South-Western College Publishing - Economics  

How Much is Too Much?
Subject Budget Surplus
Topic(s) Budget Deficits; Budget Surpluses
Key Words Budget surplus, budget deficit, fiscal policy
News Story

The goal of fiscal policy during these past years has been to reduce the budget deficit to zero. This was the general consensus among the Congress, the Presidency and the general public. When forecasters first projected a federal budget surplus, the projections were accompanied by statements that surpluses were only temporary and population demographics would once again push the budget into deficit in the 21st century. The projections of renewed deficits have been replaced with projections of continued surpluses and raise the issue of what is the appropriate federal budget surplus.

Federal budget surpluses are not new. After World War I (WWI) the federal budget surplus was used to retire the WWI debt. Retiring the debt was the agreed-upon policy and regular debt payments were incorporated into the budget. The Great Depression eliminated the surpluses, and World War II, along with Keynesian economics, pushed the budget into deficit for many years. After WWII the federal debt was greater than the gross domestic product (GDP)--a number too large to consider eliminating. Attention was directed toward government deficits. If the deficits were zero or small numbers, then the total debt would become a decreasing percentage of GDP. While we were not successful in holding deficits to zero, nevertheless the debt has decreased and now amounts to about half of GDP.

What should we do with the surpluses? There are those that argue for increased expenditures. Others push for reduced taxes, and still others want to reduce the federal debt. President Clinton has argued that the surplus should be addressed only after the Social Security problem is fixed. It would be appropriate to formulate a long-range surplus policy much the same way that we focused on budget deficits. The policy can be thought of as a tradeoff between the present and future generations. Reducing taxes or increasing expenditures benefits the present generation, while buying down the debt favors future generations.

Questions
  1. What are the principal categories of federal budget expenditure?
  2. What are the principal sources of federal tax revenues?
  3. How is the federal budget surplus defined? What is the relationship between the federal deficits or surpluses and the federal debt?
Source Herbert Stein, "At Sea With Surpluses," The Wall Street Journal, May 19, 1998.

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