SYNOPSIS: The budget surplus is a lot smaller than politicians seem to think.
Quick quiz: How big is the federal budget surplus? I don't mean those projections of a surplus of $2 trillion or more over the next decade -- projections that have turned the election into a referendum on what to do with the windfall. How big is this year's budget surplus? Guess what -- it's not very big. The "on-budget" surplus for fiscal 2000, which excludes Social Security (as both parties agree we should), will be about $60 billion. Most of that $60 billion, however, shouldn't be on-budget, because it represents the surpluses of the Medicare and federal pension trust funds -- both of which are, like Social Security, accumulating reserves for our geriatric future. The true surplus right now is around $20 billion.
So our political debate is based on projections saying that in the years ahead the federal government will run average annual surpluses about 10 times as big as this year's actual surplus. Doesn't that sound a bit like counting your chickens before they've hatched? Wouldn't you at least want to take a very careful look at the eggs? A new analysis by Alan Auerbach and William Gale (of Berkeley and Brookings respectively) does just that. And its conclusion -- that those projections are unreasonable, that the huge future surpluses we've been taking for granted are figments of our imagination -- is already ruffling feathers.
Their first point is that if you put Medicare and federal pensions into the "lock box" along with Social Security -- and what politician would admit that he plans to raid those funds? -- you immediately slice $800 billion off those future surpluses.
That still leaves a pretty big projected surplus. What drives that projection, however, is the assumption by the Congressional Budget Office that "discretionary" spending -- spending that, unlike Social Security, Medicare, or interest on the debt, is not mandated by existing law -- will stay at current levels for the next decade. If spending stays constant while a growing economy increases tax receipts, the eventual result will indeed be a big budget surplus.
But while Congressional budgeters are obliged to pretend to believe what Congressmen say, the truth is that demands for government services grow with the economy: more air traffic to control, more homes to protect from forest fires. I know, I know -- you're going to insist that the government is too big as is. Let's roll back discretionary spending, now a bloated 6 percent of G.D.P., back to what it was in 1960, when it was only . . . actually, it was about 12 percent of G.D.P.
True, most of that was defense spending. In fact, half of discretionary spending still goes for defense. That means that, given the clamor for a stronger military, it will be all the harder to hold overall spending constant.
By the way, non-military discretionary spending as a percentage of G.D.P. is now at its lowest level since 1962.
So the realistic projection is that discretionary spending will grow at least as fast as G.D.P. Indeed, if we're going to have a military buildup, keeping discretionary spending from growing faster than G.D.P. will require substantial cuts in government services.
Assuming that discretionary spending does grow with the economy, the Auerbach-Gale paper projects a surplus over the next decade of only around $350 billion -- not even enough to make room for Al Gore's tax cuts, let alone Mr. Bush's. (Mr. Bush's cuts would produce a trillion-dollar deficit.) And that's assuming that nothing goes wrong -- no recession, no military emergency. The paper goes on to argue that if you take account of the demands on federal funds that will come when baby boomers retire, we are actually in long-term deficit.
Press the advocates of huge tax cuts about all this, and it turns out they have another argument up their sleeves: that the U.S. economy is going to grow even faster than the Congressional Budget Office projects, so there will be another couple of trillion dollars to play with. Maybe -- but now we're counting chickens before the eggs have even been laid.
The most likely prospect is that those big surpluses won't materialize. And when the chickens that didn't hatch come home to roost, we will rue the days when, misled by sloppy accounting and rosy scenarios, we gave away the national nest egg.
Originally published in The New York Times, 8.23.00