Analysts Urge Uncle Sam to Pocket His Extra Money

Question: President Clinton says he plans to unveil a federal budget in February that will contain the first actual surplus in 30 years, a full three years ahead of schedule. What should be done with the extra money?

A) Use it to finance a tax cut.

B) Use it to pay for new spending programs.

C) Nothing.

Clinton and Congress are expected to spend this year arguing between A and B. But to economists and budget wonks, it’s a no-brainer: The lawmakers should do nothing and let the surplus go toward paying off the national debt.

Their reasons are compelling.

To begin with, there is no guarantee that the surplus will materialize as advertised.

The projected surplus is mostly the result of the continuing economic boom, which boosts income tax revenues, and an unexpected tax windfall stemming from soaring stock prices, which bring in more capital gains taxes, and higher corporate bonuses.

If the economy sours or the stock market takes a dive, the surplus could disappear quickly and the government could be saddled with yet another deficit. For instance, a rise in the unemployment rate to 5.5%--from the current 4.6%, which is unusually low--would cause the red ink to rise to $70 billion.

And if Congress enacts a tax cut or approves a spate of new spending programs, that could not only erase the immediate surplus but also could commit the government to actions that erode whatever surpluses might accrue in the future.

Given this, budget experts focus on paying off part of the national debt as the best thing policymakers could do for the economy.

The national debt--the total amount of money that the government owes on what it has borrowed to finance its deficit spending over the years--is about $3.8 trillion. The interest payments alone come to $250 billion a year.

Economists say paying down part of that debt would reduce the amount of money the government must borrow each year, slashing the interest it must pay and ultimately making more room for tax cuts or new programs.

Reducing government borrowing would also make more money available for the private sector to borrow and invest in new firms or facilities, which would help create jobs or improve the nation’s economic productivity--and increase its living standards.

That in turn would reduce interest rates--on everything from business loans to home mortgages--leaving consumers with more money to spend. Stanley E. Collender, budget analyst for Burson-Marsteller, a Washington public relations firm, says that alone would do more for middle-income families than any tax cut.

The budget experts also argue that running a series of surpluses would leave the government far better positioned to deal with new fiscal problems--from an unexpected recession to the Social Security crises slated to show up in 2010, when baby boomers start to retire in droves.

Carol Wait, director of the Committee for a Responsible Federal Budget, a nonpartisan budget-monitoring group, is among those arguing that neither tax cuts nor spending increases would be the best course for Clinton and Congress to follow.

“They just can’t wait to get their hands on that money,” she said. “Does that really make any sense?”