Shrinking Surplus Is Budget Battle Cry

Democratic Effort Aims to Discredit Bush Tax Policies

Democrats plan to launch an assault on President Bush's budget and tax policies this week, including town hall meetings, protests and attack ads, to undermine his political support when Congress returns to complete work on the 2002 spending bills.

Seizing on news that this year the government will need to spend Medicare payroll taxes to pay for defense, education and other federal programs -- and could even begin tapping Social Security payroll taxes -- Democrats have concluded that they can use the dwindling budget surplus to discredit Bush's tax cut, derail his plans for private Social Security investment accounts and energize the Democratic base for the 2002 elections.

Republicans dismiss the attack as a scare tactic and plan to emphasize that Bush's tax cut will stimulate the economy while making it more difficult for Congress to overspend. But Republicans privately concede they are nervous about the public's response to the news that the budget surplus has plunged so quickly.

On Wednesday, the administration will announce a projected budget surplus of about $158 billion, but when Social Security receipts are excluded, the surplus is just $1 billion, sources said. Earlier this year the administration said it would exceed the Social Security surplus by $125 billion. Now it will be able to show a $1 billion margin only by changing the accounting at the last minute to free up an additional $4 billion to add to the non-Social Security accounts.

The margin is so narrow that a separate forecast by the Congressional Budget Office next week could show that the government is actually a few billion dollars into the Social Security surplus -- a line that members of both parties had promised they would not cross. Whichever is the case, the government would be spending Medicare payroll taxes on other government programs, which Democrats and many Republican lawmakers have said is not acceptable.

The president is scheduled to talk about the budget outlook in a speech Tuesday at Harry S. Truman High School in Independence, Mo., where he will note that the overall surplus this year will still be the second largest in history, and he will call on Congress not to pass excessive spending bills. Democrats plan to respond beginning today with a television ad poking fun at Bush for appearing at a school named for the Democratic president who first proposed Medicare and who had a sign on his desk declaring, "The buck stops here."

Democrats are striving to make it appear that the president is breaking a pledge that his budget "protected Social Security and Medicare," much as his father came to grief for abandoning his "no new taxes" promise.

"We think this is the defining moment for the Bush presidency," said Democratic National Committee Chairman Terence McAuliffe. Democratic lawmakers on recess are being sent "honest budget action packets" urging them to hold town meetings to draw attention to the shrinking surplus and what Democrats say that will mean not only for Social Security and Medicare, but also for priorities such as prescription drug benefits.

"I hope he's had a relaxing time in Texas," McAuliffe said of Bush. "When he gets back, he's going to have to figure out how to pay for education, defense and his missile shield. There is no money left and the bill has now come due."

The packages contain quotations from leading Republicans pledging never to use Medicare or Social Security funds to pay for government operations, as well as details on what Democrats contend are accounting gimmicks used by the administration to improve its budget forecast.

In March, House Speaker J. Dennis Hastert (R-Ill.) said, "We are going to wall off Social Security and Medicare trust funds." Just last month, House Majority Leader Richard K. Armey (R-Tex.) declared, "Let me just be very clear about this: The House of Representatives are not going to go back to raiding Social Security and Medicare trust funds."

Under government accounting, spending Social Security or Medicare taxes does not reduce the amount of Treasury bonds credited to the trust funds of the two programs; it also does not affect benefit payments. Until the last few years, the government routinely spent payroll taxes to reduce the size of the deficit. If the money is used for spending rather than debt reduction, it reduces national saving and could lead to higher interest rates, though, at least in fiscal 2001, the overall surplus is still high enough that a substantial amount of debt will be repaid this year.

The economy will play a large role in determining the size of the surplus in future years, and the administration is banking on a sharp rebound in 2002 to ease the budget situation. But its projections are more optimistic than the consensus private forecast.

In the current political environment, however, the technical mechanics of the budget process pale against the politics of spending payroll taxes generated for the Medicare and Social Security programs. From the start of the year, Democrats have charged that the Bush tax cut would make it more difficult to fund other priorities down the road; to their surprise, the sputtering economy brought that moment a mere two months after passage of the tax cut.

"This is energizing folks like nothing I've ever seen," said one top Democratic aide. "This is what we've been saying for a year now."

Mitchell E. Daniels Jr., the White House budget director, said the Democratic rhetoric is "all nonsense." He said the only reason to set aside Medicare payroll taxes was to restrain spending by Congress. That mission has been accomplished by the president's tax cut.

"Since the trust funds are in identical shape with the president's tax cut, this hysteria can only be about one thing -- spending," Daniels said. "It is a good idea to take this money off of the table."

Daniels, who declined to discuss the administration's budget forecast before its official release, said Democrats have become focused on erecting largely meaningless budget lines that have obscured what he considers a major achievement -- a large surplus in a declining economy. "We are awash in surplus money," he said. "We ought to call a cease-fire and congratulate each other."

Democrats, however, have been spoiling for a fight ever since Bush was able to push through what they considered a reckless tax cut just before the Senate reverted to Democratic control. They have been frustrated that, in their view, Bush has been able to pick and choose his legislative fights. They say that will change when Congress returns next month and must focus on passing the 13 annual spending bills that fund the government in the coming fiscal year, which begins Oct. 1. A Democratic strategist said Bush's high-profile identification with the tax cut will make it difficult for him to walk away from a battle over whether there is enough money to increase spending for education and defense.

As an added benefit, Democrats believe raising questions over how Bush has handled the Social Security surplus will cast doubts on his plans to partially privatize Social Security. Bush's Social Security Commission holds a public meeting Wednesday, the same day the White House budget projections are officially released, and Democrats will try to link the two events in the public's minds.

Democrats began the attack yesterday in their weekly radio address, with Sen. Paul D. Wellstone (Minn.) warning, "Cuts to Social Security's guaranteed benefits are part and parcel of private account proposals."

While both the declining economy and the tax cut have cut into the surplus, neither event by itself would have touched the surplus generated by Medicare payroll taxes this year. But in the tax bill passed this summer, Republicans shifted $33 billion in corporate tax payments from fiscal 2001 to 2002 because they feared that the tax cut in 2002 would reduce revenue so much that the government would be forced to tap Medicare payroll taxes to cover government expenses in an election year. Instead, the shift merely moved up the date of reckoning.

Daniels says in retrospect that was a mistake. "It is an artifice," he said, saying he agreed with Democratic critics of the maneuver. "This is an example of the nonproductive energy that is consumed when we attach too much importance to annual numbers."