The Bigger the Surplus, the Easier the Politics

WASHINGTON —  Despite recent boosts in government spending and an economic slowdown that might be expected to reduce tax revenue, Washington’s estimate of its record budget surplus is about to get even bigger, perhaps by as much as $1 trillion.

The government’s bulging wallet could do almost as much to determine the politics of the next few years as settling who controls Congress and the White House. It could make Congress and the president think big and live large at a time when the unbelievably narrow margins from Tuesday’s elections would otherwise breed political caution.

“Money makes the world go round, and the more there is, the more it can smooth over the political discord,” said Robert E. Litan, a former Justice Department official who is head of economic studies at the Brookings Institution, a nonpartisan think tank based in Washington.

In private meetings one day after the election, economists with the Congressional Budget Office, the agency responsible for the most widely cited estimates of Washington’s budget surpluses, told a panel of outside experts that they intended to ratchet up their economic forecast for the next decade.

The CBO’s move will boost the amount of money that Congress and the new president will have for tax cuts and new spending programs. It will also make it easier to pay for the pork-barrel projects that are often necessary to buy support for major legislation.

Exactly how much more will be available will not be known until January, after the lame-duck Congress passes its final appropriation bills in a session later this year.

But almost everyone involved agrees that over the next decade, the extra plug of money will be immense--on the order of $500 billion to $1 trillion. And so will its political consequences.

The CBO currently estimates that the budget surplus will hit $4.6 trillion by 2010. About half, tied up in the Social Security system, will be off limits to politicians. The rest is considered fair game.

The most immediate effect of raising the surplus estimate will be to boost chances for a big tax cut, which would prove helpful to Republican George W. Bush if he finally cinches the presidency.

During the campaign, Texas Gov. Bush touted a $1.6-trillion tax cut over 10 years. The proposal attracted opposition not just from his Democratic opponent, Vice President Al Gore, but from a wide array of economists and budget experts. Polls suggested that voters were equally skeptical.

If Bush could now claim that he could pay for most of his cuts with the extra surplus that growth is generating, he would be in a nearly unassailable political position to push his plan, analysts said.

“An increase in the surplus would bail Bush out,” said Robert D. Reischauer, president of the Urban Institute, a nonpartisan economic and social policy organization, and a veteran Washington economist. “It would make a big tax cut inevitable.”

Growing surpluses could also help Bush’s plan to partially privatize Social Security by letting younger workers divert some of their tax payments from the retirement system, where it now goes, into individual investment accounts.

Critics charge that the proposal would siphon off more than $1 trillion needed to pay future retirement benefits. Bush could counter that the money for the accounts could come from the non-Social Security portion of the growing budget surplus, perhaps in the form of a loan to account holders.

A President Gore could also profit from the bigger surplus. He might be able to persuade the nation that it could afford to give elderly Americans a generous prescription drug benefit. Gore says his plan would cost $340 billion over 10 years; critics peg the cost at twice that amount.

In each instance, the role that economic and budget conditions will play in the political debate will be the opposite of what it was when the country last had a new president.

When Bill Clinton won office in 1992, the economy was in or near recession, and deficits, not surpluses, were growing. Clinton used these conditions to dampen the expectations that he had raised during the campaign by, among other things, backing off the promise of a middle-class tax cut and dropping plans for a big public works package to revive economic growth.

Now, the economic outlook is so favorable that some prominent analysts believe it will trump Congress’ near perfect parity between the parties, which would ordinarily be expected to produce stalemate.

“The small mandate doesn’t matter,” said David Hale, the global chief economist for Zurich Financial Services in Chicago, who believes Bush will eventually be declared the new president. “The odds are very high Bush will implement his agenda.”

That prospect worries some observers.

In part, that’s because Bush’s call for big tax cuts, which would rev up economic growth, runs at cross-purposes to the Federal Reserve’s efforts to slow the economy to protect against renewed inflation. “There is a real potential for tension with the Fed,” Hale said.

And in part, it’s because the ballooning surplus estimates have as much to do with the mechanics of Washington budgeteering as with the actual budget outlook, and they can be easily misinterpreted.

The new surplus estimate will be based on the 10 years from 2002 through 2011, rather than 2001 through 2010. Dropping 2001 and adding 2011 adds hundreds of billions of dollars to the 10-year surplus estimate because the surplus is expected to grow each year.

The agency is well aware of the dangers and is trying to justify a cautious surplus estimate. But the CBO’s economic growth estimates are already well below those of most private economists, and agency officials say they must raise their forecasts just to avoid being accused of distorting figures to influence policy.

“They’re in a tough spot,” said Alan J. Auerbach, one of the agency’s outside advisors. “They really can’t deviate much from whatever the conventional wisdom is about growth.”