WASHINGTON (MarketWatch) -- President Bush sent lawmakers a $2.57 trillion, fiscal 2006 spending plan Monday that boosts defense spending and extends tax cuts while aiming to rein in deficits by clamping down on domestic spending programs.

The blue-and-tan budget tome outlines Bush's effort to cut or eliminate some 150 federal spending programs, while holding overall discretionary spending -- outlays set by Congress each year -- to an increase of 2.1 percent, lower than the rate of inflation.

"It is a budget that sets priorities. Our priorities are winning the war on terror, protecting our homeland, growing our economy. It's a budget that focuses on results," Bush told reporters after a Cabinet meeting.

Defense spending would rise by 4.8 percent. Non-security discretionary spending would fall by 0.5 percent in fiscal 2006 -- the first outright cut since the Reagan administration.

Bush also proposed mandatory spending cuts that would total $137 billion over 10 years. Much of the reduction would be achieved by cuts in Medicaid and health care-related payments by the Veterans Affairs Department.

The White House said the budget plan leaves the administration on track to meet Bush's campaign pledge cut the deficit "in half" by 2009.

Democrats charged that the budget plan achieves the administration's deficit-reduction goals by targeting programs for the needy while omitting the costs of key items, including ongoing military operations in Iraq and Afghanistan, as well as forecasts of costs associated with the president's call to create private Social Security accounts.

"The president's budget is a hoax on the American people.  The two issues that dominated the president's State of the Union Address -- Iraq and Social Security -- are nowhere to be found in this budget," said House Minority Leader Nancy Pelosi, D-Calif.

The budget plan also left out any recommendation on tackling the alternative minimum tax, or AMT. The tax, originally designed to hit wealthy taxpayers, threatens a growing number of middle income taxpayers each year.

The Concord Coalition, a bipartisan budget watchdog group, warned that military spending supplementals and AMT relief could add $500 billion in deficits over five years, and $100 billion in 2009 alone.

Economists at Goldman Sachs said the White House's budget forecasts offered less than meets the eye. For the deficit to be sliced in half by 2010, Congress would have to agree to a five-year, virtual freeze on non-defense discretionary spending. Also, the AMT would have to be left alone and supplemental defense and homeland security spending would have to be a thing of the past by then, said economists Ed McKelvey, Alec Phillips and Chuck Berwick, in a research note.

"All three are highly questionable in our view," they wrote.

White House Office of Management and Budget Director Joshua Bolten said the AMT question was left to the president's tax reform panel, which is scheduled to report to Bush by the end of July.

The budget plan calls for making the president's 2001 and 2003 tax cuts permanent. That's forecast to cut revenues by $1.1 trillion through 2015. All of Bush's tax cuts are scheduled expire by 2011.

As the White House had previously indicated, the budget outline forecasts the current fiscal year will see a $427 billion deficit. Fiscal 2005 thus would be the third consecutive year of record deficits.

At 3.5 percent of the nation's gross domestic product, however, the gap is well below the peak of about 6 percent seen in the early 1980s.

Lower deficits estimated

The Bush budget's accompanying forecast projects persistent but shrinking deficits over the course of its five-year window. Specifically, the administration expects the fiscal 2006 deficit to total about $390 billion, dropping to $233 billion in 2009 and $207 billion in 2010.

The White House said the forecast shows that the administration remains on track to halve the deficit from its fiscal 2004 level. The administration, however, is using a fiscal 2004 estimate of $521 billion provided early last year by the White House's Office of Management and Budget as a starting point, rather than the actual 2004 deficit of $412 billion.

The Bush budget plan aims to cut the budget of 12 Cabinet-level departments, including a nearly 10 percent reduction for the Agriculture Department and a 5.6 percent cut for the Environmental Protection Agency.

Attempts to slash or reduce programs are notoriously difficult, however, even when the same party controls Congress and the White House. Key Republican lawmakers have already signaled they're ready to fight administration efforts to cap subsidy payments to farmers at $250,000.

And many of the administration's other proposed cuts were rejected by lawmakers last year.

Bolten said the administration doesn't expect to get everything it wants program by program, but is optimistic Congress will work to hold overall spending to the levels sought in the budget documents.

"Every individual member will be disappointed about something in this budget, I am sure. Overall, I think they understand in the aggregate the need to restrain the federal government spending appetite, and I'm hopeful we're going to get some good support," Bolten said.

Senate Budget Committee Chairman Judd Gregg, R-N.H., called the outline a "restrained" budget that would rein in deficits caused by a recession, the war in Iraq and an ongoing battle with terrorism. He pointed to slashes in weapons programs as evidence that "everyone's ox gets gored" by the proposed cuts.

Democrats countered that the budget sought to pay for Bush's first-term tax cuts by slashing programs that benefit the needy and have had little role in rising deficits.

"In the end, those cuts barely make a dent in the deficit, but they're real and they hurt," said Rep. John Spratt of South Carolina, the senior Democrat on the House Budget Committee.

Bush has come under fire from Democrats and some fellow Republicans as the budget swung from surplus to mounting deficits during his first term. Democrats have blamed Bush's tax cuts, while conservative critics have charged Bush with failing to rein in a spendthrift Congress.

Bush has argued that while current deficit levels are too high, they were inevitable given the early 2001 recession, the bursting of the tech bubble, and the Sept. 11, 2001, terror attacks.

On the defense front, Bush asked Congress for $419.3 billion for the Pentagon for fiscal 2006, a 4.8 percent increase over the current year's spending. Bush sought a 7 percent increase in defense spending in fiscal 2005.

Congress already has appropriated $25 billion for military operations in Iraq and Afghanistan this year, and the White House is planning to request another $80 billion soon, approximately $30 billion of which is expected to be spent in the current fiscal year.

Those expected outlays are reflected in the 2005 and 2006 figures, but the White House made no effort to forecast future spending on those operations.

There will be additional war costs, Bolten said. "But it wouldn't be responsible for us to take a guess at what those costs are."

Where the money is

Bush drew the ire of some fiscally conservative Republicans in 2003 when he pushed through a Medicare drug benefit that's expected to add around $400 billion in new, mandatory spending over its first decade, according to Congressional Budget Office projections. The administration has estimated the cost at more than $500 billion.

Bush's budget plan says the White House will seek reforms that will save $137 billion in mandatory spending over the next 10 years.

Bush, in his budget message, said that unfunded mandatory spending commitments were the top, long-term budget challenge and that he would work with Congress "to develop a Social Security reform plan that strengthens Social Security for future generations" while protecting benefits for current and near-retirees.

The Social Security proposal tops Bush's domestic agenda. The White House has said the Social Security accounts, which would be phased in over three years beginning in 2009, would result in $754 billion in added debt by 2015. Democrats say the total transition costs would total more than $3 trillion over the first two decades.

Bolten said the transition costs would boost the deficit in 2009 and 2010 above levels in Monday's White House forecast. As a percentage of GDP, however, the deficit each year would be 1.7 percent, which would remain below the 40-year average, he said.

Commentary:
I'm not sure why republican president bother writing a budget in the first place. Bush doesn't include war costs, the costs of SS etc. So why spend $500,000 on a document that is dead on arrival? Bush will ask for and get more spending but his supporters will blame Congress for the new spending much like they did during the Reagan years. I can't wait until grown-ups are governing us once more. Why can't republican presidents write honest budgets that are balanced? It is because there is no such thing as an honest or moral republican president?