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GOP Wants to Cut Taxes With Surplus

The Budget
By George Hager
Washington Post Staff Writer
Saturday, January 30, 1999; Page A3

Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) signaled yesterday that Republicans will push ahead with plans to spend a big part of future surpluses on tax cuts, despite warnings from Congress's chief economic forecaster that all of those surpluses might not materialize.

Congressional Budget Office (CBO) Director June O'Neill unveiled huge new budget surplus projections yesterday, but she simultaneously warned that the economic forecasts that underlie those surpluses are highly uncertain.

"There is no way for anyone projecting the economy to say that their projections are going to come true, because chances are they won't," said O'Neill. CBO's economic forecasts yield nearly $800 billion in surpluses in the non-Social Security part of the federal budget over the next 10 years, a sum that O'Neill cautioned might vary depending on what happens to the U.S. economy over the coming decade.

"Is this surplus real enough for us to take some action regarding it?" Domenici asked.

O'Neill told him her agency had several different projections that showed different outcomes.

"You may have five" projections, Domenici replied, but "we've got to use one."

Asked after the hearing whether he thought it wise to commit surpluses to tax cuts given the uncertainty, Domenici said, "I sure do." Domenici said his reading of economic trends indicates that the same conditions that have created big surplus forecasts will continue.

"When they [CBO] do the next mid-year review, the surplus is going to be bigger, not littler," Domenici said.

The Domenici-O'Neill exchange illuminated a key issue in the debate that will unfold this year as both Democrats and Republicans vie to use enormous new surpluses in the non-Social Security side of the federal budget for their favorite proposals -- Republicans for tax cuts and the White House for Medicare, 401(k)-style retirement accounts and new spending on defense and domestic programs.

Both parties want to use the money in ways that are all but irreversible, but the surpluses themselves are eminently reversible.

Once granted, tax cuts are politically difficult to take away; ditto for President Clinton's plans to devote money to Medicare or new retirement accounts. Once those expensive tax-cut or spending plans are in place, though, the erosion or disappearance of surpluses meant to pay for them could create new deficits.

"We could be right back in the soup," said Sen. Kent Conrad (D-N.D.), who urged his colleagues not to commit future surpluses until they actually materialize. "I don't want to be part of any operation that would lead us back into the ditch," he said.

The good news for policymakers, though, is that while the future is uncertain, even CBO's near-term disaster scenarios do not do away with surpluses entirely in the short run. While the agency's official projection follows what O'Neill called a slightly "pessimistic" path that it says is the most likely outcome over the next decade, the agency developed three scenarios to show what might happen if its core projection is wrong.

CBO's most likely path for the economy predicts a "soft landing" in which today's hot growth cools off over the next year or two but leaves the economy growing steadily at a lower rate. That produces enormous surpluses.

The agency's most optimistic scenario, which presumes that high growth rates continue a while longer before finally subsiding, actually increases the surplus by a third over six years.

But a "boom-bust scenario" that presumes a classic domestic recession in 2000 would slash the surplus by about 20 percent over the next six years. A "financial turmoil scenario" that presumes a recession caused in part by global financial instability would be more benign, cutting the surplus by only about 8 percent over the next six years.

"Even the worst scenario still has surpluses," said O'Neill, although that worst-case, domestic recession scenario would delay the arrival of a non-Social Security surplus for three years beyond its expected advent in 2001. That would complicate plans to begin spending that surplus for tax cuts or spending programs any time soon. "It would take a cataclysmic recession to get rid of surpluses" completely, she said.

The uncertainty of long-term economic and budget forecasts is increasing the attractiveness of the one alternative use of the surplus that economists and policymakers agree would pose no risk: using the money to retire the nation's publicly held debt, which now stands at about $3.7 trillion. The federal government pays about $240 billion in interest on that debt every year, the third-largest single expense in the budget.

While both sides fight over what to do with non-Social Security surpluses, Republicans have agreed to a White House proposal to use most of the Social Security surplus -- the excess payroll taxes that will be collected over the next several years to help prepare the program for baby boomer retirements -- to pay down the debt.

Economists say that would have a beneficial impact on the federal budget and the economy, in part by pushing capital out of government securities and into private securities such as stocks and corporate bonds.

Now some policymakers are suggesting that all future surpluses be devoted to retiring the debt.

In a departure from her prepared statement to the budget committee, O'Neill said doing nothing with the surplus, which would have the effect of automatically devoting it all to debt reduction, "is really the best thing to do."

That put her squarely in the middle of the accelerating partisan debate over how to handle the surpluses, though, a place the scrupulously nonpartisan CBO director is not supposed to be. On the other hand, yesterday was O'Neill's last day in the job after a four-year term.

"Since I'm leaving," she said, "I can say whatever I want."

© Copyright 1999 The Washington Post Company

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