The Right Way to Use The Surplus

COMMENTARY Budget and Spending

The Right Way to Use The Surplus

Mar 15th, 2000 3 min read

Visiting Fellow

With a record surge of tax revenues lifting the federal budget into surplus, Congress and the president have a problem: Deciding what to do with all that extra income. Some policy-makers have proposed retiring the national debt. Others want to fund new spending projects. But the most sensible course is cutting taxes and reforming Social Security.

Using the whole surplus to pay down the debt may appear to be a responsible solution, but considering the way Washington actually works, it must be rejected as unrealistic. Any debt-reduction plan is certain to be thwarted by the urgency of politicians to spend every available dollar. History shows that no matter what the circumstances - in war or peace, amid deficits or surpluses, under Democratic congresses or Republican ones - government spending tends to rise. Federal belt-tightening is the exception, not the norm.

But an absence of fiscal discipline is no excuse to raid the surplus for new spending. Even as Americans voice concerns about the long-term viability of Social Security, the president has proposed using $2 billion of next year's surplus on high-technology pork-barrel projects, and at least an additional $22 billion to launch new government programs. This despite the fact that such "investments" would inject government into areas best left to the private sector.

The fact is, today's robust economy reflects not what the federal government is doing, but what it is not doing. The high-technology sector, which has remained largely untouched by government, is driving record economic growth. As this sector gains momentum, bureaucrats seem eager to impose new regulations and keep taxes high, even though this threatens to slow the new industries and thwart the entrepreneurs who must create tomorrow's jobs.

 True, congressional leaders recently agreed to keep spending increases to a minimum: about $596 billion, or $10 billion above current spending. But considering how high spending levels already are, this resolution hardly qualifies as "fiscal restraint," as House Budget Committee Chairman John Kasich, R-Ohio, described it. Congress and the president can put the surplus to better use by following a three-part course.

First, lawmakers should hold next year's discretionary spending - that is, money not "automatically" allocated to a particular program - to 2000 levels. Since 1990, entitlement spending has surged, and non-defense discretionary spending has increased by more than 50 percent. Now the White House and Congress want new programs and entitlements, even though the federal government operates too many programs and wastes too many tax dollars.

Although it is politically easy to make new commitments during economic booms, supporting these commitments during economic downturns can prove costly. No sensible parent who has earned overtime pay this year would use that extra income to purchase a larger house and mortgage and risk putting the family on the street when the overtime pay dries up. If Washington allows non-defense discretionary spending to continue rising as fast as it has over the past three years, the surpluses will disappear entirely.

 Second, they can promote economic growth by cutting taxes. As every successful business knows, it is precisely when sales revenues are high that investments must be made for the future. Washington should be giving the business sector incentives to create the next wave of products and jobs. This means reducing taxes on capital gains and ending the estate, or "death," tax, which heavily penalizes families that try to pass their hard-earned wealth on to their children. Government can also encourage Americans to save for retirement, long-term health care, and other family obligations by repealing the "marriage penalty" and expanding individual retirement accounts.

Third, even after enacting these specific tax cuts, lawmakers will still have a substantial sum left over for Social Security reform. Social Security's trustees have said the program, which is running a long-term deficit in today's dollars of nearly $20 trillion, will not have the funds it needs to pay promised benefits. Plus, most young workers will get a meager retirement income in return for their Social Security taxes. A portion of the surplus could be used to ensure full funding of promised benefits while giving younger workers the option of putting some of their payroll taxes into personal retirement accounts, allowing them to retire with bigger nest eggs.

President Clinton recently urged Congress to "steer clear of a fiscal dead end" on next year's budget. But unless sensible lawmakers are willing to grab the wheel and insist on tax cuts and Social Security reform, that's exactly where they're headed.

Angela Antonelli is the former director of The Heritage Foundation's Roe Institute for Economic Policy Studies.

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