If I were king, with 20/20 hindsight...
Ten years ago I would have developed a "cheap dumb disposable rocket" for getting astronauts or large payloads to and from Earth orbit. This should have been done along with the Space Shuttle Program. Yes, it would have cost more money then. But we will pay the price of inaction in a few years - other countries will have to transport our astronauts to and from space.
But I'm not king and this is now. What do we do?
I would finish the ISS, and focus on operations and doing good space research. It cost a fortune to build. Let's milk it for all it's worth, and not deorbit it until it has reached it's operational lifetime.
I personally do not support the use of resources to get man back to the Moon or go to Mars AT THIS TIME. I have been a live-long supporter of astronomy, space science, and humans in space. I would save these journeys for the next generation. Those heavenly bodies will be there for us when we're ready.
I would fund R&D into next-generation rocket propulsion technology (e.g. magnetoplasma rocket - http://en.wikipedia.org/wiki/Variable_specific_impulse_magnetoplasma_rocket). Until cost per pound of payload is reduced by several orders of magnitude, viable long-duration missions outside of low Earth orbit are very expensive.
Continue efforts to privatize the space industry. The govt will always be needed to fund basic science missions, but can get out of commercial applications. Spend big bucks on robotic missions to the Moon, asteroids, and planets. Also, find the NEO's, and fund R&D into asteroid/comet impact mitigation strategies.
Man-rate ASAP the Delta IV Heavy or SpaceX's Falcon 9 or Orbital Sciences Corporations' Taurus or Minotaur rockets, or combination thereof. Does Atlas V have a role? What ever happened to the Shuttle-C (same tank and SRB's, orbiter replaced with a big cargo pod and disposable main engines) discussed years ago? Richard Branson (yeah, that's a stretch)? Europe (they've talked about manned vehicles since before Ariane was built - e.g. Hermes)? As for Ares, well, we can't fund everything else I mention if we fund Ares I and Ares V. Again, manned missions should focus on the ISS for at least the next ten years.
Can we invite the Chinese to participate in ISS missions? Contracts with member partners limit things, but maybe the U.S. could sell one of it's slots. Besides being a political cooperation gesture, why not let them learn from the best?
The above are just a few of my ideas. I'm no industry expert, just a citizen. As per forum rules, I've tried to keep politics out of the discussion. I support allocation of public money for space, but to also make the environment favorable for private companies. This forum is not the place to discuss allocation of funds to non-astronomical Earth-bound activities. I think it is appropriate to discuss how to allocate a set amount of funds.