The debate surrounding the anticipated budget surplus.
February 19, 1998
in this forum:
Is the Clinton administration using smoke and mirrors to create this so called surplus? If there is a budget surplus, wouldn't it be beneficial to pay down the national debt? What are the key assumptions in the projection of a Federal budget surplus? If a surplus does exist, wouldn't it make sense to give it back to the American people in the form of a tax cut ? Wouldn't it make sense to use this surplus to bolster the long-term solvency of the Social Security system?
February 2, 1998
Budget Director Franklin Raines and Senator Pete Domenici (R-NM) discuss the possible budget surplus.
January 9, 1998
Exploring the possiblities and plausibility of a budget surplus.
August 5, 1997
President Clinton signs a budget deal that will balance the books by 2002.
Experts analyze the budget deal.
Sen. Pete Domenici and Budget Director Franklin Raines discuss the budget agreement .
Browse the NewsHour's coverage of the budget, the White House and the Political Wrap index
Office of Management and Budget
U.S. Senate and House of Representatives
The Urban Institute
Citizens for a Sound Economy
Stephen Dunivent of Foothill Ranch, CA, asks: What are the key assumptions in the projection of a Federal budget surplus? What has to materialize in order to make the surplus a reality? Knowing this will help the public evaluate whether the projected surplus is an illusion.
Dr. Rudolph Penner, the Arjay and Frances Miller Chair in Public Policy at the Urban Institute, responds:
The budget was balanced sooner than expected because of a large number of small surprises that all went in the right direction. The economy proved to be slightly more ebullient than expected, although the forecasting error was quite small. Corporate profits, which are heavily taxed, turned out to be a slightly higher proportion of total income than expected. This helped tax revenues grow faster than the economy. Taxpayers in high tax brackets received an unusually high proportion of the benefits of the economic expansion and this also helped tax revenues grow rapidly. The soaring stock market added to capital gains tax revenues. On the spending side, Medicare and Medicaid costs grew less rapidly than expected. Last, despite all this good news, the budget could not have been balanced were it not for the decline in defense spending associated with the end of the Cold War.
The surpluses that are now projected by the administration and the Congressional Budget Office are based on extremely conservative assumptions. Economic growth is expected to slow significantly; the unemployment rate is expected to rise; and corporate profits are expected to grow less rapidly than the economy. It is my guess that actual surpluses will significantly exceed those now being projected. But this is only a guess made with enormous uncertainty. Any of the many things listed above that went right in recent years could go wrong in the future. In particular, a recession would cause deficits to reemerge as would a rise in international tensions that required a large increase in defense spending. There is also a risk that medical costs will again rise rapidly after being relatively quiescent for many years.
Mr. James Miller, counselor at the Citizens for Sound Economy, responds:
Especially when you're talking about a balanced (or nearly balanced) budget, the deficit is truly the small difference between two large numbers -- receipts and outlays. Any small change in either can mean big changes in the difference.
Receipts to the federal government are very closely related to overall economic activity. Obviously, anything that would promote economic growth would raise receipts, and vice-versa. The key determinants of economic growth (and its composition) include productivity increases, total employment, wage, profit, and interest rates, and capacity utilization. Other factors can affect outlays, including the unemployment rate (compensation), interest rates (payment for the debt), and medical costs (medicare and medicaid).
Thus, any forecasts of deficit or surplus in today's environment should be taken with a grain of salt -- especially those for the "out years" (that is, those beyond the coming fiscal year). The bases for the forecasts in the President's budget seem, on the whole, reasonable. But slight changes in the economic climate could easily mean the difference between a net surplus or a net deficit.