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The Budget Surplus: Now You See It, Now You Don't

In his 2000 campaign, George W. Bush talked about federal surpluses stretching as far as the eye could see. Even as the economy started to stall earlier this year, White House and congressional forecasters figured the 2001 surplus would cover both big tax cuts and big spending increases on popular programs such as education and medical research. Now, in the face of slowing growth, the tax cut just passed, and new spending pressures, the much hyped surplus--excluding money for Social Security and Medicare--could vanish within months. Says Senate Budget Committee Chairman Kent Conrad (D-N.D.): "It's slowly dawning on people that, hey, we may have a problem."

That eventuality would have dramatic political and policy consequences. It will doom any prospect for business tax cuts in the near term. It will make it harder for Bush to fund his costly defense buildup and for Democrats to boost social spending. And it has Dems ready to batter Bush and the GOP for "raiding" Medicare to fund "tax cuts for the rich."

Nobody is predicting a rerun of the deficits of the '80s. The total surplus for fiscal year 2001--which ends Sept. 30--may still top $175 billion. But $156 billion is earmarked for Social Security and $28 billion for Medicare. The money actually is used to pay down the federal debt but is credited to those trust funds.

GIMMICK TIME. Where did the surpluses go? With the economy growing at less than half the 3% pace Congress estimated, revenues could fall short by as much as $20 billion. The big reason? "Corporate profits are plunging," says Mark M. Zandi, who heads the consulting firm

Then there's the tax cut: Rebate checks will drain an additional $40 billion. Add to that a budget gimmick of the first order. When it passed the tax cut, Congress was worried that it would cost too much in fiscal 2002. So to offset some of the expense, it delayed a scheduled Sept. 15 corporate tax payment until Oct. 1. That will shift $33 billion into fiscal '02 but reduce the '01 budget by an equal amount. Hill Democratic budget analysts predict $10 billion in red ink. Congress has "a mighty thin margin for error," says Robert L. Bixby of the Concord Coalition, an advocacy group for fiscal conservatism.

The squeeze will tighten in fiscal '02, when the tax cut reduces revenues by $37 billion more and Bush wants $18 billion in extra defense outlays. Even if the economy rebounds, the effects of this year's slump could drain more than $30 billion from federal coffers in '02.

Bottom line: The '02 deficit, excluding Social Security and Medicare, could top $20 billion. "I thought Democrats might be saying `I told you so,' but I hoped we wouldn't be saying it this soon," says Charles B. Rangel (D-N.Y.), senior Democrat on the House Ways & Means panel.

Democrats think they have a winning political issue. According to a June 11-13 survey by Democratic pollster Stanley B. Greenberg, two-thirds of likely voters would rather roll back top-bracket tax cuts than borrow from the Medicare surplus. Says Greenberg: "This is potentially very dangerous for Bush."

Republicans think Democrats are to blame for any raid on the Medicare trust fund. Says House Majority Leader Richard K. Armey: "The strategy of the Democrats is to try to spend Congress into the trust funds so they can spin it as the fault of tax reduction."

The threat of deficits may help Bush hold down spending. But with Republicans in control of the White House and the House, any reappearance of deficits could come at a huge political price. That's why, when budget negotiations start in the fall, look for the Bushies to do almost anything--including reprising the worst of the 1980s' budget gimmicks--to avoid dipping into those Medicare funds. California Governor Gray Davis jokes that he can solve his state's energy woes by buying an extension cord long enough to reach Texas. But President Bush isn't laughing. His poll numbers are sinking fast in the West. According to an ABC News/Washington Post Poll, just 28% of voters in Western states approve of Bush's handling of energy policy, and just 44% say the Prez is doing a good job. But the former Texas governor gets a thumbs-up from two-thirds of Southerners. With campaign-finance reform looking like a good bet this year, business and conservative groups are gearing up to defeat it in court. So, Senator John McCain (R-Ariz.), Representative Amo Houghton (R-N.Y.), and Trevor Potter, ex-chairman of the Federal Election Commission, have created the Reform Institute to help counter court challenges to the likely new law and give moderate GOPers an alternative to existing campaign-reform groups, considered liberal bastions by many Republicans. Will the U.S. Navy torpedo its new destroyer? Some admirals believe that the stealthy, $20 billion DD21 isn't that innovative. The cash-strapped Navy brass are therefore considering the use of DD21 technology on existing ships--perhaps instead of building new ones. One possible omen: The Navy has delayed a decision on whether a General Dynamics Corp. or Ingalls Shipbuilding Inc. team would build the DD21, pending a review of all shipbuilding plans.

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