Huge surplus spurs political horse-trading

THE BALTIMORE SUN

WASHINGTON - The federal budget surplus is projected to balloon to a staggering $1.87 trillion over the next decade, more than double the 10-year surplus projected by White House budget forecasters four months ago, President Clinton said yesterday.

A surge in tax revenues - powered by strong economic growth and improving worker productivity - immediately triggered the kind of Washington horse-trading that is sure to heat up as Election Day approaches and lawmakers scramble for accomplishments they can take to the voters.

Clinton made what he called "a very good faith offer" to accept spending $250 billion on a Republican plan to eliminate the disparity between the taxes paid by married couples and singles, but only if the Republican-controlled Congress approves his $250 billion plan to provide Medicare recipients a prescription drug benefit.

"This is a proposal for true compromise," Clinton said in the White House Rose Garden, beside a chart illustrating a plunging national debt. "It asks each party to accept some of the positions of the other party in the name of progress."

As the president was offering a half-trillion dollars of the surplus, he was scrambling to rope off most of the remaining dollars for debt reduction and pet spending programs.

The economic boom has generated surpluses in three major areas of federal spending. Clinton was talking yesterday of the general fund surplus, which comes from income taxes and similar broad-based levies. Separate payroll taxes fund Social Security and Medicare, and those programs also have surpluses.

Both parties agreed this year to dedicate all of the surplus from Social Security taxes - about $2.3 trillion over 10 years - to debt repayment. Yesterday, Clinton embraced a proposal by Vice President Al Gore to also earmark Medicare taxes for debt reduction, thus taking an additional $403 billion from the money available for spending or tax cuts.

Dedicating Medicare and Social Security surpluses to debt reduction would erase $2.7 trillion of the $3.5 trillion the government owes the public.

"In the environment of just three years ago, that would have been considered unimaginable fiscal restraint," said Robert Reischauer, president of the Urban Institute, who once headed the Congressional Budget Office.

Clinton also proposed walling off a $500 billion "reserve for America's future," which would pay for retirement savings accounts, small tax cuts, education, research, health care and environmental spending over the next decade.

Projections keep growing

No matter how fast the White House scrambles to find uses for the money, the surplus projections keep growing. This year, the surplus - including Social Security and Medicare - will hit $211 billion. By the end of the year, the Treasury Department will have reduced the federal debt by $324 billion since the federal government began running surpluses two years ago. And Clinton says the government is on track to eliminate the debt by 2012, a year earlier than was expected last winter, and still fund his priority programs.

"We have an enormous opportunity here to build the future of our dreams for our children," he said.

Economists of all political stripes agreed that the surplus projections appear to be plausible, at least economically. If anything, the White House budget office's estimates on economic growth and worker productivity might be too conservative. For the past three years, forecasters at the White House and in Congress have significantly underestimated surpluses.

"We know these projections are going to be wrong," said Alan Blinder, a Princeton University economist and adviser to Gore's Democratic presidential campaign. "But since they are not based on rosy scenarios, we have no reason to believe they'll be wrong on the high side. They just could be wrong on the low side."

Few analysts believe such surpluses will materialize. They think politicians will find it impossible to resist spending the money or returning it to the taxpayers.

Republicans did not immediately accept Clinton's offer on a marriage penalty tax cut and Medicare drug benefit. Senate Majority Leader Trent Lott said he looks forward to "working with the president to end the punitive penalty imposed on married couples ... and providing the elderly most in need with a Medicare prescription drug benefit."

"What I will not do," Lott added, "is engage in political horse-trading that gives short shrift to the long-range challenges we face as a nation."

Democrats were taken by surprise by Clinton's offer to swap marriage penalty relief for a generous prescription drug benefit.

"I'm not happy about it," said Rep. Benjamin L. Cardin, a Baltimore Democrat. "It's too expensive."

In the fall, when Congress struggles to finish the 2001 budget in time to campaign, lawmakers might be in more of a mood to compromise.

"Just because we can't agree on everything, we shouldn't let that stop us from agreeing on anything," White House Chief of Staff John Podesta said.

The higher forecasts immedi- ately offer promise and peril to Gore and his likely Republican rival for the White House, Texas Gov. George W. Bush. For Gore, the surplus is more good economic news to take to the voters, but it makes it considerably more difficult for him to portray Bush's Social Security privatization plan and 10-year, $1.3 trillion tax cut as economically risky.

Bush has been given far more room, not only for his proposed tax cuts, but also for promised spending increases in education and defense spending.

When the governor first outlined his economic platform, his advisers had to jettison the official forecasts of the White House and Congress to make his proposals fit into a balanced budget. That might no longer be necessary, though Gore spokesman Chris Lehane said Bush's budget numbers still don't add up.

A case for debt payment

Still, a case could be made for leaving the surplus largely untouched to pay down the debt, said Robert Bixby, executive director of the Concord Coalition, a budget watchdog group. The $3.5 trillion federal debt owed to the public still equals 40 percent of the nation's economic output, far higher than the 26 percent in 1980, before the huge budget deficits of the Reagan years. If the surplus was used only to pay down the debt, that figure would not shrink to the pre-Reagan level until 2003, Bixby said.

What is remarkable is that so little of the surplus has been spent. That is partly because of the complex structures Congress set up during lean budget times to protect its spending priorities. For instance, when some Republicans moved this spring to repeal the 4.3-cent-a-gallon federal gasoline tax approved in 1993, others balked because money raised by that tax is dedicated to transportation projects in their districts.

But the temptations posed by a gaudy surplus could overcome turf battles and rigid budget rules. Gore has proposed using some of the surplus generated from income taxes to shore up Medicare and Social Security, a move that would violate the time-honored principle that those programs should be funded only by the payroll taxes dedicated to them.

Bush and Gore have proposed using the surplus to significantly increase the federal share of education spending.

To tax-cutters, this "spend it if you've got it" attitude has become increasingly aggravating. Peter Sperry, a fellow in budgetary affairs at the conservative Heritage Foundation, implored Congress to cut taxes, saying, "When the bathtub is overflowing, the first thing you do is turn down the tap."

Sun staff writer Karen Hosler contributed to this article.

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