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June 30, 2000

Surplus, Debt and Temptation

By

Most Americans believe that mounting federal budget surpluses will automatically go toward reducing the national debt. If only it were that simple.

Unfortunately, there is nothing inevitable about debt reduction. In fact, many lawmakers - political rhetoric notwithstanding - are reluctant to use the surplus to pay down the debt. Yes, the House of Representatives recently voted to earmark the extra revenue already collected for debt reduction, but there's a good chance the legislation won't even be considered by the Senate, let alone enacted.

The Treasury Department must use specific procedures to pay down the debt. If these procedures are not followed - or even go slowly - Congress can use the extra revenue for play money instead. Essentially, the Bureau of the Public Debt must outrace special interest groups eager to spend the surplus revenues, and it is starting to fall behind. The national debt of $3.54 trillion won't be reduced one penny unless Congress ensures the surplus is used for the debt reduction and nothing else.

How can you have surplus and debt simultaneously? Like this: Say a family with a mortgage, credit card debt and student loans unexpectedly gets a lot of money. They will likely deposit the funds in a checking account. They might take some time to consider how to spend the money - refinance the mortgage, pay off credit cards, etc. They might decide to leave the money in the checking account until they can restructure their debts on the best possible terms. Meanwhile, their debt remains until it is formally paid off through checks.

But temptation might win out, and the family could spend its money on frivolous pursuits. (I'm afraid I speak from experience. The last time my family had a "budget surplus," I bought a BMW convertible.)

Like our hypothetical family, the federal government has an unexpected windfall. In fact, the money is accumulating in the Treasury Department's operating accounts faster than the Bureau of the Public Debt can earmark it for debt reduction. Although Treasury has retired over $230 billion worth of publicly held debt since 1997, the opening cash balance for May 2000 was $92.5 billion, the largest on record. Not surprisingly, special interest groups have already tried to spend an additional $115 million on arts and humanities, the federal government's version of BMW convertibles.

The legislation just passed by the House would ensure these funds are not misused while it works on the budget. The measure would protect the surplus revenues collected during the rest of fiscal year 2000 and use them for debt reduction by putting them in a special "Public Debt Reduction Account."

Although the extra revenues may cause an increase in cash balances, the cash would be sent to the special debt account rather than to the Treasury Department's operating cash account. Appropriators would be able to reallocate these funds only through legislation that would need to pass both houses of Congress and gain presidential approval.

Once surplus revenues are deposited in the special debt account, appropriators would have limited ability to increase spending without creating a deficit, which many taxpayers would perceive as a raid on the Social Security trust fund. Many powerful members of the Senate recognize this and may prevent this legislation from coming up for a vote.

The legislation would protect surplus revenues collected during the rest of the fiscal year. It also would serve as a model for how Congress should handle future surpluses. And it wouldn't interfere with tax reform, because it is limited to the current fiscal year. It affects only revenues that have already been collected or will be collected before any tax reforms take effect.

Once this special account is created, Congress could continue to channel funds to the account at any time. This means Congress would be able to reduce revenues through tax reform and still have a mechanism to prevent future surpluses from being used for anything other than debt reduction.

It's too early to tell whether the Senate will follow the House's example and vote to protect the surplus revenues in our nation's checking account. The only alternative is to hope the Treasury Department can speed up debt repayment before any more special interest groups sell lawmakers new convertibles.

Peter B. Sperry is the Grover M. Hermann fellow in federal budgetary affairs at The Heritage Foundation (www.heritage.org).

Distributed by nationally by Scripps-Howard News Service.

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