Surplus mania

Nation's Business, March, 1998 by James Worsham

The last time Uncle Sam had more money than he knew what to do with was more than a generation ago.

Richard Nixon was settling into the White House, war was raging in Vietnam, hair was long, and skirts were short. And the word "trillion" wasn't yet part of Washington's everyday vocabulary.

It was 1969. The federal government had posted a $3.2 billion surplus, thanks mostly to a temporary 10 percent surcharge on personal and corporate income taxes to help finance the war. The surcharge had added $9 billion to that year's federal revenues -- enough to produce the $3.2 billion surplus after the $183.6 billion of spending in that year's budget.

The surcharge was terminated by law in 1970, about the time the economy went into a recession and federal budget surpluses disappeared.

Now, surpluses are on the horizon again, and federal policy-makers, the business community, and the nation are facing opportunities that they haven't encountered in nearly three decades.

The Congressional Budget Office is forecasting all-but-balanced budgets -- deficits of $5 billion or less on spending of around $1.7 trillion -- for 1998, 1999, and 2000. In 2001, the CBO says, a $14 billion surplus will emerge.

Surpluses will continue to rise, the CBO forecasts, from 2001 to 2008, except for a slight decline in 2003.

The president, meanwhile, has submitted a fiscal 1999 budget that projects a $9.5 billion surplus.

Some private economists are more optimistic, however, forecasting that the government could post a surplus of tens of billions of dollars for fiscal 1998, which ends Sept. 30. Thus, the federal budget could go into the black four years ahead of the schedule projected in last year's historic budget agreement.

Such forecasts have emboldened supporters of tax cuts and proponents of new spending. While many Republican congressional leaders plan to push for a variety of tax cuts, President Clinton proposed in his Jan. 27 State of the Union address that any surplus be set aside for Social Security. "Let us say to all Americans watching tonight, whether you're 70 or 50, or whether you just started paying into the system, Social Security will be there when you need it," he said. "Let us make this commitment: Social Security first." He thus established a firm starting point for the surplus debate.

Clinton proposed town-hall meetings on Social Security around the country this year, a White House conference in December, and negotiations between the administration and Congress next year on a long-term solution.

Top administration officials subsequently explained to the House and Senate budget committees that Clinton favors using a surplus to pay down the national debt until long-term reforms of the Social Security system can be agreed upon and enacted.

It is because of the currently growing surplus in the Social Security trust fund and money in other government trust funds that the overall, "unified" budget can show pluses or near-surpluses. Without the trust funds, last year's $22 billion deficit would have been $146 billion, according to the CBO. Unless reforms are enacted, however, the Social Security nest egg will begin to shrink when baby boomers start retiring in about 10 years.

During his State of the Union address, the president also proposed about $140 billion worth of new spending programs and tax credits over five years, which he suggests paying for with money from a proposed settlement with tobacco companies and the elimination of some tax advantages for businesses.

Meanwhile, Federal Reserve Board Chairman Alan Greenspan as well as some members of Congress from both political parties would prefer to see any surplus used for paying down the $5.5 trillion national debt. Reducing the debt -- the accumulation of annual federal deficits -- would lower the amount of interest paid on it by taxpayers and could push down interest rates for businesses and homeowners.

Like Clinton, some lawmakers want to set aside surpluses for Social Security, and others in both political parties want to use the surplus to shore up the Medicare program, which provides health insurance for the elderly.

The Medicare trust fund for hospital expenses -- Part A of the program -- is projected to run out of money in 2007, 22 years before Social Security is projected to go bankrupt.

The business community, which has spent years lobbying for a balanced budget and a smaller federal government, is drafting its strategy on a federal budget surplus with an eye toward ensuring that economic progress continues and that achievements on fiscal discipline aren't lost.

"We don't have a surplus yet, and we ought to make sure we have one before we spend it on anything," says Bruce Josten, executive vice president for government affairs of the U.S. Chamber of Commerce.

Businesses have a big stake in the outcome of the surplus debate, Josten says. "We want to make sure that whatever the surplus is used for promotes the same kind of economic growth and job creation that have benefited the country over the past seven years," he adds.