Newsday (New York, NY)

August 17, 2001 Friday NASSAU AND SUFFOLK EDITION

Pg. A07

U.S. Budget Surplus Dries Up; Bush concedes $125B nearly gone

By James Toedtman; CHIEF ECONOMIC CORRESPONDENT

Washington - The once-flush federal budget surplus has all but vanished, the Bush administration conceded yesterday as it detailed some mid-year tinkering with the books and Democrats revved up their criticism of what they called "Rosemary Woods accounting."

The surplus of $125 billion forecast in February has been depleted by a combination of $5.5 billion in emergency spending; the tax cut that included $40 billion in rebates and a postponement of $33 billion in business taxes; and by the economic slowdown, which has drastically reduced tax payments. That has put special focus on economic forecasts due Wednesday by the Office of Management and Budget and a week later by the Congressional Budget Office that are expected to show the federal government breaking even or slightly in the red.

President George W. Bush acknowledged the problem Wednesday night at a Republican fund-raiser in New Mexico, putting the blame on Congress and the economic slowdown. "They're screaming up in Washington, 'Oh, we're running out of money.' Well, that's because they want to spend every single dime that ever gets up there." He dismissed criticism that the financial squeeze resulted from the $1.35 trillion, 10-year tax cut he proposed and Congress passed last spring. Instead, he said, the problem is "the economy is slowing down, which means we have less projected money."

For the most part, balancing a $2 trillion annual budget with a few billion dollars is more a political than an economic problem. Preserving the Social Security Trust Fund has become "the inviolable line in the sand. Congress and the administration will do whatever they can to avoid crossing that line," said Carol Cox Wait of the Committee for a Responsible Federal Budget.

As Bush continued his August "tour of the heartland" yesterday, his budget writers were explaining how they had recounted Social Security and Postal Service Trust Fund revenues for the past four years in a way that provides an extra $4.6 billion in general spending this year.(*)

Democrats say this is the first of a series of budget gimmicks the administration will use to insist it has not balanced the budget with Social Security funds. Gene Sperling, former President Bill Clinton's chief economic adviser, said, "This is Rosemary Woods accounting, stretching as far as they can to contort themselves into a fiscal policy that is putting us in danger."

Sperling was referring to the classic photograph of former President Richard Nixon's White House secretary, Rosemary Woods, as she demonstrated how she had inadvertently created an 18-minute gap on a White House tape of Oval Office conversations.

Sperling, former Office of Management and Budget Director Jack Lew and Rep. John Spratt (D-S.C.), top Democrat on the House Budget Committee, were especially critical of a feature of the tax bill that delayed the due date of $33 billion in estimated corporate taxes from Sept. 17 until Oct. 1, the start of the 2002 fiscal year. It essentially diverted $33 billion of revenue from this year to next, creating the hole that yesterday's bookkeeping filled.

White House Press Secretary Ari Fleischer insisted there would be "a small on-budget surplus" when the fiscal year closes.

"They are just trying to pretty up the bottom line," Spratt said. "This is the first sign of lots of problems to come in a deteriorating budget."

It is also the first volley in a season of crossfire as Congress begins considering the 13 appropriations bills that must be adopted before the new fiscal year begins. The Bush White House, gambling that the popularity of the tax rebates will offset the discomfort of missed budget forecasts, unleashed a parade of official comments from Fleischer to top economic advisers Lawrence Lindsey and Glenn Hubbard, who minimized accounting maneuvers as normal business and forecast a slight budget surplus.

Bush had started the year forecasting the largest budget surplus in the nation's history and repeated the claim in New Mexico.

"We still have the largest surplus," Bush said, then corrected himself, " ... the second largest surplus in the nation's history."

* Isn't this an interesting figure? It's exactly what we have in real cash surplus contributed so far over and above the surplus we had last year. At the close of fiscal 2000, the Social Security surplus was $95.4 billion. Add $4.6 billion to that and you've got what Social Security has taken in as surplus so far this year. Veeeery In-ter-esting. Who really has their foot on the erase pedal anyway?