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The President’s 2007 Budget continues his
commitment to fighting and winning the War
on Terror, protecting the homeland, and advancing the cause of freedom across the globe.
Its policies also promote a strong U.S. economy
and support important domestic initiatives,
such as improving our schools and reducing
the cost of health care. As in past budget
proposals, the President is focusing taxpayer
dollars on these priorities, and enforcing
additional spending restraint elsewhere across
the Federal Government. By holding Federal
programs to a firm test of accountability, we
are taking the steps necessary to achieve deficit
reduction goals and promote our economy’s

Strong Economic Growth Continues
Percent change in real GDP from year earlier


4 3.7














2000 2001 2002 2003 2004 2005

2006 2007 2008 2009 2010 2011

NOTE: GDP growth for 2005 is an estimate.

The 2007 Budget continues policies that have helped fuel economic growth. In 2001 and again in
2003, the President signed major tax relief benefiting workers, families, and businesses. Thanks to
this tax relief, and the hard work of America’s entrepreneurs and workers, our economy is strong.
Over the past year, inflation-adjusted Gross Domestic Product is estimated to have grown at a strong
annual rate of 3.6 percent. Economic expansion has produced more than 4.6 million new jobs since
May 2003, reduced unemployment to 4.9 percent, and raised homeownership to all-time highs.
In addition, we have seen dramatic increases
in household wealth. U.S. equity markets have
added more than three trillion dollars in value,
and the net worth of Americans has risen by 28
percent since early 2001.

Actual & Projected Receipts
Dollars in billions



These gains are especially impressive given
the challenges that this economy has faced:
a stock market collapse, recession, corporate
scandals, the terrorist attacks of September
11, 2001, the War on Terror, and most recently,
major hurricanes and a surge in energy prices.



The strong economy has had a positive impact
on the fiscal condition of the Nation. With
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
the President’s tax relief fully implemented in
2003, the economy responded strongly, and tax
revenues rebounded. In 2004, receipts grew by 5.5 percent. In 2005, receipts increased by $274
billion, at 14.5 percent, the largest increase in 24 years.



The increase in receipts in 2004 and 2005 played a significant role in bringing down the size of the
deficit. Since the President set a goal of cutting the deficit in half from its projected peak in 2004 of
4.5 percent of GDP, or $521 billion, the deficit has come down markedly. The final 2004 deficit was
3.6 percent of GDP, or $413 billion, and the 2005 deficit fell further, to 2.6 percent of GDP, or $318
In last year’s Mid-Session Review, the Administration forecast a higher nominal deficit for 2006, in
part reflecting the implementation on January 1, 2006 of the new Medicare prescription drug benefit.
With the unanticipated spending associated with relief and recovery efforts in response to Hurricanes
Katrina and Rita, the deficit is now expected to be larger than previously forecast. We now project
that the 2006 deficit will come in at 3.2 percent of GDP, or $423 billion.
While this increase in the deficit is unwelcome, a deficit at this level is still well within the historical range. At 3.2 percent of GDP, it would still be smaller than the deficits in 11 of the last 25 years.
More importantly, if we build on the policies of economic growth and spending restraint reflected in
this Budget, the deficit is projected to return to its downward trajectory and stay on track to meet
the President’s goal of cutting the deficit in half by 2009.

Cutting the Deficit in Half
Percent of GDP
February 2004


February 2005


40-year Historical Average 2.3%


For 2007, the Budget forecasts a decline in
the deficit to 2.6 percent of GDP, or $354 billion.
By 2009, the deficit is projected to be cut by
more than half from its projected peak to just
1.4 percent of GDP, which is well below the
40-year historical average deficit.
As last year’s dramatic increase in receipts
demonstrates, the most important factor in
reducing the deficit is a strong economy.

To extend the economic expansion that has
produced gains for American workers and
businesses, and improved the Nation’s fiscal
condition, the 2007 Budget proposes to make
2005 2006
2008 2009
permanent the tax relief signed into law by the
President in 2001 and 2003. Unless tax relief is
made permanent, income tax rates will rise, the marriage penalty will go up, the child tax credit will
be cut in half, savers and investors will see their taxes rise, and the death tax will come back to life.
To further promote long-term economic growth, the 2007 Budget proposes policies to maintain and
build America’s competitive edge. The President will continue to press his agenda of removing trade
barriers and opening markets overseas to U.S. goods and services, reducing unnecessary litigation
and regulation, supporting reform and high standards in public schools, confronting the rising costs
of health care, and promoting and developing new energy sources. In addition, the 2007 Budget
places special focus on a new effort, called the American Competitiveness Initiative, to better prepare American children in math and science, develop and train a high-tech workforce, and further
strengthen private-sector innovation and entrepreneurship. Progress in all these areas will help ensure that America’s economy continues to grow at the healthy pace required to generate increased
revenues to the Treasury.
A second critical component of deficit reduction is a vigorous policy of spending restraint. This
past year, the Administration and the Congress achieved significant success in restraining spending. In the 2006 Budget, the President set three major goals for the discretionary side of the budget:
first, the President proposed to hold growth in overall discretionary spending below the rate of inflation; second, he proposed an actual cut in the non-security portion of discretionary spending—the



first such proposal since the Reagan Administration; and third, he proposed major reductions in or
eliminations of 154 Government programs that were not getting results or not fulfilling essential
The Congress delivered on all three goals. It held overall growth in discretionary spending below
the rate of inflation and enacted appropriations bills that cut non-security spending. It also achieved
$6.5 billion in savings by acting on 89 of the 154 discretionary programs the Administration targeted
for termination or reduction.
The 2007 Budget builds on this success in reining in spending. Like last year, the 2007 Budget
holds overall discretionary spending growth below the rate of inflation and again proposes a cut in
non-security discretionary spending. The 2007 Budget also proposes major savings in or eliminations
of 141 Federal programs, saving nearly $15 billion.
Over the long-term, however, the greatest threat to our fiscal health comes from unsustainable
growth in entitlement programs such as Social Security and Medicare. Toward the end of the
next decade, deficits stemming largely from these programs will begin to rise indefinitely, and
no plausible amount of spending cuts in discretionary accounts or tax increases could solve the
problem. If unaddressed, these unfunded obligations will put an increasing burden on our children
and grandchildren. To solve this problem, we do not need to cut these programs, but we do need to
slow their growth.
Last year, we took an important first step on the mandatory side of the budget: the Congress
adopted a spending reduction bill that will achieve $40 billion in mandatory savings over five years.
The 2007 Budget proposes reforms that will produce an additional $65 billion in net mandatory
savings over the next five years, including reforms in Medicare that will promote competition and the
delivery of efficient, high-quality care to beneficiaries. The 2007 Budget paves the way for additional
reforms that will be needed over the longer term to bring Medicare’s finances in line with available resources. The President will also continue to promote the cause of comprehensive reform of
Social Security to place the program’s finances on sustainable footing for future generations, while
preserving benefits for those already at or near retirement.
These responsible efforts to restrain spending will help the Nation meet its near-term and
long-term fiscal challenges. Taken together with pro-growth economic policies, especially tax relief,
we are setting the stage for an even brighter economic future for all Americans.

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