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Friday, 27 October, 2000, 14:02 GMT 15:02 UK
How to spend the surplus
US budget surplus
By BBC News Online's Steve Schifferes

The presidential candidates are competing to spend a huge projected budget surplus - despite the fact that it may never materialise.


The surplus numbers the candidates are using are unrealistic

Robert Bixby, Concord Coalition
But they have very different approaches to how to spend it, with George Bush planning to give most of it away in the form of tax cuts.

The Democratic candidate Al Gore doesn't want to spend it all on tax cuts and has earmarked some of it to pay off debt and increase health benefits.

Since the presidential campaign began, the size of the Federal government's projected surplus has soared - but many economists believe it would be irresponsible to plan to spend it just yet.

In the current financial year, which ended on 30 September, the government had a surplus of $237bn, the third surplus in a row, for the first time since the l940s.

Money to burn?

And the non-partisan Congressional Budget Office now projects that in the next 10 years that surplus will grow to around $4 trillion in total - equal to the size of the total government debt.

That is a lot of money to play around with - and it has made it easy for both campaigns to offer big plans for spending or tax cuts.

But much of the estimated surplus is purely hypothetical, and a large chunk of it is earmarked for the social security and Medicare programmes which provide for the elderly, and which would otherwise begin to accumulate big deficits.

About $2.2bn of the surplus is designed to bolster those programmes, which face serious problems in the next century as the number of retired people increases relative to the number of people still in the workforce.

Much of the surplus, especially the on-budget surplus, will only materialise in the last half of the next decade - if Congress does not spend the money first.

The estimates of the size of that non-social security surplus depend on two rather heroic assumptions.

First, that even after an eight-year boom, the economy will continue to grow steadily at about 2.7% for the entire decade without suffering a recession.

And secondly, that the government will contain discretionary spending at no more than the rate of inflation. In the past, spending has usually grown at the same rate as revenues.

In fact, even this year the Congress and the Clinton Adminstration are on the verge of agreeing spending plans that would reduce the estimated on-budget surplus by around half, including $400bn in extra spending and $300bn in tax cuts.

"The surplus numbers the candidates are using are unrealistic," says Robert Bixby of the Concord Coalition, a bipartisan group that watches the budget deficit.

Differing priorities

The Bush and Gore approaches to spending the surplus are also a reflection of the ideological differences between the previous Republican administrations of Ronald Reagan and George Bush senior, and those of the Clinton administration that Mr Gore had a role in shaping.

George Bush's spending plans
The Reagan approach emphasised tax cuts as a means of boosting the economy.

The bulk of Mr Bush's proposals for spending the surplus involve tax cuts.

He is proposing a $1.3 trillion reduction in federal income taxes and the elimination of all inheritance taxes.

The Gore campaign accuses Mr Bush of favouring the rich with these tax cuts.

Although there is a higher percentage reduction for the lower tax brackets, overall the bulk of the money given back by the government will go to higher earners (who pay the bulk of taxes anyway).

And Mr Bush is also planning to give people the option of reducing their contributions to the social security trust fund as long as they invest the money in their own private pension scheme.

That could reduce receipts - and therefore the surplus - of the social security trust fund by up to $1.0 trillion, although Mr Bush argues it would save money in the long run.

Compared to these proposals, Mr Bush's other main spending priorities are peanuts. His biggest spending proposal involves health care, with subsidies to promote the use of private insurance to pay for prescription drugs.

But that accounts for less than 10% of his plans.

Gore's approach

In contrast, Mr Gore has proposed a more even division of the budget surplus between spending, tax cuts, and deficit reduction.

Al Gore's spending plans
He is prepared to put much more money into health care, with the extension of Medicare to provide prescription drug benefits at a cost of around $350bn over the 10 years.

He also wants to pay down the government's debt, which will reduce interest payments in the future.

But he too is proposing a tax cut, although it is much more targeted and costs much less than the Bush plan.

And he is allocating about $200bn for a retirement benefit, outside of the social security system, which will allow people to save more for retirement with extra government help.

Mr Bush says that the Democrats' plan, which also include some extra money for education and the environment, amount to the biggest boost to spending the US has ever seen, and that the tax cut plan is too confusing, selective, and intricate.

Irresponsible

But many economists believe that both candidates are being irresponsible.

They argue that the government should not commit itself to spend or give away in tax cuts money it does not have, and doubt that the economy can be counted on to continue to perform so well.

"The economy is playing the lead role in the government's stellar fiscal performance," said Mark Zandi, chief economist for the consulting firm Economy.com. "But I don't think the economy nor the stock market will cooperate to the degree necessary to result in the surpluses currently being projected,"

Many would agree with the chairman of the Federal Reserve, Alan Greenspan, who has argued that all the surplus should be used to reduce government borrowing, thus freeing capital for private investment which would boost productivity and the long-term growth rate of the economy.

However, it is not surprising that in an election year that has not proved to be a popular prescription.

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See also:

04 Jul 00 | Business
US social security battle heats up
29 Jun 99 | The Economy
The trillion dollar surplus
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