The Dallas Morning News

September 18, 2001, Tuesday THIRD EDITION

SECTION: BUSINESS; Pg. 5D; SCOTT BURNS scott@scottburns.com

The vanishing federal surplus that never was

BYLINE: SCOTT BURNS

Before the terrorist attacks on the World Trade Center and the Pentagon, daily political posturing had one basic message - the federal surplus had been lost.

The Democrats said that President Bush lost the surplus with his tax cut.

The Republicans denied the charges. They said the economy had slowed, but that there was still plenty of money coming into Treasury coffers. The Social Security trust fund, they swore, wouldn't be touched. In fact, there was never a surplus.

My evidence: Federal debt is still rising.

This happens because our government doesn't account for income and expenses the way you and I do.

In the Burns family checkbook, there is income and there are expenses. When we subtract the expenses from the income, we have our "surplus" - the amount of money we have available to reduce debt. When we have a surplus for several years, debt is reduced very rapidly.

Your checkbook works the same way.

That's not the way our government works its checkbook.

While there has been endless talk about the size and scope of the federal surplus, the simple fact is that total federal debt has continued to expand. I pointed this out last year, observing that they took the National Debt Clock down too soon.

The accompanying table, updated from last year, tells the story. Government debt is divided into two distinct categories.

The first is debt held by government. The second is public debt, which is held by individual investors, institutions and foreign governments.

In the last four years, government-held debt - largely comprising assets in federal trust funds such as Social Security - has risen. Indeed, this form of debt has grown by $ 807 billion.

During the same period, publicly held federal debt has declined by $ 450 billion. As a result, total federal debt has risen by $ 356 billion during the purported period of surplus.

One reason this has happened is that interest on federal debt held by the Social Security trust fund and other government trust funds isn't paid in actual cash from general revenue. If it were, publicly held debt would not have fallen so much. Instead, the Treasury simply credits the trust funds with new Treasury obligations in the amount of the earned interest.

What does it all mean?

Both kinds of debt represent future claims on our income, usually in the form of taxation. The only question is when those claims will be realized.

And there's the rub.

Debt owed to the public is like your Visa card - it can be renewed forever if you're willing to pay the interest. The Treasury replaces maturing Treasury bills with new Treasury bills every week, rolling existing debt into the distant future. This is the easy debt, the stuff that's declining.

Debt held by the government - the kind that's growing rapidly - is another matter. It's more like a car lease with a balloon note. The hard part is the last payment.

The employment tax was increased in 1983 so that Social Security could build a fund to cover the early waves of Baby Boomer retirements. When those retirements begin, Social Security will pay out more money than it receives. Social Security will cover the shortfall by redeeming some of the IOUs in the trust fund. They will need to issue benefit checks backed by real cash because this particular obligation can't be deferred.

Bottom line: Both parties are posturing, and whatever our party affiliation, it's your family and mine who will take the hit.

To see the most recent figures of government debt and its change month by month, visit the Bureau of Public Debt's Web site at www. publicdebt.treas.gov/opd/opdpdo dt.htm.

You can also read last year's column on taking the National Debt Clock down too soon on my Web site at www.scottburns.com/ 001112SU.htm.

Questions of general interest will be answered in future columns. Write Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, 75265 or send an e-mail.