South-Western College Publishing - Economics  
Surging Surplus
Subject Budget surplus
Topic Fiscal Policy
Key Words Budget Surplus, Tax Cuts, Inflation
News Story

The President released revised forecasts for the budget in the next 10 years. The new numbers show an even greater surplus than the previous forecasts of February 2000- an increase of over $1 trillion. Whereas initial projections of a surplus divided political groups into spenders and savers, the growing size of the surplus has considerably reduced the number of non-spenders. The President also stated that there was now enough money available to make both Democrats and Republicans happy.

The government's previous estimate of the surplus was $2.92 trillion for fiscal years 2001 through 2010. Latest figures show a cumulative surplus of $4.19 trillion - an increase of over $1.2 trillion. Furthermore, all of the increase results from sources other than Social Security. While there is a debate about what to do with surpluses resulting from Social Security taxes, legislators are free to spend the excess revenues collected from other sources.

As the estimated surpluses have grown over the past several years, Republicans have increasingly called for large tax cuts. The President had successfully blocked these proposals arguing that the solvency of Social Security and Medicare had a higher priority. However with the surging surplus the President and his Democratic followers believe that there is now room for discussion, that is, the President seems willing to trade, for example, tax cuts for a prescription drug benefit program.

The President suggested using the increased surplus to:

  • Provide a prescription drug benefit through Medicare. This is estimated to cost $253 billion over 10 years.
  • Cut the marriage-penalty tax by $250 billion over 10 years.
  • Set aside $500 billion for tax cuts and increased Federal spending
  • Pay off the national debt by 2012.

These suggestions include measures like a reduction in the marriage-penalty tax that the Republicans wanted and a prescription drug benefit favored by the Democrats.

(Updated August 1, 2000)

1. Explain how an expanding economy could generate budget surpluses.
2. What are the primary sources of government revenues?
3. What is the relationship between the government's budget deficit or surplus and the federal debt?
Source John D. McKinnon and Jacob M. Schlessinger, "As Surplus Surges, Clinton-GOP Deals Look More Likely," The Wall Street Journal, June 27, 2000.

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