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It Just Keeps On Growing
Subject Budget Surplus
Topic Fiscal Policy
Key Words Budget Surplus, Tax Cuts, Inflation
News Story

The budget surplus keeps rowing and growing! In Fiscal 2000, which ended in September, the budget surplus soared to $237 billion, a $113 billion increase from the previous year. The increase in the surplus is the result of revenues increasing at twice the rate of expenditures. Given the trend in revenues and spending, many analysts are projecting a budget surplus of over $300 billion for Fiscal 2001, especially given the likelihood that the next president will not have a mandate for new spending programs.

Estimates of government surpluses are probably going to grow even larger. The Congressional Budget Office (CBO) is considering a revision in the rate of growth that the CBO uses as the basis for its budget projections. CBO used a 2.7 percent growth rate in the July forecasts that produced an estimated surplus of $4.6 trillion for the years 2000 through 2010. They are considering replacing the 2.7 percent rate with a 3.3 percent rate. Increasing the growth rate to 3 percent would add over $500 billion to the July forecast.

Many economists are urging caution in making these revisions. There are a number of sings of slower growth and the stock market has been flat for most of this year. Payroll growth and capital gains have been largely responsible for the increased in federal revenue relative to the size of the economy. Administration officials counter that slower growth has been incorporated into budget estimates, including a rise in the unemployment rate from the current 3.9 percent to 5 percent. As far as capital gains, they argue, there is a significant amount of unrealized gains, and, as assets change hands, revenues will be generated.

The concern among many citizens that legislators have already spent the surplus is unfounded. Over the past 5 years, federal revenue has increased 8.4 percent, while federal spending rose only 3.4 percent. In Fiscal 2000, spending increased at a 5 percent rate, but revenues rose 10.8 percent.

(Updated December 1, 2000)

Questions
1.

Explain the difference between discretionary spending and automatic stabilizers.

2. What are capital gains? Capital gains taxes?
3. What arguments do critics of the proposed upward revision in the economy's estimated growth rate make?
4. How do progressively higher marginal tax rates generate increased federal spending when the economy is growing?
Source John M. Berry, "Ballooning Budget Surpluses May Get Even Bigger," The Washington Post, November 19, 2000.

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