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Surplus Slipping Away

President Bush's tax cut and the sluggish economy have combined to virtually erase the projected budget surplus not dedicated to Social Security this year and next, the White House estimated Wednesday.

The Office of Management and Budget projected a fiscal 2001 surplus of $158 billion, only $1 billion above the tax receipts that flow to Social Security. The revision is $123 billion less than the last estimate in April but the surplus still will be the second-largest ever.

The forecast envisions a similarly tiny non-Social Security surplus of $1 billion in fiscal 2002, which begins Oct. 1. That represents a $58 billion drop from the April estimate, for an overall surplus of $173 billion next year that is almost entirely Social Security.

OMB Surplus Projections
Click here to read the Office of Management and Budget's revised estimate of the budget surplus (.pdf format).
Despite the reductions, White House Budget Director Mitch Daniels said, the government's fiscal health is sound even as the economic woes continue. "The nation is awash in money, and it will be," Daniels said.

The new figures for fiscal years 2001 and 2002 will add fuel to Democratic charges that Mr. Bush's 10-year, $1.35 trillion tax cut is squandering the surplus.

"I see no more irresponsible act than that of the Bush administration's tax cut," Sen. Robert C. Byrd, D-W.Va., who chairs the Senate Appropriations Committee, said in an interview Tuesday. "It was a tax cut based on faulty projections."

Republicans, led by the president, retort that even with the economic slowdown plenty of money is available for the tax cut, to meet government spending needs and to protect Social Security and Medicare. The OMB predicts that economic growth will pick up next year, partly due to the stimulus provided by the tax cut, which in turn would boost government revenues.

Speaking Tuesday in the hometown of former Democratic President Truman, Mr. Bush dismissed charges his tax cuts threaten to squander the massive surplus and eat into the popular entitlement programs.

"I know the American taxpayers and I know the president in this case expects the Congress to live within the budget we passed," Mr. Bush told the crowd of a few hundred. "We don't want the budget to be a hollow noise. We want the budget o be real and that's why I've been given the power of the veto."

Mr. Bush said his mid-session budget review, "will show in plain terms that we have fully funded and will be able to fund our nation's priorities and that we have enough money to preserve and protect Social Security."

He said the budget would pay down more than $100 billion of public debt, dedicate "every dime that comes into Medicare" to that program and pay for more military and education spending.

Some key points in the OMB budget outlook:

  • The economic downturn will reduce government revenue by $148 billion over the next 10 years, mainly in lower income and corporate taxes in the early years. But an improving economy will increase revenue in 2005 and beyond, leading to an overall upward revision of almost $74 billion for the decade.
  • The 10-year surplus is forecast at $3.1 trillion, of which $2.5 trillion is Social Security. That leaves $575 billion for spending or tax cuts, down from $850 billion forecast in April. The total surplus before the tax cuts or other spending was pegged at $5.6 trillion.
  • The administration is proposing a 10-year, $198 billion increase in defense spending and an extra $37 billion over the decade for a Medicare overhaul, including a prescription drug benefit.
  • Growth in the nation's gross domestic product, estimated at just 1.7 percent in 2001, is projected to improve to 3.2 percent in 2002 and remain above 3 percent for the balance of the decade. The tax cuts and interest rate reductions by the Federal Reserve should improve the economy dramatically, the OMB says.
The fiscal 2001 surplus figure includes an accounting change criticized by Democrats that effectively shifted $4.3 billion from the Social Security trust fund to regular government accounts. This enabled the administration and congressional Republicans to say that, just barely, they kept a promise not to dip into Social Security for other government operations.

But the document also says that further tax relief or spending initiatives beyond those proposed by Mr. Bush would have to be offset, either by other spending cuts or by raising other taxes. Republicans say that will force Congress to adhere to strict spending limits that were ignored in previous years.

"We must contain spending over the coming year," the OMB document says.

Click here for a closer look at the Bush presidency.
Click here for a look at the 107th U.S. Congress.

The nonpartisan Congressional Budget Office, whose estimates Congress must follow, plans to release its own surplus update next week. Many analysts on Capitol Hill expect the CBO to show that a small portion of the Social Security surplus will be diverte to other government purposes this year.

"The president needs to present a new budget and explain how he will work with Congress to solve this mess of his own making," said House Minority Leader Dick Gephardt, D-Mo.

On Medicare, the OMB update estimates a $32 billion surplus for Part A, which pays hospital costs. That surplus will be shifted to cover unpaid costs such as doctor bills from the program's Part B. Without that money and other cash from general government accounts, the White House estimates, Part B would face a $48 billion shortfall this year.

Democrats contend that this still amounts to a raid on Medicare — Part B always has been paid for with general revenue — breaking a bipartisan commitment to keep both Medicare and Social Security walled off in a so-called "lock box." Republicans say that's a distortion.

©MMI, CBS Worldwide Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. Reuters Limited contributed to this report

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