TOPICS > Economy

Shrinking Surplus

August 21, 2001 at 12:00 AM EDT


GWEN IFILL: And joining me now is the White House Budget Director, Mitch Daniels and John Spratt, the senior Democrat on the House Budget Committee. Welcome, gentlemen. Mr. Daniels…

REP. JOHN SPRATT: Thank you.

GWEN IFILL: …When we see this mid-session review tomorrow, what will we learn about the state of this federal budget surplus?

MITCH DANIELS: Gwen, we’ll learn that we’re about to experience the second biggest surplus in American history. The federal budget is in tremendous shape. It is the economy of the country that is struggling, but we will see a surplus in the neighborhood of $160 billion. What a staggering thing, because just a few years ago, people doubted if the budget could even be balanced, let alone shoot way past balance to surpluses like that. And that money essentially will be used to reduce the debt outstanding of the federal government again this year. We’re headed for a year next year where, for the first time in a long while, interest costs will be less than a dime on the federal dollar. So there’s good news there. Our concerns ought to be about jobs and income getting economic growth restarted.

GWEN IFILL: Well, let’s talk about that, because as we documented just a moment ago in that taped piece, $284 billion down to $160 billion. This is not exactly a good trend line on this.

MITCH DANIELS: We’ve got to be a little careful here, Gwen. Two-thirds of that was very purposeful, was by act of Congress, to return, as the president has suggested, that much of that surplus to the people who earned it. And that was front-loaded by a bipartisan suggestion of Democrats and Republicans to rebate much of that money this year, and that accounts for about two-thirds of the difference. We have about a 2 percent, or about a $46 billion shortfall in revenues, and that’s something to watch and be careful about, but it’s hardly catastrophic.

GWEN IFILL: Congressman Spratt, what’s your take on where we stand right now with this federal budget surplus?

REP. JOHN SPRATT: Well, let’s look at this year. The last year of the Clinton administration, there was an on budget surplus of $56 billion. That’s without counting the surplus in Social Security or the surplus in Medicare, which we think ought to be set aside. The general fund of the Treasury had an on budget surplus of $56 billion. This January, when Mr. Bush came to office, we gave him a present that few presidents in recent years have enjoyed: A budget and surplus. The on budget surplus…

GWEN IFILL: When you say… Thank you. When you say on budget surplus, you mean…

REP. JOHN SPRATT: Excluding Social Security and excluding Medicare. Thank you. You’re exactly right. It was about $90 billion. The tax cut in this year, ’01, amounted to about $74 billion. They signed supplementals, which the Congress passed, supplemental appropriations bills for about $12 billion. 12 plus 74 is 86; less 90, left about $4 billion. So that’s about how much is there and when the economic restatement of the likely overall surplus is reduced, we think they’ll be into Social Security. We know they have consumed the entire amount of the Medicare trust fund.

GWEN IFILL: Now how do you think they have done this?

REP. JOHN SPRATT: Well, first of all, the tax cut this year was $74 billion. That took up the lion’s share of the available surplus.

GWEN IFILL: Didn’t Democrats– I’m sorry– didn’t Democrats support that tax cut, as well?

REP. JOHN SPRATT: Well, some Democrats did. I didn’t. I did propose, however, first person to propose, that we have a tax rebate. And the House Democratic budget resolution we brought it to the House floor. It was smaller than the overall tax cut that the Bush administration ended up imposing on the year ’01, but most Democrats voted for our budget reduction… our tax reduction which was less than their tax reduction, significantly. But still we were talking about a $750 billion to $800 billion tax cut. Still a significant tax cut. The real problem with this year is, number one, it breaches a principle that we’ve tried to establish, namely that we are not going to tap the Social Security trust fund again.

We used to do that, use it for funding spending. We don’t want to do that again. And secondly, we want to apply the same principle to Medicare. We’ve breached that principle. But the main problem with this year’s budget is that it may be the tip of a much larger iceberg, an omen of things to come. And we think, in fact, the on budget surplus, exclusive of Social Security and Medicare, is probably negative for several fiscal years to come. We’re a very tight situation.

GWEN IFILL: Let me give Mr. Daniels an opportunity to respond to that, specifically the charge that this administration is about to tap into the Social Security and Medicare trust funds that it promised not to touch.

MITCH DANIELS: These trust funds will be exactly as large as they would have been if there had never been a Bush tax cut. They’re growing, they’re each going to grow substantially this year. It’s a red herring and really a very duplicitous thing to say to suggest that anybody ever raids these funds. The only question we’re asking is whether we will use these moneys for debt reduction or any other purpose. Let me untangle a couple of things about this year. First of all, the year we are measuring right now was the last budget of the Clinton administration, passed last December. And the Congress raised spending by a gigantic amount, $50 billion over the year before. In retrospect, I suspect that if folks want a bigger surplus than the one we have, they might wish they had spent a little less money then.

GWEN IFILL: Mr. Daniels, how big… Explain to the layperson who’s listening to this debate about why it matters– and I’m going to ask Mr. Spratt the same question– why it matters at all whether we touch these trust funds or not.

