White House Sees Shrinking Budget Surplus

The projected federal budget surplus has shriveled since April, the White House said Wednesday, setting the stage for a bitter partisan struggle over proposals to provide prescription drug coverage under Medicare and boost spending on defense and education.

The combined effect of tax cuts, spending increases and a slumping U.S. economy have reduced this year’s estimated surplus to $158 billion, down from $281 billion projected by White House budget officials only four months ago.

If Social Security funds are taken off the table, as President Bush and many members of Congress insist they must be, the surplus dwindles to $1 billion both this year and next, the White House said.

Key lawmakers said the downward revisions will intensify the already fierce competition for the limited pool of funds available to finance new spending initiatives. The possible casualties, they said, include Bush’s efforts to add $18 billion to his original Pentagon budget request, free up additional funds for education and earmark future revenue for a prescription drug benefit.

“We face a difficult choice: Fund your priorities and exceed the budget constraints we have established or live within those constraints and fail to provide the funding you seek for defense and education,” Democratic leaders said in an open letter to Bush.

The revised numbers have already triggered a heated debate between administration critics who say the president squandered a budgetary windfall by pushing through a massive tax cut and Bush defenders who say tight budgets are needed to curtail excessive congressional spending.

“The real threat to running a deficit is more government spending, not returning tax overpayments,” said Rep. Ed Royce (R-Fullerton). “Whenever the government runs a big surplus, it means the government is keeping more money than it needs.”

Mitchell E. Daniels Jr., director of the White House Office of Management and Budget, noted that even at its reduced level, this year’s estimated surplus would rank as the second-largest in U.S. history. The fiscal outlook will brighten even more once the economy recovers from its slowdown, which is crimping government tax collections.

“The federal government, even at a time of economic weakness, is taking in vastly more money than it needs to pay its bills,” Daniels said. “. . . We have a budget that’s in great shape, an economy that’s not.”

The White House estimates that over the next 10 years the federal government will accumulate a surplus of $3.1 trillion, even after allowing for proposed new spending initiatives such as prescription drug coverage. As much as $2.2 trillion of the surplus could be used to pay down the national debt, Daniels said.

“The nation is awash in extra money,” the budget director said. “The real issue [is] how to maintain that kind of momentum and how to apportion that extra money most prudently for the long-term benefit of working Americans.”

Democrats, however, cited the reduced surplus estimates for this year and next as evidence that Bush’s insistence on passing a big tax cut has jeopardized the government’s ability to address new funding priorities, including some of the president’s own proposals.

“He claimed we could afford his massive tax cut, a major defense buildup and more money for education while paying down the debt and protecting Social Security and Medicare. He was wrong,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.). “This is fiscal mismanagement, big time.”

For the 2002 fiscal year, which begins Oct. 1, 2001, the administration now forecasts a surplus of $173 billion, down from its April estimate of $231 billion. Excluding Social Security, the surplus will be $1 billion, the same as this fiscal year.

The White House surplus estimates include the proposed funding increases contained in Bush’s 2002 budget as well as an additional $18 billion the president is seeking next year to help the Pentagon acquire new weapons and restructure military forces.

The 10-year budget calculations set aside $190 billion for Medicare reform, including the president’s proposal to provide recipients with some form of prescription drug coverage. But many Democrats contend a drug benefit would cost far more than envisioned in the White House projections.

Besides making Bush’s big initiatives a harder sell, the squeeze on next year’s spending will make it harder for individual members of Congress to obtain additional funds for their own legislative priorities and special projects.

“It clearly makes it more difficult to squeeze our state’s fair share out of the federal budget,” said Steve Maviglio, spokesman for California Gov. Gray Davis, a Democrat. “Everything from weatherization money to Lake Tahoe restoration . . . could be on the list for cuts if Congress needs to tighten its belt.”

The scramble for funds will be exacerbated by the promises made by the White House and both parties in Congress to keep their hands off Social Security funds.

From an accounting standpoint, the Social Security debate is somewhat misleading. The Social Security trust fund currently collects far more payroll taxes than it needs to pay benefits to retirees, a situation that will be reversed when baby boomers begin retiring later this decade. The trust fund invests the surplus funds in Treasury bonds, making the money available for the government’s immediate use. If it is not spent on current operations, it is used to pay down the federal debt. Either way, the trust fund is left holding government IOUs.

But the issue has assumed huge symbolic importance, and the Social Security surplus is considered off-limits by administration officials and most lawmakers. The same had been true of the Medicare surplus, but Bush’s new budget proposes using those funds to finance current operations.

“The numbers for 2001 are an early warning of worse to come,” said Rep. Charles B. Rangel of New York, the ranking Democrat on the House Ways and Means Committee. “In future years, this administration’s reckless tax cut will force them to dip into the Social Security and Medicare trust funds repeatedly.”

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Times staff writers Richard Simon in Washington and Edwin Chen in Crawford, Texas, contributed to this story.

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Surplus Shrivels

How the total projected budget surplus for 2001 changed from April to August, according to the White House Office of Management and Budget:

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Projection made in April: $281 billion

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Projection made in August: $158 billion

Change in surplus: $123 billion

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Where the Money Went

Tax refund checks -$40 billion

Medicare changes +$3 billion

Defense spending - $4 billion

Farm aid - $5 billion

Economic downturn -$46 billion

Interest changes -$1 billion

Other -$28 billion

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NOTE: Does not match total due to rounding

Despite the sluggish economy, this year’s surplus is still the second-largest in history.

Source: Office of Management and Budget; Associated Press