the way this budget is structured -- does it build in for the unexpected things like Katrina?

DOUGLAS HOLTZ-EAKIN: The U.S. has never really budgeted for the kinds of unexpected things that go on every year, even though something happens every year. There's an earthquake. There's a fire. There's a hurricane.

Budgeting for disasters has never been a strong point in the federal government.

GWEN IFILL: Is it?

ALICE RIVLIN: Oh, that's right. Budgeting for disasters has never been a strong point.

But to give the president his due, Katrina was a disaster off the charts. It wasn't one that could have been predicted as sort of an ordinary hurricane cycle.

And when you start a war, you are taking on big expenditures for a long-run future, and those things have to be budgeted for, but they can't always be predicted.

GWEN IFILL: Let me ask you about one detail in the president's budget. He called for health savings accounts, which is this extensive program basically to have people put money aside; they get a deduction for being able to save for their medical expenses.

Is this something which is basically telling Americans we're steering you towards self-sufficiency on these issues?

DOUGLAS HOLTZ-EAKIN: I think you can take health saving accounts as a symbolic statement that says, look, we need to come to terms with how much health care costs and what we're getting for it and balancing those two things. What are we getting and what does it cost is absolutely at the center of the debate. Will any single thing, health savings accounts or something else, be the silver bullet that brings us altogether? No.

GWEN IFILL: And finally, Ms. Rivlin, we are just now winding up the budget cycle from last time.

ALICE RIVLIN: Right.

GWEN IFILL: We see these documents come out; we seem them go to the Hill. Some things live; some things die. Why do they matter?

ALICE RIVLIN: Well, they matter to the people who have benefits under programs that might be cut. That matters very much. And they matter to our children and our grandchildren who will have to pay for these expenditures that we're making now because we aren't paying for them.

We're just loading the debt on them and saying, sorry, we decided we had --we wanted a bigger government than we wanted to pay for, and you're going to have to pick up the bill.

GWEN IFILL: So you're saying the argument has to happen even if the answers are not immediately apparent?

ALICE RIVLIN: Yes. I think the answer that is immediately apparent is that you can't go on living on credit forever so you have to face up to how are you going to pay for the government expenditures that you want?

GWEN IFILL: Alice Rivlin and Douglas Holtz-Eakin, thank you both very much.

ALICE RIVLIN: Thank you.