MITCH DANIELS: Gwen, we don’t touch the trust funds. As I have just told you, they are growing, they will get credited with the same amount of bonds based on their revenues, regardless of the size of this year’s surplus. We do not touch them. They are secure. The real issue for Social Security and Medicare is whether we’ll have economic growth on a sustained basis, and whether we reform those programs or let them run off a cliff in the future. And that’s what the president has been showing leadership on, and I hope that that’s what congress will eventually engage with him constructively to do.

GWEN IFILL: Congressman Spratt, what about that? Why does it matter whether or not you touch these trust funds?

REP. JOHN SPRATT: In the Congress– both houses, both parties– we reached a consensus, and that consensus was that now that we’ve finally got the budget in surplus, we’re not going to borrow any more to fund spending out of the Medicare trust fund or the Social Security trust fund. Instead, we resolved that we would take the surpluses in these trust funds and have the Treasurer go into the open market and buy outstanding Treasury bonds. That way we would be investing the trust funds and the same assets they’ve always had, Treasury bonds, but at the same time we would be paying down the debt held by the public. We felt that if we did this religiously for the next ten to twelve years, we could pay off all the debt held by the public, about $3.4 trillion. And that would have two effects: It would add $3.4 trillion to net national savings, give the economy a boost.

And secondly, when these bonds have to be presented to the Treasury for payment, after 2020– because the Social Security administration needs them to pay benefits– the Treasury would be in better shape, more solvent than ever to redeem these bonds, because it would not have the outstanding debt to the public. This is a fundamentally important policy decision that we made in the Congress that the administration apparently doesn’t fully share yet.

GWEN IFILL: Well, let me ask you another question. Mitch Daniels just started by saying that basically the surplus is not what it was, but it’s also still a surplus. If the economy is stumbling, if it can’t quite get on its feet, why are we guarding the surplus so jealously… if dipping into it would help jumpstart the economy?

REP. JOHN SPRATT: Well, what we hope this policy will do– that is, buying up outstanding debt- drive down interest rates even more and be a boost to the interest- sensitive sectors of the economy that are usually at the leading edge of a growing economy: Automobiles, housing. That’s what we’re trying to do with this particular policy: Drive down the cost of capital, drive down interest rates by retiring debt held by the public and putting the money back into the pool of national savings. That’s our deliberate policy here.

GWEN IFILL: Mitch Daniels, is this a fiscal problem at its root, or is it a political one?

MITCH DANIELS: I think it’s a political one, but I think that Congressman Spratt just stated the case very well, and he laid the groundwork, I think, for the agreement that has to finally come. You notice he did not engage in the misleading rhetoric about raids and dips and drains. He stated the matter very accurately; that these surpluses are used to pay down debt, and the president supports that. There’s maybe a difference in degree. I would point out that if interest rates, low interest rates, were all that mattered, we’d have a boom on right now because they’re very low, both short and long. So we’re looking for balance, and part of that balance the president thought ought to be stimulus that put more money in consumers’ pockets so they could help, perhaps, lead us out of this recession. But I think that the general point that the Congressman made is an accurate one and one that the administration supports.

GWEN IFILL: And how much of this balance should also be spending cuts, budget cuts?

MITCH DANIELS: Budget cuts are not particularly… are not really necessary. The budget that’s before Congress right now, that the president has proposed, would contemplate growth of almost 6 percent. And that can be done consistent with protecting the entire Social Security surplus for debt reduction. So we think that’s a good balanced policy and one we hope a bipartisan majority will support.

GWEN IFILL: Congressman Spratt, we heard the House Democratic leaders say on Sunday that the budget… They should start and take a look at this budget from scratch, and maybe revisit a lot of assumptions, including the assumptions Mr. Daniels just talked about. Why would we have to do that? Why should we do that?

REP. JOHN SPRATT: Well, we’re going at… First of all, we used CBO, the Congressional Budget Office as our official score keeper– neutral, non-partisan– and we look to them to tell us what’s the condition of the budget. When their numbers come out on August 28, I think they’re going to take a more sober view of the situation than OMB has taken. OMB is assuming growth, I think, of 3.2 percent to 3.7 percent in the economy — a strong rebound in the economy, almost immediately happening in the fourth quarter of this year. We don’t think that CBO will be nearly that bullish, and consequently, when we see the CBO numbers, the Congressional Budget Office numbers, we think they will be presenting us with a projection of deficits– on budget deficits, exclusive of Social Security and Medicare– for some years to come. And that means we’ve got to sit down with this budget and rethink our priorities.

GWEN IFILL: Mitch Daniels, are your scenarios too rosy?

MITCH DANIELS: We won’t know for a while. We think they’re in the mainstream. We’ve certainly consulted and looked at other forecasts, and ours will be below those of many respected private sector economists. I would also say that our technical assumptions about how much revenue might come in will lead to a very modest revenue expectation for next year of a little over 3 percent. So we don’t think there’s a whole lot of downside. But it’s a very uncertain time, and again, I return to the thought that restoring economic growth is the most important thing we can do. The tax cuts undoubtedly are going to help. We have to be prepared, I think, to do still more if they don’t suffice.

GWEN IFILL: Director Mitch Daniels and Congressman John Spratt, thank you very much for joining us.