The New York Times

August 24, 2001, Friday, Late Edition - Final

SECTION: Section A; Page 18; Column 1; Editorial Desk

The Incredible Shrinking Surplus

The surplus seems to have vanished while Washington is on vacation.

The relentlessly optimistic Bush administration, which released its latest budget projections this week, had to struggle mightily to produce even a tiny nub of a surplus -- $1 billion this year outside of Social Security, based on overoptimistic forecasts and convenient omissions. The Congressional numbers due next Tuesday are likely to be even less heartening.

Except for the money in the Social Security trust fund, which both parties have vowed to use for debt reduction, the cushy surpluses of last spring have melted away in the heat of the summer. All this happened in a political vacuum, with Congress off on recess and President Bush himself vacationing in what is now ordained as the Western White House. But the administration is doing no one a favor by pretending that the situation can be solved by a little restraint on the part of House and Senate appropriations committees. In the real world, there is no way Mr. Bush can protect the Social Security trust fund surplus and his recent tax cut program. The sooner Congress is forced to face reality, the better.

The administration still insists that over the next few years it will take in a few billion dollars more than it spends, while saving the Social Security surplus -- but not the Medicare surplus -- for debt reduction. After a few years of close calls, the administration says, the surplus outside of Social Security will begin to blossom again, growing to $575 billion over the next 10 years.

To maintain faith in the surpluses of the future, President Bush is making some far-fetched assumptions. The White House assumes that, adjusted for inflation, the economy will grow by 3.2 percent in 2002. Popular private forecasters beg to differ. The survey of 33 analysts by the Federal Reserve Bank of Philadelphia comes in at 2.6 percent; The Economist's survey of 16 major investment banks and consultants averages 2.7 percent; and the Blue Chip Economic Indicators consensus of 53 sources says 2.8 percent.

In addition, the updated budget implicitly assumes that Congress is not going to do anything about the alternative minimum tax. If the targeting of the tax is not fixed by 2004, up to 35 million taxpayers, many from the middle class, will be subject to this onerous levy by the end of the decade. The chances are minimal that legislators will allow their constituents to be hit by something they will certainly perceive as a big tax increase. (if you have any idea what the editor is talking about here, would you please tell me)

Money to renew investment tax credits and finance additional defense spending, both of which the administration supports, is also left out of the budget. These three initiatives alone could eat up the entire surplus outside Social Security and cast the rest of the government into the red. Washington has a tradition of ignoring policies in the "expected but not budgeted" category, but never to this extent.

Mr. Bush has been telling the nation that the only thing it has to fear is a spendthrift Congress. Both parties have expensive items on their agendas -- a prescription drug program for the elderly, heavy spending on aid to agriculture and the inevitable highway construction programs. It is unrealistic to believe that the president, who seems unwilling to drop any of his own big-ticket priorities, like the missile shield, is going to be able to persuade members of Congress to give up theirs.

Despite what the administration wants the public to believe, surplus funds collected by Medicare and Social Security will almost certainly be tapped to pay for the president's tax cut and general spending for the foreseeable future. If this money were instead used to pay down more of the government's debt, it would lower the cost of borrowing to pay the retirement benefits already promised to today's workers. The only other way to supply these benefits would be through higher taxes.

The budget needs more breathing room, but the White House's huge tax cut threatens to smother it.