The Battle Over the Budget Surplus

July 23, 1998

After several years of seemingly impregnable budget deficits, the prospect of budget surpluses for the next few years is decidedly a piquant one. As Washington grapples with the question of what to do with them, battle-lines are being drawn in somewhat surprising ways.

  Take the position espoused by President Clinton and his fellow Democrats. Social Security first, they aver. With a keen eye on the influential legions of the elderly, the Democrats have sought to establish their credentials as protectors of t he popular program, and have promised to resist all attempts by the Republicans to hijack the budget surpluses for their nefarious ends.

  The Republicans find themselves in a somewhat awkward position. After having railed unceasingly against the profligate ways of the federal government for the last few years, the sudden emergence of budget surpluses has caught them flat-footed . It is difficult to fulminate against the government wasting dollops of taxpayer money at a time when it is operating soundly in the black. So they have fallen back on their favorite theme: Cut taxes; give the money back to the taxpayers of America.

  But they are aware of the pitfalls associated with their clarion call for tax reductions. Since their preferred cuts apply to taxes on capital gains and the top marginal income tax rates, the Republicans find themselves vulnerable to the charge that they are interested only in making the rich richer.

  In order to rob the Democratic accusations of their sting, the Republicans have attempted to cast their tax cut proposals in a different light: the lower taxes, they assert earnestly, will benefit the middle class enormously. The more prudent members of the GOP go further. Conceding that Clinton's idea has merit, they are willing to settle for more modest tax reductions, with the remainder of the imminent budget surpluses used to "save" Social Security (and Medicare).

  That Social Security and Medicare need saving is no secret. With the growing proportion of elderly in the country's population, rising life expectancies, and burgeoning health care costs, both programs threaten to consume unsustainably large chunks of government revenue in the near future. In a matter of a few years, the payroll taxes levied on workers is going to fall substantially short of the payments to be made to Social Security and Medicare beneficiaries.

  So Clinton's "Social Security First" is no empty shibboleth. If the surpluses of the next few years are applied toward the two entitlement programs, the task of placing them on a sounder financial footing becomes a bit more manageable.

  There is another, perhaps more compelling, reason to Just Say No to the more hotheaded Republicans who are almost fanatically devoted to the idea of tax cuts. It was not too long ago that the Congressional Budget Office was projecting large b udget deficits for several years to come. Now they are predicting fairly large surpluses for the next ten years.

  Why the change of heart? A stronger-than-expected economy. The duration, and robustness, of the expansionary phase of the current business cycle has taken a lot of folks by surprise, including those at CBO, who have been scrambling furiously in the past few months to revise their estimates of GDP growth and tax revenues upwards. If the good times continue, budget surpluses will become a more familiar fixture in the economy. A nasty little recession, on the other hand, could result in smaller surpluses, or even, Heaven forbid, bring back the dreaded budget deficit.

  In view of this uncertainty, a tax cut today appears to be a risky move. It is, point out the Democrats with gloomy relish, an irresponsibly profligate measure. They are glad that, for once, they are not at the receiving end of the customary tax-and-spend charge from the Republicans.

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