The Incredible Shrinking Surplus


By Howard Gleckman When President Bush sold the nation on his massive tax cut, his most compelling argument was simple: The government is collecting more tax money that it can prudently spend. Thus, it should return the extra dough to the taxpayers.

In theory, that makes a lot of sense. Too bad the President was wrong -- so wrong -- about the reality. The White House's own budget update released on Aug. 22 reports that nearly all the money available for new initiatives -- be they major increases in defense spending, education, Social Security reform, a significant Medicare drug benefit, or future tax cuts -- has vanished.

Yep, it's gone. True, government accounts still show a surplus. But it's made up almost entirely of Social Security payroll taxes. These are extra dollars over and above what today's workers pay to provide seniors their benefits this year. The plan had been to use the Social Security surplus to pay down the $3 trillion national debt, a priority that Bush, Congress, and a majority of voters have wholeheartedly embraced.

BIG ASSUMPTIONS. If you do that, though, virtually no surplus is left. The biggest problem for Bush is that this isn't just a short-term cash-flow squeeze that will disappear once the economy gets back on track. The White House is still assuming growth will jump to 3.2% next year, 3.5% in 2003, and will average 3.1% over the next decade. Even in such a robust economy, the surplus will still largely vanish, concedes the White House Budget Office.

Here are a few numbers. In January, the Congressional Budget Office figured the surplus this fiscal year would reach $281 billion. Off that, $156 billion was made up of those extra Social Security payroll taxes. The remaining $125 billion of the black ink represented income taxes and other non-Social Security revenues.

What's left, after the economic slowdown and the Bush tax cut? The non-Social Security surplus is less than $2 billion in fiscal 2001. What about fiscal 2002, which begins on Oct. 1? It's even worse -- $1 billion.

POLITICALLY EXPLOSIVE. Now, look at the long run. Just eight months ago, the White House and Congress figured that over the next decade, the surplus would reach a stunning $5.6 trillion. That has shrunk to $3.1 trillion. That's still a lot of money. But of that, $2.53 trillion is excess Social Security payroll taxes. What's left to fund all those new priorities Bush and Congress say they want? By the White House's count, $575 billion.

Even that number may be high. The calculation is based on the assumption that the entire tax cut will be allowed to expire after 2010 -- a politically explosive decision that would hit taxpayers hard. If it isn't repealed, one-third of that $575 billion working surplus disappears.

The Administration also leaves out $70 billion in new farm spending that Congress has made room for in its budget and that the White House supports. The budget assumptions do account for a Medicare drug benefit, but one that's substantially smaller than the $300 billion program Bush and Congress say they want. And the Administration doesn't address at least half of the defense buildup that Bush is pushing so hard. Plus, it leaves out much of the education funding Congress is sure to pass.

SQUABBLES AHEAD. Add it all up, and there's nothing left for Social Security reform and not a dime available for the new business tax cuts that Bush has promised Corporate America. Also, no money would be in the till to allow for scaling back the alternative minimum tax, a levy that largely eliminates the benefits of the Bush tax cut for 35 million taxpayers.

Something will have to give. Between now and the 2002 election, Bush and Congress will likely squabble over who lost the surplus and will battle over what few crumbs of surplus remain. Democrats will surely charge that Bush has raided both Social Security and Medicare to pay for his tax cut.

For Bush, the forecast suggests even deeper trouble. His agenda is dead in the water for the rest of his term if the new numbers turn out to be accurate. Either Washington is going to pay off much less of the federal debt than it has promised, or the Bush tax cut is going to be sharply scaled back, or a lot of folks hoping for new federal spending -- whether they're defense contractors, corporate tax officials, or senior citizens -- may be in for a long wait. Gleckman, senior correspondent in BusinessWeek's Washington bureau, has been covering fiscal policy issues for two decades


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