Pols jockey for position in race to spend budget surplus
By Daniel W Gottlieb -- Purchasing, 3/11/1999
The sudden turnaround from budget deficit to surplus has set the stage for post-impeachment drama: Republican tax cuts versus Clinton's rescue of future Social Security and Medicare. With the surplus projected to rise steadily from $107 billion in 1999 to just over $381 billion in 2009, according to the non-partisan Congressional Budget Office (CBO), the battle over how to spend it will have a significant effect on business investment, the trade balance, and inflation.First, however, one must question the veracity of the surplus. The CBO says: It's real and here to stay for about 10 years--if etc., etc., etc. Even under CBO's worst "boom and bust" scenario, surpluses continue, albeit much reduced (by about 60% in 2002, for example).
Of course, one can dismiss the green-eye shade assumptions made by the CBO. Even the outgoing budget director says they can't be relied upon with certainty. But over the 1988-1998 period, CBO's errors in five-year projections were off by an average of just 13%, excluding the unforeseeable impacts of legislation that affected revenues or spending.
Odds that the Republicans will win their 10% across-the-board tax cut, reduction in estate (death) taxes, and elimination of the marriage penalty: Slim. It's unlikely they'll be able to push the 10% cut through without gobbling up most of the surplus. To avoid alienating senior voters, they'll probably have to go along at least part way with Clinton's plan to bolster Social Security when it faces deficits in the 2020s and 2030s. That's when the baby boomers come of age and start withdrawing more than wage earners contribute.
Clinton already has planted the seeds of compromise by buying part way into the Republican proposal for privatization of retirement benefits through individual retirement savings accounts and investment of trust funds in the stock market. While Federal Reserve Chairman Alan Greenspan says the latter would be dangerous for the economy, the relative size of the Social Security stake in the market Clinton plans would be far less than that of mutual funds and private pension funds, for example. But if it grew it could be a boost for capital investment.
A compromise may be to take most of the surplus (most of which--ironically--comes from Social Security payroll taxes exceeding payout of benefits) to pay down the national debt. Reducing the debt would free capital that goes into government securities for investment in stocks and corporate bonds. It also could bolster the dollar, which would keep imports flowing at cheaper prices.
The present actions of Congress could start the ball rolling on long-term spending patterns that would be hard to reverse if the country's economic fortunes change for the worse. Unanticipated military expenditures, to contain trouble in the Balkans and the Middle East, could also upset the surplus.
It's still too early to sense how the drama will play out, but the battle lines should be clearer in April when the budget resolution must be approved.
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