Even Surpluses Need Rules
Subject Federal Budget
Topic Taxes, Spending, and Deficits
Key Words Budget Deficit, Budget Surplus, GDP
News Story

Will government deficits return? President Bush campaigned for a tax cut, an idea that was even blessed by Alan Greenspan, chairman of the Federal Reserve. Both Bush and Gore pushed for extending Medicare coverage to prescription drugs, increases in defense spending and education initiatives. Even though lowered tax rates coupled with increases in government spending do not necessarily result in government deficits, it may be that the 'natural' inclination of Congress and the Administration to spend whatever surplus it has on hand will push us to deficits once again. Robert D. Reischauer, former director of the Congressional Budget Office, argues that new rules on government spending are needed to prevent this.

Because of the growth in the budget deficits in the 1980s, Congress enacted legal restrictions on spending. There were caps on discretionary programs like defense, medical research, law enforcement and community development. Pay-as-you-go rules required lawmakers to identify offsets to any increases in spending on entitlement programs. These rules are partly responsible for the budget surpluses of today.

As the strong economy and booming stock market transformed budget deficits into surpluses, lawmakers abandoned fiscal discipline and circumvented the rules they had established. While a relaxation of constraints in an era of surpluses does not seem to be a problem, the danger is that a spending frenzy will result in either too much or the wrong kind of spending.

What is needed? First, an agreement should be reached to take Social Security and Medicare surpluses off the table. Then, especially because of the uncertainty surrounding budget projections, a limit should be imposed on spending of the remaining surplus. Such a policy will allow the government some flexibility in facing issues or unexpected demands in the future. Furthermore, new legislation is needed to limit the ability of the Congress and the administration to tie up future surpluses. These rules would allow Congress to cut taxes and/or increase spending but in a controlled environment.

(Updated March 1, 2001)

1. What determines the size of the federal budget surplus? What are the primary sources of revenues and expenditures?
2. The article states that it is the 'natural' inclination of Congress to spend. Do you agree? Disagree? Explain.
3. How is the federal budget formulated? Are there any checks on government spending?
Source :Robert D. Reischauer, "Stop Them Before They Overspend Again," The New York Times, February 8, 2001.

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