As President Bush talks about the economy during his State of the Union address tonight, the specter of a drastically shrinking federal budget surplus is looming in the background.
And while it currently exists only on a spreadsheet, the diminishing surplus has effects that are anything but abstract: Less money in the federal coffers means fewer funds for popular programs like prescription-drug coverage or health-insurance coverage. And a decade or so down the road, a potentially huge crunch in Social Security benefits lies in wait.
The latest 10-year budget forecast, an annual report issued last week by the bipartisan Congressional Budget Office, has the surplus withering from $5.6 trillion, the estimate just one year ago, to the current estimate of $1.6 trillion.
Just like that, $4 trillion has vanished. But some Bush administration officials say the figures don't mean much.
"These numbers oscillate wildly and are of very, very little use," White House Budget Director Mitch Daniels told reporters after the CBO announcement Jan. 23.
A year ago, though, the Bush administration was singing a different tune. Back then, when the CBO produced its $5.6 trillion surplus forecast, White House spokesman Ari Fleischer said the CBO numbers were "as close to accurate as the estimating business can be" and "right in line with the blue-chip economic forecasters."
So which view is right? And is the CBO's budget estimate a good one? And why does it matter so much?
A Premium on Economic Forecasting
On a practical level, it matters because the CBO's estimate will be cited countless times in Washington during political budget fights in the coming year. The battle lines are already drawn: Many Republicans claim Democratic spending programs will endanger the remaining surplus, while Democrats are saying Bush's 10-year, $1.3 trillion tax cut has already put the surplus in jeopardy.
With less money in reserve, the surplus has become Washington's most hotly contested zero-sum game, with both parties fighting to decide how to use the leftover cash. Bush is expected to outline additional spending proposals in tonight's address, including more military spending, before presenting his budget proposal to Congress early next month.
But the one thing leaders in both parties agree on is that the recession-bound economy has tied their hands. Lower corporate earnings and higher unemployment mean the government collects less tax revenue from companies and people, further shrinking the budget surplus.
Certainly, a change such as the current slowdown — unlike long-term spending programs or tax plans — is an unpredictable part of the budget equation. So when it comes to budget estimates, the CBO's ability to make good forecasts is at a premium. And in the past, changes in the economy have led the CBO numbers to vary greatly from the eventual reality. In 1997, for instance, the CBO projected a $170 billion deficit for fiscal year 2000, which thanks to a still-booming economy had turned into a $236 billion surplus by the time 2000 rolled around.
Now the opposite scenario seems to be unfolding. The CBO's relatively rosy economic outlook of January 2001 — just two months before the onset of the current recession — helped create its $5.6 trillion estimate. This year, the CBO economists have factored in the recession, taking the surplus projection down a notch.
CBO: Perpetual Optimists?
No one thinks it's easy to project changes in the nation's growth far in advance. But there are economists who believe the CBO was slow to notice the sputtering economy, and herald this year's numbers as a correction of sorts.
"I think they're finally getting a little realistic," says Steve Cochran of Economy.com in West Chester, Pa. "They never accounted for any recession in the outlook until recently … What the CBO has done really reflects the current economic situation."
Of course, with the typical postwar U.S. recession lasting from 12 to 16 months, most economists are already anticipating an economic recovery later this year — although it's anyone's statistic-studded guess when and how sharp the recovery will be. The CBO seems to be on the optimistic side of this debate, too; Director Dan L. Crippen told Congress last week that "the most likely path for the economy is a mild recession that may already have reached its nadir."
All told, the CBO projects 2.5 percent growth in 2002 and a 4.3 percent gain in 2003 — a slightly stronger recovery than Cochran, for one, is willing to project. But others are more accepting of the CBO's figures. Richard Kogan of the Center on Budget and Policy Priorities in Washington says the "more flexible economy" of the current day means "this sort of bounce-back is not atypical after recession."
And in congressional testimony on Thursday, Federal Reserve Chairman Alan Greenspan essentially endorsed the CBO's view, implying the office was right to be "reasonably sanguine about the economy's growth prospects for the next 10 years."
Tax Cut a Bigger Chunk of Change
But if the forecasting ability of the CBO is an important variable in the surplus debate, the current report makes something else clear, as well: The economic slowdown accounts for but a relatively small portion of the missing $4 trillion.
According to the CBO forecast, the tax cut constitutes about 40 percent of the difference — nearly twice as much as the economic downturn, which accounts for slightly more than 20 percent of the disappearing money. Spending increases, including post-Sept. 11 security measures, are nearly 20 percent; and bookkeeping changes, like larger interest payments on the national debt, are about as large.
And since most of Bush's tax cut is scheduled to take place in the last five years of the 10-year period, some would argue the state of the economy, while the main reason for the dwindling surplus over the last 12 months, will soon become a less significant budget issue than the tax cut.
"It really isn't a matter of opinion, it's right there in the CBO numbers," says Robert Greenstein, executive director of the Center on Budget and Policy Priorities. "The economy is the single largest factor behind the shrinkage of the surplus in the short term, and the tax cut is the single largest factor behind the shrinkage of the surplus over the long term."
With that in mind, Democrats have been trying to rein in the tax cut, hoping to connect with a public that appears to strongly support fiscal discipline. An ABCNEWS.com poll released this month shows 52 percent of Americans would scrap the remainder of the Bush tax cut "if doing so helped to avoid a deficit in the federal budget," while 32 percent oppose doing so.
Bush, in response, has accused the Democrats of wanting to raise taxes, and is vowing to keep the whole tax cut intact. All of which means the budget battle will create plenty of fireworks in the future — no matter what the CBO says about the economy.