Snow, Praising Bush on Budget, Calls Clinton's Surplus `Mirage'

By Alison Fitzgerald

Dec. 21 (Bloomberg) -- President Bill Clinton left office in 2001 with a federal budget surplus of $127 billion. President George Bush ran a deficit of $319 billion in 2005. So who deserves more credit for fighting red ink?

No question, says Treasury Secretary John Snow: It's his boss, Bush. Sipping a latte at a Starbucks coffee shop with reporters in Washington two days ago, he said that ``the president's legacy will be one of having significantly reduced the deficit in his time,'' and said Clinton's budget was a ``mirage'' and ``wasn't a real surplus.''

Snow said the Clinton surplus was inflated by a stock-price bubble and that Bush will be remembered for cutting the gap from a record $412 billion in the 2004 fiscal year.

``Snow's comment would be laughable if it weren't so pathetically and obviously inaccurate,'' said Thomas Mann, a political analyst at the Brookings Institution, a policy research group in Washington. Colleague William Gale, who worked on the Council of Economic Advisers under President George H.W. Bush, said calling members of the current administration ``deficit-fighters is completely at odds with all of their policies.''

Snow has some support for his view. ``Capital gains receipts were unusually high'' during the last years of the Clinton administration, said Ed McKelvey, senior U.S. economist at Goldman, Sachs & Co. in New York. He estimated that when the budget surplus reached a peak of $237 billion in 2000, capital gains tax payments were about $90 billion higher than the norm for the early-to-mid 1990s.

Government Forecasts

Government forecasts for continued surpluses depended on those tax payments continuing, Snow, 66, said. ``You're going to make a lot of mistakes if you forecast based on a bubble,'' he said. ``Bubbles burst.''

James Lucier, a political analyst at Prudential Equity Group Inc. in Washington and former economic research director at Americans for Tax Reform, said the projected surpluses weren't real because of the ``artificial'' way Congress accounts for spending.

Even so, the ``enormous growth'' in so-called discretionary spending by the Bush administration -- programs such as defense, transportation and education, which must be approved each year by lawmakers -- ``belies the notion that spending restraint has been the major focus of this White House,'' Lucier said.

Justifying Tax Cuts

Moreover, Gale said, the administration used the same Clinton-era forecasts to justify its tax cuts in 2001. Since taking office, Bush pushed through tax cuts totaling $1.85 trillion and raised government spending 23 percent in his first four years in office to $2.29 trillion.

After the Sept. 11 terrorist attacks, the U.S. invaded Afghanistan and later Iraq. Defense spending rose 48 percent to $454 billion in 2004, according to the non-partisan Congressional Budget Office.

Discretionary spending under Bush rose from $649.3 billion in 2001 to $895 billion in 2004, CBO figures show. Discretionary spending also rose as a share of the economy, from 6.5 percent in 2001 to 7.7 percent in 2004.

``The surpluses in the late '90s weren't a mirage, and as the deficits of the last few years grow even larger with the erosion of budget discipline, they won't be a mirage either,'' said Chris Rupkey, senior financial economist at Bank of Tokyo Mitsubishi Ltd. in New York. ``About the only thing you can say in the administration's favor is that a fast-growing economy of over $13 trillion covers up a lot of mistakes.''

Hurricane Spending

After reaching a record in 2004, the deficit fell by $94 billion in the budget year that ended Sept. 30 as tax receipts soared. The improvement won't last, and even Snow says the deficit will rise this year as the government spends more to rebuild after the hurricanes. Economists including Drew Matus at Lehman Brothers Inc. in New York said the deficit may rise enough to wipe out all of last year's improvement.

Snow and other administration officials said they inherited a recession in 2001, after the equity bubble burst a year earlier, and then had to increase spending to kick-start the economy and fight the war on terror.

At the same time, the administration also opposed renewing rules for government spending that required all tax cuts or spending increases to be offset elsewhere in the budget. Bush wanted such rules to apply only to spending measures and not to tax-cutting proposals.

Those rules imposed a discipline on the Clinton administration that forced it to keep deficits in check, economists including McKelvey and Lucier said. That restraint has disappeared.

``The president has disappointed many of his supporters by failing to rein in spending,'' Lucier said.

To contact the reporters on this story: Alison Fitzgerald in Washington at afitzgerald2@bloomberg.net

Last Updated: December 21, 2005 00:09 EST

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