Congress may be in recess but the Bush Administration is already busy developing the President’s budget for FY 2008. With federal tax receipts coming in at a rate much higher than expected, some in the Administration see a window of opportunity to propose a budget that would eliminate the federal deficit in three or four years. However, even with rosy figures for economic growth, a balanced budget would require dramatic reductions in current levels of Medicaid and Medicare spending.

Sources tell me that the Bush Administration is looking – albeit carefully – at proposing a series of Medicaid and Medicare budget cuts as part of the President’s FY 2007 budget submission to Congress this February. The bulk of the specific details will be ironed out late this fall but we do know that Administration budget writers have not given up on their eagerness to reduce significantly federal outlays for health programs.

But it’s still very early. At this point, the budgeteers are running scenarios and crafting options for internal briefings later this fall. With Medicaid spending growth at its slowest pace in a decade and Medicare spending seen by many as a much bigger fiscal problem, the White House may ultimately decide to focus on Medicare reforms.

Of course, with a few exceptions, any proposals in the President’s budget will require Congressional approval. And right now, Capitol Hill has no stomach for major cuts to either Medicaid or Medicare. If Democrats take control of the House, which looks increasingly likely according to the latest polling figures, you can expect a genuine battle royale, as the two parties position for the 2008 presidential election.