South-Western College Publishing - Economics  
Surplus Season
Subject Budget Deficit and Surplus
Topic Taxes, Spending, and Deficits
Key Words Budget Deficit, Budget Surplus, Recession, Economic Growth
News Story

After 28 years during which the federal government spent more than it received in tax revenues, the federal budget is now in surplus. September 30, 1998 marked the close of the 1998 fiscal year with the budget in a surplus estimated to be about $70 billion. Interest rates are lower as a result of the surplus than they might have been with a deficit, and the lowered interest rates have helped push unemployment down and incomes up. Fiscal restraint was an important factor in propelling the economy forward and creating the economic strength that has so far insulated the U.S. economy from the Asian economic turmoil. The question now being debated is what to do with the surplus.

The Congressional Budget Office estimates that future surpluses will amount to $1.55 trillion over the next decade. President Clinton and others argue that the surplus should be kept in reserve until a plan is devised to shore up Social Security for the retirement of the baby-boom generation. Others, including many Republican legislators, want to use the surplus to finance tax cuts so that it will not be available for increased government spending. To emphasize their point, the Republicans point to a proposal by Mr. Clinton to spend $17 billion of the surplus on emergency spending for domestic and military programs. A third view is represented by John F. Cogan, a senior fellow at the Hoover Institution, who says the surpluses provide the nation with an opportunity to change its tax system, strengthen Social Security, or reduce the $5.5 trillion debt.

The many years of deficits has had a profound impact on our social and fiscal policies. Rather than being guided by a search for the correct policy, political action in the past seemed to be driven by the belief that balancing the budget was more important than financing social programs. The existence of surpluses will allow the economy greater flexibility in economic and social policy: issues such as Social Security and Medicare.

(Updated November 11, 1998)

1. How is the budget deficit or surplus calculated?

2. How does the budget deficit or surplus vary over the business cycle?

3. What policy decisions help transition the economy from deficit to surplus? What other factors help explain the transition?

4. What is the Social Security problem to which the article refers?

Source Richard W. Stevenson, "Red Ink No More", The New York Times, October 1, 1998.

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