Smaller surplus may imperil defense spending hike

From Major Garrett
CNN White House Correspondent

CRAWFORD, Texas (CNN) -- If Congress follows President George W. Bush's admonition to "live within the limits of the budget that we all agreed on," there may not be enough room for more defense spending.

Bush wants to boost the Pentagon budget by $32 billion next year.

But Congress' own budget rules may prevent it. And if they don't prevent it, Congress will have to cannibalize other programs or rewrite airtight rules meant to protect the so-called Medicare trust fund.

Either way, if Pentagon spending rises, it will come at the expense of cuts in other domestic programs or Congress will have to reverse itself on a highly publicized and politically potent promise to shield Medicare surpluses.

Defense Secretary Donald Rumsfeld conceded as much Thursday.

"We need every nickel, and we'll be working to get it," Rumsfeld said.

When reminded of the smaller surpluses and intense competition over dwindling dollars in Washington, Rumsfeld fell back on Bush's insistence on a larger defense budget.

"Well, defense is a priority that's distinctive," Rumsfeld said. "And the president has indicated that."

But as Rumsfeld and many in Washington are now discovering, this is but one of many problems wrought by a smaller federal surplus.

Here's the central problem:

The budget for 2002 has very strict spending rules. Congress cannot increase spending -- for defense or anything else -- if the overall surplus is not large enough to cover the so-called Medicare surplus. Congress refers to the excess payroll taxes sent to pay for part of Medicare as the Medicare surplus.

Twice in the budget, Congress refers to future defense spending increases, one tied to a boost arising out of Rumsfeld's top-to-bottom review of military strategy, the other any additional spending that Bush requests for the Pentagon. Rumsfeld has not completed his top-to-bottom review, but Bush has already asked for more defense dollars -- adding $18 billion to his original budget request for next year of $310 billion.

"We need every nickel, and we'll be working to get it," Defense Secretary Rumsfeld said Thursday.

But Congress specifically says if the surplus cannot cover the Medicare surplus, the Pentagon can only receive a funding increase if cuts of equal size are made to other domestic programs.

"It means everything is on the table," said Brenna Hapes, spokeswoman for the House Budget Committee. "That includes Defense. We're going to have to prioritize."

The squeeze arises out of Congress' devotion to the so-called Medicare surplus, something the White House says doesn't even exist.

"There is a common misperception that there is a Medicare surplus and that Congress must take action to preserve its assets," wrote White House Budget Director Mitch Daniels in the president's midsession budget review. "There is no Medicare surplus."

But that doesn't' mean Congress doesn't count it and slavishly defend it.

Medicare is made up of two parts. Part A covers all hospitalization costs and is paid for by payroll taxes. This year Washington will collect $32 billion more in payroll taxes than it will pay in hospitalization costs. It's this excess amount that Congress refers to as the Medicare surplus.

But that ignores the real deficit Medicare runs because of the huge costs of doctors' visits paid for by Medicare. Doctors' visits are covered under Medicare Part B and when those costs are factored in this year, Medicare runs a net deficit of $48 billion.

But Congress decided in this year's budget to treat as untouchable the $32 billion in Part A payroll tax surplus. It's an accounting procedure, but a politically important one. Congress has used this as a measure of its devotion to Medicare and almost every member of Congress has endorsed this accounting maneuver to seek maximum political advantage on the question of loyalty to Medicare.

How does all of this affect defense spending?

Well, next year's surplus will not be large enough to cover the Part A Medicare surplus. By Congress' own rules, all spending increases -- including defense -- must come at the expense of other programs. If Congress increases defense spending, it must cut other programs by an equal amount. That would pit defense against other popular programs like education, health care, environmental protection and law enforcement.

The White House sees this and wishes Congress would change its rules.

"It's a phony creation," White House Press Secretary Ari Fleischer said of the Medicare surplus. "We've never accepted it. Not during the campaign and not now."

Even so, those are the rules. And until Congress changes them, Congress and the president must live with them.