Commentary: The Surplus: Now You See It...

On Jan. 27, the Congressional Budget Office announced that the cumulative federal surplus over the next decade could top $1.85 trillion. For a nation that has been battling over deficits for nearly 20 years--and over how to spend the surplus for the past two--such numbers represent an almost unimaginable and irresistible opportunity. Not surprisingly, everyone--from President Clinton, to the Republican-dominated Congress, to every Presidential candidate--is wasting no time figuring out how to spend the windfall.

Maybe they'll get the chance. But if Congress follows recent practice, those trillions may never appear in the first place. "By the time you account for all the things virtually certain to happen," says James M. Horney, a fiscal expert at the Center on Budget & Policy Priorities, "there isn't much left."

How much? The projected surplus, BUSINESS WEEK calculates, could be more like $300 billion over the next 10 years. And that's before a single new tax cut or spending program has been enacted.

GETTING SERIOUS. How does $1.85 trillion disappear so fast? For starters, knock off $1 trillion by getting serious about how Congress is likely to spend money over the next decade. CBO's optimistic estimate assumes that non-Social Security and Medicare spending will be frozen at current levels for 10 years. But that would only happen if current spending caps remain in place and are actually enforced. The caps are set to expire after 2002, and they've been widely ignored in recent years. Last year, they were exceeded by $30 billion for exceptions such as aid for Kosovo and disaster relief.

A more likely scenario: So-called discretionary spending rises with inflation. That, says the CBO, reduces the 10-year surplus to $838 billion. And the White House figures it would come in even lower--about $750 billion. Says former CBO Director Robert D. Reischauer: "It's not realistic to expect Congress and the President to keep on a fiscal hair shirt in the face of budget surpluses." Especially in a year when a new President, 435 members of the House, and 33 senators will be elected, there will be little restraint when it comes to vote-getting spending ideas.

President Clinton won't be thinking about spending caps when he releases his final budget on Feb. 7. His recent State of the Union address included scores of new tax incentives and spending initiatives--for everything from health care to education. But even if his proposals are DOA in Congress, spending is likely to be higher than the CBO has optimistically forecast. "This is the new rosy scenario," says top White House economic aide Gene Sperling.

Three years ago, for example, Congress promised to end agricultural subsidies. But each year since, it has given farmers about $7 billion in disaster relief. Since droughts or floods seem to hit annually, let's add $70 billion in spending over the next decade.

Then, there are special-interest tax breaks, fondly known in Washington as "extenders." These are credits for everything from high-tech research to low-income housing that have been reauthorized every couple of years since 1986. With no reason for Congress to suddenly kill them, knock another $50 billion off the surplus.

Hidden in the black ink is an additional $40 billion a year that is already spoken for, although nobody wants to admit it. That's money earmarked for the retirement of federal civilian employees and military personnel. If you think that Congress will slash military pensions to pay for new spending or tax cuts, then count it in the available surplus. If not, subtract $400 billion more.

So now we are down to roughly $280 billion. But there is still the proliferation of tax-cut plans to consider. Clinton, who held the line against sweeping ones last year, seems ready to do something limited. His opening bid: $350 billion.

Republican leaders still cling to far bigger ideas. On Feb. 2, the House Ways & Means Committee approved a $182 billion marriage penalty and tax-rate relief bill, just the first of many tax cuts GOP lawmakers promise this year. Since Clinton will propose his own version of marriage-penalty relief--at a cost of only about $45 billion--it's a good bet that some compromise is likely. Says Robert Bixby, executive director of the Concord Coalition, a Washington group dedicated to fiscal discipline: "That opens the door to a megadeal between a President who wants more spending and a Congress that wants [big] tax cuts."

SENIOR BENEFITS. Clinton and Congress also both support new drug benefits for seniors. That could cost $10 billion to $40 billion a year, depending on who is covered and how generous the plan is. Then, there is the money that will have to be shifted eventually from the general fund to help make Social Security and Medicare solvent. Although neither fund should go into the red within ten years, money has to be set aside sooner to avoid large tax increases or benefit cuts later. And the costs of many proposals hit the trillion-dollar mark very quickly.

The news is not all bad. Future surpluses could be higher than the CBO projects--if the economy cooperates. After all, muscular growth in both the stock market and the real economy added $500 billion to the forecast. And more of the same could produce even bigger numbers. For example, the CBO estimates that the economy will grow 2.8% annually over the next decade. But 3.3% growth would bring in another half-trillion. Even a bit of inflation could help. If it doesn't tank the economy, higher inflation will produce more tax revenues, dwarfing higher interest costs.

Of course, if the economy sags, those big numbers would evaporate, and the nation might find itself heading toward deficit again. But such hypotheticals are not likely to slow politicians. They have many promises to make--and so little time to run for reelection.