NCPA - National Center for Policy Analysis

Lower Growth Depleted Surplus

January 10, 2002

Senate Majority Leader Tom Daschle (D-S.D.) has been pinning the blame for the declining budget surplus on President Bush's $1.35 trillion tax cut. Much of the cut is to be phased in over several years and Daschle wants to cancel those reductions.

Bush, on the other hand, argues that rescinding the tax cut constitutes a de facto tax increase and vows to veto any moves in that direction. He sees the recession as the cause of the declining surplus. Many economists side with the President's interpretation, because while policy makers often talk as if the budget drives the economy, it's really the other way around.

  • Because slower growth simultaneously raises spending on social programs and reduces revenues, the surplus will fall by about $12 billion for every 1 percent of expected growth that doesn't materialize.
  • Over the 10 years following just a single year in which growth was 1 percent less than expected, the surplus will shrink by a cumulative $463 billion.
  • If growth were 1 percent lower than expected not just for 1 year, but for 10 straight years, the cumulative reduction in the surplus would balloon to $2.6 trillion.
  • What this means is that very tiny changes in economic assumptions -- when projected out over a 10-year budget window -- can quickly add up to real money.

For these reasons, the recession gets the lion's share of the blame for lower surpluses, just as Bush contends. The way to restore surpluses is simply to restore growth. Indeed, forecasters now believe that the worst of the recession is past and that the economy will be growing smartly by mid-2002 -- even without a stimulus package.

The debate over the surplus is also a debate over the proper role of government. Daschle would like to see the surplus restored because it would make it easier to initiate new government spending programs. Bush sees tax cuts as a way to keep the size of government under control.

Source: Bruce Bartlett (National Center for Policy Analysis), "Who Lost the Surplus?" New York Times, January 10, 2002.


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