By Robert D. Reischauer
Sunday, September 21 1997; Page C09

Had Rip van Winkle been around a few years ago, he would have been put to sleep reading the endless stream of apocalyptical budget reports which warned that the large deficit of the day would soon explode if politically impossible spending cuts or tax increases were not enacted immediately. Had he been roused a few weeks ago and told that the president had just signed the first significant tax cut since 1981 and that the latest budget projections were for modest but growing surpluses after 2001, he undoubtedly would have gone into immediate cardiac arrest.

The amazing budgetary turnaround of the past year and the prospect of future surpluses have also quickened pulses on Capitol Hill. Those who worship at the concrete altar already have drawn up plans to boost highway spending; those whose faith tells them that lower taxes can solve all of the nation's problems have begun crafting further tax reductions; and those whose worthy social initiatives have been cruelly sacrificed to the gods of fiscal responsibility over the past decade are dusting off their proposals for expanded social investments.

Before the promised surpluses burn a hole in the congressional pocketbook, lawmakers should remember that these surpluses are not yet in hand and that there are benefits from sustaining rather than spending them. The projections of surpluses assume that Congress and the president will adhere to the balanced budget act's limits on discretionary spending. These limits, which provide half the deficit reduction needed to balance the budget in the year 2002, will require politically painful votes on appropriations in each of the next four years, votes that will reduce real discretionary spending 12 percent below current levels by 2002. The experience of the past few months should raise a bit of skepticism about the political system's ability to mete out such sacrifice. When faced with the $544.8 billion discretionary spending cap that the 1993 budget agreement set for the coming fiscal year, Congress and the president balked and used the new agreement to add $8.5 billion to the fiscal 1998 limits.

The projected surpluses could also evaporate if there are many slips in those portions of the balanced budget and tax relief acts that do not require further legislative action. Some of the promised Medicare savings, which account for over half of the spending reductions anticipated for the next five years, could fail to materialize if the Health Care Finance Administration has difficulty implementing the 226 complex provisions of the new law that generate these savings. The $21.4 billion expected to be bid for rights to use portions of the electromagnetic spectrum for commercial purposes could turn out to be more pie-in-the-sky than money-in-the-bank. The revenue loss from the tax relief act could be larger than anticipated if individuals respond with more gusto than expected to its incentives or if wily tax accountants find unforeseen ways to mine the provisions of the new law.

The considerable uncertainty that surrounds estimates of both how much the program cuts will save and how much tax reductions will cost if cuts and reductions are implemented as planned is a further reason for caution. The Office of Management and Budget's estimate of the net reduction in Medicare spending over the next five years is 34 percent larger than the Congressional Budget Office's, while Congress's Joint Tax Committee calculates that the child tax credit will cost 19 percent more than Treasury estimates.

While the economic assumptions upon which the new budget projections are based appear to be quite prudent, an average-sized recession could easily add $100 billion to the deficit for a year or two and delay the attainment of a balanced budget until well after 2002.

These warnings may represent excessive caution; modest surpluses could well materialize early in the 21st century. But if they do, there are good reasons to squirrel them away – that is, to pay down the federal debt – rather than spend them on program expansions or further tax cuts. Even in 2002, when the budget is first projected to be in surplus, taxpayers won't come close to footing the full bill for what the federal government provides them. The overall budget surplus of $32 billion that CBO projects for 2002 will be made up of a $120 billion surplus in the Social Security program offset by a whopping $88 billion deficit in all of the government's other accounts. It is well recognized that Social Security is incurring future liabilities that far exceed its modest surpluses and that without major reform it will be insolvent before the last of the baby boomers has retired.

Furthermore, surpluses have consequences that can be every bit as salutary as those provided by tax reductions or expanded government programs. Surpluses add to national saving, boost domestic investment and thereby raise, by small but important amounts, productivity, economic growth and incomes. If surpluses are allowed to develop, interest rates will be reduced, and the federal debt will begin to shrink. As a consequence, the portion of the federal budget devoted to debt service – currently one out of every seven dollars – will shrink, leaving more for real priorities.

Having probably achieved a balanced overall budget – an objective that seemed to be unattainable only a few years ago – it is time to shift the focus of the policy debate to balancing the non-Social Security budget and restructuring Social Security and Medicare for the long term. If these objectives can be achieved, Rip van Winkle won't find when he next wakes up a nation in which either retirees are scrimping by on inadequate social insurance benefits or workers are unduly burdened supporting the aged.

The writer, director of the Congressional Budget Office from 1989 to 1995, is a senior fellow at the Brookings Institution.