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A Disappearing Act
Subject Tax Cut
Topic Fiscal Policy
Key Words Budget Surplus, Tax Cuts, Recession, Economic Growth
News Story

The numbers looked impressive. Three years of a growing surplus and projections of a continuing inflow of funds could provide for tax cuts, increased spending, as well as funds for Social Security and Medicare. But then the economy slowed, and the stock market fell, and President Bush implemented his tax cut, and the projections of big surpluses are gone. Instead of the politics of plenty, there are the politics of scarcity, and Congress and the President will increase competition for the scare funds.

The Congressional Budget Office earlier this year had projected a $275 billion surplus. Subtracting the Social Security and Medicare surplus leaves $92 billion. But President Bush's tax cut is estimated to cost $74 billion and the $12 billion in already approved spending leaves just $6 billion. This does not take into consideration the $18 billion in new spending that President Bush has pledged for the Defense Department. Cutting into the Social Security surplus is the only means of providing the additional funds, but Republicans had pledged not to do so. The vanishing surplus has also caused President Bush to withdraw support for a series of tax breaks for businesses that he had favored.

There is also the finger pointing. Democrats are saying that Bush's tax cut was too large and was based upon much too rosy forecasts of economic growth. Bush's advisors argue that the surplus is shrinking precisely because the economy is slowing and the tax cut is the tool that will get the economy back on track. Democratic pleas to save the surplus contradict Keynesian economic prescriptions to increase spending to counteract a slowdown. If Democrats push the argument that the surplus is sacred, they may be reminded of that position when they argue for many of their pet projects. Republicans will likely counter that Democrat-led spending is to blame if deficits reappear.

(Updated August 1, 2001)

Questions
1. What is a budget surplus? How does it arise?
2. How does the Social Security trust fund work? Are the funds earmarked for Social Security sitting in a vault somewhere?
3. How does a slowing economy affect the budget surplus?
4. Describe the federal budget process. How is the federal budget created?
Source John F. Harris and Glenn Kessler, "Dwindling Surplus Helps Hill Rekindle Blame Game," The Washington Post, July 9, 2001.

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