The debate in Washington and points beyond over tax cuts has bogged down in part over charges and countercharges about whether the federal budget surplus will last, whether it's risky to spend it, and so on. Here are some of the key questions asked about the surplus--and a stab at the answers.
Q: Is there really a surplus?
A: Yes, at least for now.
Economists say the economic projections on which the surplus is based are reasonable. Doubters should note that both the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) go so far as to factor a recession into their long-term forecasts, which makes their projections fairly cautious. CBO and OMB both project roughly $3 trillion in total surpluses over the next 10 years.
Even though private economists say 10-year forecasts are notoriously flaky--and that even one-year forecasts are frequently off the mark--they don't dispute the general happy trend, which is the result of years of politically excruciating budget-cutting and tax-raising, plus the tail wind from an extraordinarily good economy.
Q: Doesn't most of the surplus come from Social Security?
Of that $3 trillion, roughly $2 trillion would come from the excess payroll taxes being collected to fund baby boomers' Social Security benefits in the next century.
Both parties have scrambled to one-up each other in protecting the nation's single most popular government program by sticking those $2 trillion in surplus payroll tax revenues in a "lock box" to save them from being spent for anything but retirement benefits.
Alas, the lock box is a little porous, budget experts say--some of that money will almost certainly get nibbled away by both parties' decisions to spend more money on popular defense and domestic programs (see below). But most of it will not. Instead, it will be used to pay down the nation's publicly held debt, which economists almost universally agree is the single best use of any surplus funds--and one of the best ways to "save" it to pay benefits later.
Q: What about the rest of the surplus?
A: Surprisingly, there is one. Unsurprisingly, it is burning a hole in everyone's pocket.
As recently as two years ago, anyone predicting that the nation would have a surplus outside Social Security now would have been branded a budget fruitcake. After the 1997 budget deal, which was supposed to just barely balance the budget by 2002, the most almost any serious budget analyst would predict was a tiny surplus in 2002--all from Social Security money. And even that projection was widely doubted.
But with the economy doing better than anyone expected, Social Security taxes helped generate a budget surplus last year, and now both CBO and OMB say the rest of the budget will also generate a surplus, beginning next year. It starts small--only $5 billion (OMB) to $14 billion (CBO) in fiscal 2000. But it grows fast: Over the next 10 years, both agencies say, it will amount to about $1 trillion.
This is the money that Republicans want to use for their big tax cuts and that the White House wants to use for smaller tax cuts, Medicare, and defense and domestic spending programs.
Q: So, can we spend it?
A: In a way, we already have.
The $1 trillion surplus is predicated on the notion that Congress and the White House will be able to cut discretionary spending (appropriations) about as deeply as they did between 1990 and 1998, when it fell by almost 11 percent in inflation-adjusted terms.
Trouble is, the only way Congress and the president (first George Bush and then Bill Clinton) managed to make those 1990-98 cuts was by slashing defense spending after the collapse of the Soviet Union. Then, defense spending fell by 26 percent, but domestic spending (everything from the FBI and highway construction to the space program and education) shot up 24 percent, after adjusting for inflation.
Congress's problem is that both parties believe defense spending has been allowed to fall too low and want to increase it.
Q: So, why can't they cut domestic spending to compensate?
A: Technically, they could. They almost certainly won't.
Rhetoric notwithstanding, both the Republicans and Democrats like domestic spending. A lot. Witness the contortions Republicans are going through to make it look as though they are abiding by tight spending caps while at the same time spending above them for domestic programs: By declaring $4.5 billion for the 2000 census and another $7 billion to $11 billion for aid to farmers as emergency spending, for example, the GOP technically stays within the caps--emergency spending doesn't count--while freeing up money for other priorities.
On the bottom line, though, all spending is pretty much the same. The effect is to eat into the surplus. By most counts, next year's $14 billion, non-Social Security surplus is already gone. Most analysts expect much more extra spending before this is over, and they project that will inevitably break into the Social Security surplus--lock box or no lock box.
It is possible to project spending cuts deep enough to make the $1 trillion surplus materialize, but that would require Congress to cut more than it has shown the will for. "That's the issue here," said G. William Hoagland, Republican chief of staff for the Senate Budget Committee. "We're not very good at making decisions in the [appropriations] area that have any impact on reducing [appropriated] spending--Republicans as well as Democrats."
In a recent report, CBO projected the effect of extra appropriated spending on the surplus. If Congress sticks with the caps, it could see a nearly $1 trillion surplus. If it allows appropriations to rise with inflation and adds emergency spending each year, the surplus plummets to just $46 billion.
Robert Reischauer, a former CBO director who is now a senior fellow at the Brookings Institution, said that is the likeliest scenario.
"There is no [non-Social Security] surplus for all practical purposes," he said. As for both sides' plans to spend it on tax cuts or Medicare, he said, "The debate we're having now is both premature and irresponsible. But other than that, I hope they're having fun."