Bye-bye black ink, hello feud

The suddenly shrinking federal surplus is threatening to undermine the long-term prospects of George Bush's tax cut and future spending on everything from highways to fighter planes.

While Republicans and Democrats smugly blame each other for its disappearance, the lack of a financial cushion is already changing the political calculus in Washington and will force tough decisions on funding priorities that, even just a few months ago, lawmakers thought they wouldn't have to make.

True, the announcement yesterday by the White House Office of Management and Budget that the surplus will be $123 billion less than predicted doesn't necessarily have deep immediate impact. The nation is, after all, still in the black rather than running the monster budget deficits of the 1980s.

Yet the estimate that the federal surplus now stands at $158 billion - within $1 billion of breaking into the Social Security surpluses that both the White House and Congress said they would not spend - will affect how quickly and how much of the national debt is paid down.

It is giving Democrats ammunition to argue that President Bush's 10-year, $1.3 trillion tax cut was something the country can't afford - and will undoubtedly lead to efforts to rescind parts of it. More immediately, the debate on Capitol Hill will sharpen over preserving Social Security and Medicare, and how to set funding priorities for defense, education, and healthcare.

"The biggest problem is long term," says Stanley Collender, a budget expert at Fleishman-Hillard, a communications firm. "If the newest numbers are correct, then all the promised debt reduction we were told was going to happen, isn't going to happen."

More bad news is likely to come next week. The Congressional Budget Office is expected to release projections showing the budget surplus is even lower than the White House estimates.

"The news is an 'I told you so' for people who oppose the Bush tax cut, because they said from the beginning it was too big and it would have been more prudent to do a smaller tax cut," says Joel Friedman, a senior fellow at the Center on Budget and Policy Priorities in Washington. "They seem to be proven true even earlier than they had anticipated."

But the reasons go beyond the tax cut. In recent months, an economic downturn has begun to eat away at federal tax revenues.

Also, by agreeing to consider the Social Security surplus as being in a "lockbox," both parties have voluntarily limited the money pool available for federal spending.

That sets up a big fight when Congress returns next month over appropriations bills. The Senate version of the education bill includes more than $300 billion in new spending over the next 10 years, not currently provided for in the budget resolution. Democrats say they won't let the bill out of conference without it.

The White House request for $198 billion in new defense spending will also draw fire from Democrats. The routine emergency spending - for things like hurricane relief - could add anywhere from $50 to $90 billion to the budget over the next 10 years.

In addition, Congress and the White House are still $113 billion apart on the cost of a new prescription-drug benefit, even with the additional $37 billion the White House added to its budget estimate yesterday.

In one sense, the coming battles over spending are unnecessary. The lockbox is a piece of fancy accounting, not an iron safe under the Capitol Rotunda.

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