Dwindling Surplus Has GOP Scurrying

The storm clouds gathering over the economy are about to burst in Washington--and Republicans are reaching for a political umbrella.

In just a few weeks--while members of Congress are away from the Capitol for their summer break--government analysts are expected to release new projections showing the federal budget surplus will be far smaller than previously predicted as a result of the economic slowdown and President Bush’s tax cut.

Republicans at both ends of Pennsylvania Avenue are girding to defend themselves against an expected political onslaught from Democrats, especially if the surplus is so much smaller that the government will be required, in effect, to draw on the Medicare trust fund surplus to finance other programs.

Adding to the ominous sense of bad budget news was this week’s report that, short term, the government will have to borrow money to cover its expenses for the quarter that ends Sept. 30.

As lawmakers prepare to return home for the August recess, GOP leaders are moving more aggressively to prepare a response aimed at countering any impression that their fiscal policy is destined to send the government back into debt. At the same time, they are struggling to figure out how the dwindling surplus affects the shape of the budget Congress needs to pass for the fiscal year that starts Oct. 1.

If the surplus projections drop as much as many analysts expect--down to $160 billion, a 40% drop from earlier predictions--it will cast doubt on Congress’ ability to finance several elements of Bush’s agenda. These include his plans to beef up the Pentagon’s budget, construct a national missile defense system and expand education aid--unless lawmakers are willing to return to the deficit spending of yesteryear. And if the projections show a drop in surpluses for years to come, it will also jeopardize such Bush priorities as reforming Social Security.

“People are scurrying around all over the place trying to figure out what to do,” said Rick May, a former staff director of the House Budget Committee who remains close to congressional GOP budget experts.

GOP Considers Public’s Reaction

Signs of Republican anxiety are subtle but pervasive. Sen. Pete V. Domenici of New Mexico, the top Republican on the Budget Committee, cautioned during a Capitol Hill meeting Tuesday with Bush and other GOP senators that the new surplus numbers could spark public concern.

Senate Minority Leader Trent Lott (R-Miss.) acknowledged on Monday that Bush’s Pentagon buildup could be a victim of a dwindling surplus. Amid such warnings, briefing materials are being prepared for GOP lawmakers to help them explain the complex budget situation to their constituents while they are home in August.

“We need to make sure our members are well armed with information and facts,” said a top Senate GOP leadership aide.

Democrats themselves may not be able to escape blame for the changing budget picture: Many of them supported the Bush tax cut, which has taken a big chunk out of the surplus. Indeed, many Democrats wanted an even bigger short-term tax cut than was ultimately approved, to stimulate the economy. And now that they control the Senate, Democrats share some of the responsibility for adjusting the budget this fall to accommodate the new fiscal reality.

“There’s going to be a lot of blame game going around,” said Robert D. Reischauer, president of the Urban Institute, a nonprofit research organization.

The trepidation surrounding the release of midyear budget revisions--which are expected in mid-to-late August from both the Congressional Budget Office and the administration’s Office of Management and Budget--marks a big mood swing from the prelude to such reports in recent years. These midyear budget reviews repeatedly showed the budget surplus growing faster than anyone expected--generating a kind of windfall that helped Congress buy its way out of political problems. Now that the surplus is coming back down, it creates rather than solves political problems, forcing lawmakers to relearn the politics of austerity.

To be sure, even if the surplus comes in at $160 billion, as OMB Director Mitchell E. Daniels Jr. recently said it might, Republicans are poised to remind people that that is still a huge surplus by historical standards.

But that is a steep drop from the $281-billion surplus projected early this year--and the $200 billion the CBO said in May would be left after the tax cut. What’s more, a $160-billion surplus would be low enough that it would raise the politically charged question of whether the excess revenues will be attributable entirely to the Social Security and Medicare trust funds.

In recent years, members of both parties have pledged not to tap Social Security surpluses for other government spending, as Congress has in the past during the decades of deficit spending.

Democrats also argued that Medicare trust funds should be similarly protected, an assertion many Republicans in Congress echoed. As a result, Democrats believe that if the new surplus projections dip so low that Medicare trust funds are needed to finance other spending, they will have been handed a powerful political weapon. The Democrats are prepared to argue that Bush is “raiding” the trust fund (though use of such money for other purposes was commonplace under previous Democratic administrations).

Even some Republican analysts are predicting that the Medicare trust fund line is likely to be crossed.

“I think it’s true,” said William Hoagland, GOP staff director of the Senate Budget Committee. “We will have used some of the [Medicare] trust fund.”

And in 2002, Hoagland predicts, surpluses may drop so much that the budget will be perilously close to tapping Social Security revenues as well. “We’ll be skidding at the edge,” he said.

Republicans are honing arguments to defuse the issue. They contend that surpluses in the Medicare trust fund, which pays hospital bills, will be used only for Medicare expenses in a separate part of the program that pays doctors’ bills. And they will point out that the budget situation will have no short-term effect on the benefits received by the elderly and the operation of the program.

The whole debate hinges on arcane accounting practices, but Democrats see it as a politically powerful way to continue their perennial effort to portray Republicans as hostile to one of the governments most popular programs.

As this argument plays out, one certainty is that a dwindling surplus will pose serious challenges to both parties’ ability to finance their priorities--a tension that will come into sharp focus when Congress returns to work in September, when the principal task will be to finish work on annual appropriation bills.

Lott argued that a declining surplus could have the positive effect of forcing Congress to impose more discipline in spending. “We may not see as much spending as some people would like in a number of areas,” he said.

Congress Seems in No Mood for Cuts

But Congress’ ability to exercise such discipline is uncertain, if Tuesday’s debate on a farm assistance bill in the Senate was any indication. The Senate brushed aside a pointed veto threat from Bush and rejected paring the bill’s $7.5 billion in spending to the $5.5 billion originally budgeted. And last week, $1.3 billion in unbudgeted spending was added for disaster assistance by one of the House’s most conservative members--Rep. Tom DeLay (R-Texas), whose hometown of Houston is recovering from flooding from a tropical storm.

Some Republicans are simply hoping that voters will have other matters on their mind when the new surplus figures emerge--especially in the middle of summer vacation. “It’s convenient this stuff will come out when no one will be around and nobody is going to care about what’s going on in Washington,” said May, the former Budget Committee staffer.