Bush to Congress: Reform federal spending

NEW YORK (CNNMoney.com) -- As he has in prior State of the Union addresses, President Bush once again called on Congress to reform federal spending of tax dollars, in particular how they are spent on entitlement programs like Social Security and Medicare.

The president has promised to offer a balanced budget proposal for 2008 and to eliminate the deficit by 2012 by reining in spending and promoting pro-growth policies.

"We must balance the federal budget. We can do so without raising taxes. What we need to do is impose spending discipline in Washington, D.C.," the president said.

Though he didn't say so explicitly during his address Tuesday, President Bush has urged lawmakers repeatedly to preserve his tax cuts, which he supports as part of his pro-growth economic policy and which are set to expire after 2010.

But given the new Democratic majority in Congress and bipartisan emphasis on reining in the budget, Bush is not likely to push as hard to extend income tax breaks for high earners. That's "in play as a give-up for Republicans" in negotiations with Democrats, said William Beach, director of data analysis at The Heritage Foundation, a conservative think tank.

However, some of his tax cuts - such as the higher child tax credit, the creation of the 10 percent tax bracket and increased marriage penalty relief - draw bipartisan support.

Critics say making the president's tax cuts permanent - in particular the lower rates on capital gains and dividends - will only add to budget woes as policy-makers wrestle to get control of an expected surge in costs from Medicare, Social Security and possible reform of the Alternative Minimum Tax, to say nothing of the cost of the war in Iraq.

The surge in entitlement spending was President Bush's focus Tuesday night.

"Social Security and Medicare and Medicaid are commitments of conscience - and so it is our duty to keep them permanently sound. Yet we are failing in that duty - and this failure will one day leave our children with three bad options: huge tax increases, huge deficits, or huge and immediate cuts in benefits," he said.

While the projected long-term shortfall in Medicare is about six times that of Social Security, the latter is considered more manageable to fix in the near term because its costs are more predictable.

Democrats have rejected and described as a "non-starter" President Bush's proposal to create individual investment accounts that workers would fund with some of their Social Security taxes.

The president has asked Treasury Secretary Henry Paulson to reach out to Democrats to explore bipartisan solutions to Social Security's long-term shortfall, and a number of Democratic leaders have said they are in talks with him. (See where both sides' political bending points may be and learn more about the specifics of Social Security's long-term funding outlook.)

It's not yet clear though whether the discussions will result in any changes before the 2008 presidential elections.

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