Slicing up the surplus

President Reagan's budget director, David Stockman, shocked the nation in the mid-1980s by speaking of $200 billion budget deficits "as far as the eye can see."

Today's presidential candidates are counting on a budget surplus of at least $200 billion "as far as the eye can see" - or further.

Are their campaign promises realistic? Will they fit into a 10-year budget surplus projected in July by the Congressional Budget Office (CBO) as $2.17 trillion, after locking up $2.4 trillion in the Social Security Trust Fund?

Let's have a look.

George W. Bush wants to use $1.3 trillion of the surplus for tax cuts instead of debt reduction. This will increase interest costs on the national debt by an additional $300 billion.

His extra spending plans add up to $425 billion, calculates the conservative National Taxpayers Union (NTU) in Washington.

This estimate assumes that as president, Mr. Bush could come up with $17.6 billion a year in savings through "government reform" - a neat trick if it can be done.

Adding up the tax cuts and new outlays, the Bush proposals fall just within the CBO's 10-year surplus - if his savings are made.

Al Gore says his "targeted" tax cuts amount to a more modest $500 billion over the next decade. He also suggests a laundry list of spending proposals that the NTU estimates as costing $2.33 trillion in 10 years - an amount five times larger than proposed by the Texas governor.

As a result, the NTU says, Mr. Gore would create a $161 billion deficit over 10 years with his spending proposals alone.

The spending proposals of the candidates, however, are rather fuzzy. Certainly the Gore campaign sees its spending total as far less than the NTU has estimated.

Economist Alan Auerbach says he hasn't seen a realistic "bottom line" on Gore's extra spending costs.

Perhaps the public, with good reason, doesn't expect much realism in campaign promises in the heat of an election season.

But there are other reasons to wonder about these 10-year projections.

One is that federal revenues have been coming in "like gangbusters," as budget expert Fred Ross says. The consultant to Schwab Washington Research Group predicts a total surplus of $250 billion in the fiscal year ending this month and $300 billion in fiscal 2001. Lawrence Kudlow, an economist with ING Barings, a New York investment firm, says $260 billion this year.

Those numbers are well above the $232 billion for fiscal 2000 and $268 billion for fiscal 2001 projected in July by the CBO. Revenues have been growing at an astounding 11 percent rate so far this year. If they were to grow at a somewhat more modest 8 percent a year for the next decade, the candidates would have perhaps a $10 trillion surplus to play with.

But will revenues grow that fast in the future? What if the economy slows, as last week's statistics apparently confirm?

Long-term budget speculation is "kind of silly," says Mr. Ross. Projections beyond a couple of years are almost certainly wrong.

Professor Auerbach of the University of California, Berkeley, agrees.

Nonetheless, taking the CBO 10-year projections as a base, he and William Gale of the Brookings Institution in Washington calculate in a paper that a more realistic 10-year surplus for the candidates to use is only $350 billion - not $2.1 trillion.

Contrary to a CBO assumption, discretionary spending, which includes military outlays, will not shrink as a proportion of gross domestic product, the total output of goods and services in the nation. Congress will renew various tax breaks for business, as it has in the past, but the tax breaks are not renewed in the CBO base-line budget. Congress will at some point shrink the so-called Alternative Minimum Tax because it is hitting middle-class taxpayers and not just the rich.

Another reason to suspect 10-year projections is that we don't know how much Washington will boost spending. Federal outlays are increasing 4 to 5 percent this year and will do so also next year, notes Ross.

"The days of spending growth below inflation are behind us," he predicts.

*David R. Francis is senior economics correspondent of the Monitor.

(c) Copyright 2000. The Christian Science Publishing Society