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A Budget Too Flush to Fight About

Alice M. Rivlin
Alice Rivlin
Alice M. Rivlin Former Brookings Expert

November 12, 1999

The United States political system, arguably the most effective in the world, has an uncanny penchant for making its successes look like failures. The wrangling now going on in Washington over the federal budget is an ugly, confusing spectacle—long on finger-pointing and gotcha moves, short on conciliation and statesmanship. As the vetoes, gimmickry and accusations of “raiding Social Security” fly up and down Pennsylvania Avenue, it is hard to remember that the battle is over marginal adjustments in an increasingly responsible fiscal policy.

The federal budget is already in substantial surplus—revenues exceeded expenditures by about $120 billion in the fiscal year 1999, which would have seemed like a miracle only a few years ago—and the public, polls indicate, is pushing politicians to raise the bar.

The new goal, harder but entirely appropriate, is an even bigger surplus, sufficient to reduce the debt and help the economy prepare for the rapid aging of the population.

Acrimony over small changes in a successfully balanced budget is a welcome change from the 1980’s, when there was so much more to be acrimonious about. The huge deficits of that decade were clear evidence of policy failure.

The stunning success of this decade began when President George Bush and the leaders of Congress hammered out an agreement in 1990 that raised some taxes and set explicit caps on future discretionary spending. The effect was not immediately apparent because the recession the next year cut revenues, but the groundwork for a falling deficit had been laid.

The goal of President Clinton’s budget plan in 1993, which extended the caps and raised some taxes, was to cut the deficit in half in four years. The deficit for the fiscal year 1992 was $290 billion—a $50 billion surplus in Social Security, offset by a $340 billion deficit in the rest of the budget. No one thought that getting to overall balance was a goal realistic enough to talk about, let alone reaching balance without counting the Social Security surplus.

But now that the overall budget has been balanced for two years, it’s time to follow the public’s leaning and adopt the more ambitious objective of balancing the budget without counting the Social Security surplus.

Paradoxically, although this raising of the bar is highly desirable, the reasons have little to do with Social Security.

Two or three decades from now, we will have a much higher ratio of retirees to workers, and the standard of living of both groups will depend on making the economy grow faster, so more goods and services are available to be consumed by everyone. Running a larger government surplus would help the economy grow. It would reduce the national debt, put downward pressure on interest rates and encourage new investment.

It doesn’t matter much whether the surplus is in the Social Security fund or the rest of the budget; it is the debt reduction that helps the economy grow. Explaining the raising of the bar as “not spending the Social Security surplus” is a convenient way of suggesting a connection between the aging of the population and the need for growth. But the current budget debate does not affect the status of the Social Security fund or the rights of beneficiaries in any way. That’s a debate for another (post-election) day.

If political discourse were more civil, Congress and the president would have settled their differences over the fiscal year 2000 budget long before now, probably by enacting modest increases in the spending caps and celebrating the fact that the surplus is larger than anyone expected.

Then they would have gone on to explain why an even bigger surplus would be a good thing for future growth.

A growing surplus can only be achieved by restraining spending growth and avoiding a major tax cut. A tax cut would hurt prospects for economic growth by encouraging more consumer spending and forcing the Federal Reserve to raise interest rates to avoid inflation.

With any luck, the new budget will be wrapped up in a few days and Congress will go on to other business. The public will breathe a small sigh of relief but will not realize that it ought to be celebrating.

The good news is that the budget surplus is growing, no significant tax cut is being considered, and politicians are beginning to notice that the public wants them to act responsibly for the long term and reduce the federal debt.

That’s a lot of good news. It’s a shame the process is so ugly.