Shrinking surplus raises concern

As budget squeeze returns, Democrats, Republicans fighting over reasons

Posted: Monday, July 16, 2001

WASHINGTON -- Republicans and Democrats are dueling over increasingly scant federal dollars, and for the first time since 1992, the budget's bottom line is widely expected to be leaner than the previous year.

Some questions and answers about the surplus, the Social Security and Medicare trust funds and other issues the political battle has raised.

Q: Is the budget in bad shape?

A: Not from a historical perspective. Last week, the nonpartisan Congressional Budget Office estimated that the surplus for fiscal 2001 -- which runs through Sept. 30 -- will fall below $200 billion. President Bush's budget chief, Mitchell Daniels, said the figure could be as low as $160 billion. Either way, it would still be the second biggest surplus ever, trailing only the $236 billion rung up in 2000.

Q: So what's the problem?

A: After nearly a decade in which huge annual deficits evolved steadily into ever-larger surpluses, things are now headed the opposite way. Underlining the abrupt turnaround, Daniels' low $160 billion surplus estimate for 2001 is 43 percent smaller than the $281 billion that Bush projected just three months ago. Daniels and Dan Crippen, the budget office director, both say they expect the budget to recover. For now, however, the upward trend has been halted.

Q: Why has this happened?

A: Much of it is because the economy has slowed. Company profits have slipped and corporate income taxes have fallen with them. In June, they lagged $26 billion, or 11 percent, behind the same month a year ago.

Democrats say the recently enacted 10-year, $1.35 trillion tax cut was too big. This year alone, the Congressional Budget Office expects it to chomp $72 billion out of the surplus. Republicans blame Democratic efforts to increase spending, including boosts won while President Clinton was in office.

Q: Either way, wouldn't a $160 billion surplus still be a huge pot of money?

A: Of course. But it is important to understand where the surplus comes from.

Nearly all of that $160 billion figure will come from Social Security, the pension program for the elderly and disabled. For years, the two parties have agreed to use that program's surpluses only for debt reduction, and Daniels said Bush is committed to that idea.

An additional $28 billion in surplus money could come from the hospitalization portion of Medicare, which provides health insurance to the elderly and disabled. Medicare and Social Security revenues come from a payroll tax paid by workers and their employers.

The surplus could be increased further by the amount by which other tax collections -- mostly personal and corporate income taxes -- outweigh the costs of the rest of government.

Q: Don't those numbers mean that this year's overall surplus may not be much bigger than Social Security's?

A: Exactly. And that points to a big partisan dispute.

Democrats insist that the Medicare surplus be used only for debt reduction. But they predict that much of this year's Medicare surplus will disappear. Looking ahead to next year's congressional elections, they blame Republicans for dipping into that popular program's trust fund to help pay for Bush's tax cut.

Democrats say the tax cut and GOP budget policies will also drain all of next year's projected Medicare surplus, plus some of the Social Security surplus as well. They say that for both this year and next, that means the tax cut will deplete money needed for defense, education and other priorities.

Q: How are Republicans responding?

A: They blame the shrinking surplus figures on Democratic spending and the lethargic economy, and say the tax cut is helping the economy by pumping money into it. They also say the Medicare hospitalization surplus is only an accounting gimmick that masks losses in the overall program.

Yet the GOP is divided. The White House says Medicare's surpluses can be used for anything, including paying for tax cuts or general government programs. Many congressional Republicans consider that a politically risky stance and go no further than saying that Medicare trust funds can be used to create new prescription drug benefits under Medicare.

Q: How would Social Security and Medicare be affected if their surpluses are not set aside for debt reduction?

A: Only indirectly. Reducing the federal debt helps keep interest rates down and spurs the economy. That should mean more revenue for the government when retiring baby boomers start using Social Security and Medicare later this decade.

But neither program's benefits are affected by whether their surpluses are used for debt reduction or not. Both collect more than enough cash to pay their beneficiaries.

In fact, using their surpluses for debt reduction is a new phenomenon. Until the huge budget surpluses of recent few years, Medicare and Social Security surpluses were routinely used to cover other government costs.

But expanding Medicare to also provide prescription drugs would drain that program's surpluses faster, pushing it toward insolvency faster than is expected today.

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