Politics of Surplus Has GOP Worried

For the first half of 2001, President Bush made tax cuts the focus of the nation’s political debate--and won most of what he asked for. Now, in the second half, Democrats think they’ve found an issue that can stop Bush in his tracks: the shrinking federal budget surplus that those tax cuts helped produce.

For weeks, Democratic leaders have assailed the president for, in their words, “squandering” this year’s surplus, which shrank by an estimated $123 billion in only four months, through “fiscal mismanagement.”

As a matter of economics, the White House has a strong comeback: a major reason for the shrinkage is the slumping economy, not solely the president’s policies. And when Social Security revenues are included, the federal government is still running an enormous surplus, the second-largest in history.

Besides, Bush said Thursday, he intended to shrink the surplus all along. “Do they want to raise taxes?” he demanded of the Democrats.

But as a matter of politics, the Democrats’ offensive has GOP strategists worried.

“There’s growing evidence that concern over the economy and jobs is ticking up as a national concern, and people see the surplus as connected to that,” Republican pollster Bill McInturff said. “The real question is where things stand in November 2002, [when the next congressional election occurs]. . . . But if this is the first sign of a protracted problem, it could be a very difficult election cycle” for the GOP.

Democratic pollster Stanley B. Greenberg agreed. “When people see the government in surplus, there’s a sense that the country is wealthier and better off. When the country slips into deficit . . . it suggests that the government is not doing its job.”

Thus the shrinking federal budget surplus and the slumping economy have redefined the nation’s political debate for the rest of the year.

Democrats and Republicans who once battled over how to spend surging tax revenues--on tax cuts, education, prescription drugs, Social Security or defense--must now make tougher choices with tighter limits.

The new, straitened circumstances mean at least three big-ticket proposals that were to be debated this fall--prescription drug coverage in Medicare, large-scale defense modernization and Bush’s education reform bill--face rougher sledding.

Among Republicans in Congress, “there’s confusion; no one’s sure where to start,” said a GOP aide who demanded anonymity. “This has caused temporary paralysis.”

Revised budget numbers released by the White House on Wednesday estimate that this year’s surplus will be $158 billion--but $157 billion of that is already pledged to Social Security.

The budget assumes that spending will increase on prescription drugs, defense and education--but the numbers it uses for those programs are far smaller than the numbers Congress has been considering.

Bush’s budget calls for an increase of $1.9 billion for elementary and secondary education next year. But the Republican-authored House bill to enact Bush’s education reform proposals calls for a much higher $4.6-billion increase, and the Democratic Senate wants a $14.4-billion hike.

“This is a substantial problem for Bush’s education bill,” said Andrew Rotherham, director of education policy at the centrist Democratic Progressive Policy Institute. “It costs a lot of money to develop good tests. If you want to bring about accountability and reform, the resources have to be there.”

On defense, Bush’s budget includes an increase of $18.4 billion in 2002 to take care of “urgent needs,” including military pay raises and housing. “We need every nickel,” Defense Secretary Donald H. Rumsfeld said Thursday. But that number doesn’t include the more ambitious military modernization program and the national missile defense system that Rumsfeld and his aides plan to propose later this year.

And now, at least in the short run, there’s almost no surplus--outside Social Security--to pay for it.

In a sense, the shrinking surplus is exactly what Bush wanted--only it has come faster, and in a shakier economy, than he intended.

The president and his aides have long worried that a big surplus would only tempt Congress to spend it.

The tax cut, Bush said this week, was “exactly the right action at the right time.” The problem, he said, isn’t tax rebates; it’s congressional spending.

“Now evidently there are some people in Washington, D.C., who are having second thoughts about tax relief,” he told reporters in Crawford, Texas, on Thursday, after visiting an elementary school. “My question to them is: Do they want to raise taxes?

“Now it is going to be incumbent upon the Congress to make sure they don’t overspend,” he said. “And one of my jobs as the president is to make sure that we don’t bust the budget. I will use the veto to make sure that Congress stays within the budget.”

Reducing the surplus “was one of the administration’s objectives,” said William Gale, an economist at the centrist Brookings Institution. “The politics of expected future surpluses are that both sides want to spend the money on their own ideas before the other one does. That’s why the administration put through the tax cut before it started worrying about spending on defense, spending on education or reforming Social Security. They literally sent the tax bill up before they sent the budget up.”

And while Democrats are more than willing to criticize the shrinking surplus, there’s no sign yet that many want to roll back the tax cuts, which many of them voted for.

“Once you go with a big tax cut, it’s very hard to walk that back if you decide you’ve overshot,” acknowledged Maureen Steinbruner, president of the Democratic-affiliated Center for National Policy.

Administration officials like to point out that the Democrats’ reverence for a budget surplus is relatively recent. When then-President Clinton first promised to bring the budget into balance, he set a target date of 2002--and never promised a surplus.

But to Clinton’s own surprise, the booming economy of the late 1990s produced an overall surplus (including Social Security taxes) in 1998 and a surplus outside Social Security in 1999.

Since 1998, both Democrats and Republicans have solemnly vowed not to touch the surplus of Social Security taxes, which is being used to reduce the national debt. But that distinction, too, is new.

In effect, the taboo against touching Social Security benefits, the “third rail” of American politics, has now been raised even higher--to prohibit using surplus Social Security taxes for other purposes.

“I think the entire debate is illegitimate,” complained Daniel J. Mitchell, a Social Security expert at the conservative Heritage Foundation.

“If you ask an honest liberal or an honest conservative, they will state, no matter how Social Security revenues are used, there will be no impact on the health of the Social Security system.

“Republicans want to stop Democrats from spending more, so they’re using this argument. Democrats want to discredit the tax cut, so they’re using this argument. It’s a short-term political debate.”

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Times staff writers Ronald Brownstein and Edwin Chen also contributed to this story.