Whatever Politicians Get, They Will Spend

For the past 15 years, one huge, looming menace has dominated American public policy: the federal deficit. Fear of the deficit has deterred Democrats from launching big new programs and Republicans from securing big new tax cuts.

Now, all that has changed.

The deficit, which only five years ago amounted to a record $290 billion, has suddenly disappeared, and Washington is about to become a very different place - possibly a more-dangerous one. The deficit applied constraints that made major policy changes almost impossible. Incrementalism ruled, and that’s been a good thing.

As the growth of government has slowed, the growth of the private sector has accelerated and the nation has become more prosperous. In a kind of ironic feedback loop, that prosperity has led to increased tax revenues, which have brought down the deficit and led us to 1998, the Year of the Surplus.

And so, in this new Washington, for the the first time since the Vietnam War, there’s money to spend. Potentially a lot of money. The figures are astonishing but at this point only dimly comprehended by a public that’s been bombarded for years with deficit-fighting rhetoric, much of it phony.

Take a look. In fiscal year 1997, which ended on Sept. 30, the budget deficit was just $23 billion. While the budget resolution for fiscal 1998 projected a deficit of $90 billion, the latest estimate of the Congressional Budget Office is for a deficit of $57 billion.

That’s unreasonably high. Barring a war or a recession, federal income will certainly exceed spending this year for the first time since 1969. The reason is simple: A tidal wave of tax revenues is washing into the U.S. Treasury.

From 1992 to 1997, revenues rose at an annual rate of 7.6 percent - a remarkable pace with inflation well under 3 percent. Over five years, federal tax receipts have risen by nearly one-half while consumer prices have been up by less than one-seventh.

The pace is accelerating. For fiscal 1997, tax revenues rose 8.6 percent - or more than six percentage points faster than inflation. And, in its latest analysis of Treasury data, the CBO reports that in October and November tax revenues were up 10.5 percent over those same months last year, perhaps because the cut in capital gains tax rates has spurred investors to unlock their stock profits.

Despite these astounding numbers, the current $57 billion deficit figure assumes that revenues will grow at just 3.5 percent in 1998.

Instead, let’s apply recent, more-realistic growth rates and see what happens to the deficit.

If tax receipts rise at the five-year average of 7.6 percent, we’ll have a surplus of $8 billion. If they rise at last year’s rate of 8.6 percent, we’ll have a surplus of $24 billion. If they rise at the October-November rate of 10.5 percent, we’ll have a surplus of $54 billion. And that’s just for next year. At a 7 percent growth rate, the surplus will be about $300 billion in 2002.

All of this assumes that federal spending meets current estimates. In fact, if the economy keeps booming and inflation remains tame, spending could be lower, since payments to the poor and interest on the debt won’t be as much as expected.

It’s true that the economy could turn down and it’s true that these projections include healthy Social Security surpluses. But such quibbles miss the point: The political reality of the deficit has vanished. Congress and the White House will see money to spend.

Last year, we got a whiff of what the new era will be like. Toward the end of budget negotiations in April, the CBO discovered that revenues were exceeding its estimates by $45 billion a year. Rather than returning those dollars to the taxpayers or using them to retire the debt, Congress and the president spent them.

They crafted a 1998 budget with the biggest spending increase - in dollar terms - in history. Spending will rise in 1998 by a hefty 5.6 percent, according to the latest CBO figures. That compares with a rise of just 2.7 percent and an average increase of 3.0 percent over the past five years.

Of course, to hear them tell it, these same politicians balanced the budget by being tough on spending. That’s pure bunk, as Robert Reischauer, former CBO director and now a fellow at the Brookings Institution, shows clearly in a new paper for the National Tax Journal.

In 1995, the expected, or “baseline” deficit, for the year 2002 was $130 billion. After the budget deal in the spring of 1997, it was zero. But, Reischauer writes, “Only a small portion of the improvement … was attributable to policy changes.” Farm program cuts and welfare reform “reduced the projected 2002 deficit by $2.1 billion and $12.6 billion respectively. No other legislation had a significant impact on the projections.”

Where did the vanishing deficit come from? “It is the economy that has raised tax receipts and lowered social spending much more than anticipated - not any bill passed by Congress,” writes John Steele Gordon, in a new afterword to “Hamilton’s Blessing,” his excellent history of the public debt.

And it is the economy that will be placed in jeopardy if politicians resume spending. The only solution is to deny them the money. The best way to do that is by cutting taxes immediately - preferably by lowering everyone’s tax rate as a prelude to a flat tax or national sales tax or some combination.

What about paying off the $5 trillion national debt? That may be a good idea, but again, the pot of money is just too tempting. Under the new rules of a deficitless Washington, if it’s there, it will be spent.

xxxx