Washington Eager to Enter Era of Cash-Flush Budgets

Skeptics abound but strong economy may deliver a federal surplus well before 2002.

Want to know Washington's surprise issue of the summer? It's what to do with the excess cash if the US government starts running a surplus.

No, a certain warm netherworld has not frozen over. The Boston Red Sox aren't bound for the World Series. Pigs aren't flying like sparrows in the skies over Midwestern farms.

But the federal budget may soon reach a fiscal state thought wildly improbable only a few years ago. Strong tax receipts - plus this summer's budget deal - could send Uncle Sam's books well into the black, before 2002.

That's what optimistic analysts say, anyway. If they're right the whole nature of national politics might change. Scarcity would no longer dominate budget discussion. Instead, there could well be a race to divvy up the new loot.

Members of Congress are already introducing bills on the subject. At least one think tank has hosted a "coming surplus" discussion. In fact, deficit hawks think the whole debate is already out of hand. "Do you believe this, given the long-term problems that we face?" says Carol Cox Wait, head of the Committee for a Responsible Federal Budget. "Social Security and Medicare are unsustainable in their current form, and we're talking about the surplus."

So where's this (possible) fiscal surplus coming from? It seems as if President Clinton and GOP Republican leaders had a hard enough time striking an agreement that purports to simply balance the budget by 2002.

Here's how optimistic experts figure it: The big budget deal will actually work out better than any of its architects intended.

That's because the pact's underlying economic assumptions are too pessimistic, in the view of some. It predicts that tax revenues will grow 4 percent annually - whereas throughout the 1990s actual tax revenue increases have been closer to 7.5 percent per year.

Extrapolating past experience into the near future, plus figuring in some windfall revenue from the coming capital gains tax cut, produces figures that point to a river of black ink. "I get a complete reestimate with a $16 billion surplus next year, rising to a $137 billion surplus in [fiscal] 2002," writes Lawrence Kudlow, chief economist of American Skandia, in a recent fiscal analysis.

Of course, more-pessimistic experts think this kind of thinking represents hubristic budget triumphalism. A recession, or even a hiccup of the business cycle, might throw the figures off. Congress might never make the unspecified future spending cuts called for in the budget agreement. The capital gains tax cut could produce a net revenue loss, not a gain.

As Ms. Cox Wait points out, the recent fiscal history of the United States is not exactly replete with pleasant surprises. And the fiscal shortfalls of Social Security and Medicare could cause the budget to dive back deeply into the red beginning around 2010.

But that hasn't stopped the debate over dividing up these notional surpluses from beginning. There are three basic options: spend it, use it for tax cuts, or pay off a portion of the national debt.

To many in Congress defraying a portion of the debt sounds attractive. It seems like the fiscally responsible thing to do, as the big deficits of recent years have increased the federal debt held by the public fivefold since 1980, to $3.7 trillion.

At least one piece of pending legislation would devote most surpluses to debt reduction. Introduced earlier this year by Rep. Mark Neumann (R) of Wisconsin, the bill would allocate two-thirds of all excess funds to paying back what the government owes. Representative Neuman claims the total federal debt could be paid off by 2026.

But a number of economists do not believe debt reduction should be a primary goal.

True, such a move could reduce the government's burden of interest payment, currently running around $253 billion annually. But "debt" really means "treasury bills owned by the public banks," economists point out. Lowering the debt would lower national income, and perhaps slow the economy.

Furthermore, debt repayment could preempt necessary investments in health, education, and infrastructure. Debt reduction bills? "They're terrible," says Robert Eisner, a Northwestern University economist.

Then there's always tax reduction. A significant number of GOP lawmakers think surplus money should be used to keep shrinking down the federal government's fiscal reach. Their legislative vehicle of choice is the Economic Growth Dividend Protection Act - a bill introduced by Sen. Spencer Abraham (R) of Michigan that would reserve any surpluses over the next five years for tax cuts first, and debt reduction second.

Even if the government leaves deficits behind and enters an era of surpluses, budget politics still won't be easy. "Even if the deficit disappears, the debate will remain," writes Stan Collender, managing director of the Federal Budget Consulting Group at Burson-Marsteller.

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