Revised July 2, 1999
Much of the Projected Non-Social Security Surplus Is a Mirage
Large Majority of Surplus Rests on Assumptions of Deep Cuts in
Discretionary Programs that Are Unlikely to Occur
by Sam Elkin and Robert Greenstein
Congressional Budget Office figures released today indicate that the substantial majority of the surplus projected outside Social Security is essentially artificial because it depends on unrealistic assumptions that large, unspecified cuts will be made in discretionary programs over the next 10 years. When the more realistic assumption is made that total non-emergency expenditures for the discretionary part of the budget will neither be cut nor increased, and will simply stay even with inflation, nearly three-fourths of the projected non-Social Security surplus disappears. (An even larger share of the projected surplus vanishes if emergency spending is taken into account. Some discretionary expenditures designated as emergency spending this year do not really represent responses to short-term emergencies; they constitute expenditures that policymakers are likely to continue.)
The new CBO projections released today show that under current law, the federal government will begin running surpluses in the non-Social Security budget in fiscal year 2000 and will run cumulative non-Social Security surpluses of $996 billion over the next 10 years. But these projections like those OMB issued Monday assume that total expenditures for discretionary programs, including defense expenditures, will remain within the austere and politically unrealistic "caps" the 1997 budget law set on such programs.(1)
- To remain within the FY 2000 caps will entail cutting discretionary programs billions of dollars below the FY 1999 level. No one expects this to occur. Leaders of both parties have acknowledged that a number of appropriations bills cannot pass unless funding for these programs is restored.
- The caps for FY 2001 and 2002 are even more unrealistic than the FY 2000 cap; the caps for those years are significantly lower than the FY 2000 cap when inflation is taken into account. Moreover, the CBO and OMB projections assume that for years after 2002, total expenditures for discretionary programs will remain at the level of the severe cap for FY 2002, adjusted only for inflation in years after FY 2002. This means the surplus projections assume levels of discretionary program expenditures for fiscal years 2001 through 2009 that are lower, when inflation is taken into account, than the highly unrealistic FY 2000 cap that almost certainly will not be met.
- Moreover, both parties have proposed significant increases in defense spending in coming years. Defense spending constitutes about half of overall discretionary expenditures. In addition, legislation enacted last year requires increases in highway spending in coming years.
CBO must issue budget projections based on current law. The discretionary spending caps are current law. CBO has acted appropriately developing its projections. But policymakers who act as though the $1 trillion in non-Social Security surpluses projected over the next 10 years all represents new funds that can go for tax cuts or program expansions appear to misunderstand the meaning of the projections.
- Because they rest on the assumption that discretionary expenditures will be held to the levels of the discretionary caps, the new CBO projections assume that over the next 10 years, discretionary spending will be reduced $584 billion below current (i.e., FY 1999) levels of non-emergency discretionary spending, adjusted for inflation. (A CBO table prepared this week shows the $584 billion figure.)
- Since defense spending is widely expected to rise, all of these $584 billion in cuts would have to come from non-defense programs, primarily domestic programs. Achieving cuts of this magnitude in domestic discretionary programs would be unprecedented and would dwarf the cuts Congress was able to pass in these programs when the nation was mired in large deficits.
- Cutting federal expenditures results in lower levels of debt. The $584 billion in discretionary program reductions assumed in the CBO baseline are projected to generate approximately $150 billion in additional savings through lower interest payments on the debt. Consequently, the reductions in discretionary programs that the CBO projections assume result in total savings of approximately $735 billion over the next 10 years.
These $735 billion in assumed savings account for all of the non-Social Security surplus through 2001 and approximately 74 percent or nearly three-fourths of the non-Social Security surplus projected over the next 10 years. Since most or all of these cuts are very unlikely to materialize, the majority of the surplus projected in the non-Social Security budget is essentially a mirage.
Dividing Up the Surplus
CBO projects a non-Social Security surplus of $996 billion over the next 10 years. Some policymakers have made statements that seem to suggest all of this amount can be used for tax cuts and program expansions. Such statements are not realistic.
The CBO and OMB surplus projections assume that all of the surpluses will be used to pay down debt, resulting in a lower national debt and hence lower interest payments on the debt. To the extent the surplus is used for tax cuts or program expansions rather than for debt repayment, interest payments on the debt will be higher than those the CBO projections assume.
If all of the available non-Social Security surplus is used for tax cuts or program expenditures, interest payments will be at least $175 billion higher over the next 10 years than the CBO forecast assumes. Hence, about $820 billion is potentially available for use for tax cuts and program expenditures, not $996 billion.
From this $820 billion, approximately another $30 billion over 10 years must be subtracted for the administrative costs of operating the Social Security program. CBO counts these costs as a Social Security expenditure. But Congress treats them as part of the non-Social Security budget. (CBO discusses this matter on p. 6 of its new report.) This reduces the remaining non-Social Security surplus to $790 billion.
Simply keeping discretionary expenditures at the FY 1999 non-emergency spending level adjusted for inflation would cost $584 billion, as discussed in this analysis. Hence, if one assumes that overall expenditures for these programs will stay even with inflation, rather than rising or falling, roughly $205 billion would be available for tax cuts and program expansions. To provide amounts larger than this for tax cuts or program expansions entails cutting discretionary (or other) programs.
The Congressional budget resolution approved earlier this year assumes a much larger tax cut. The resolution can accommodate such a tax cut because it assumes that none of the surplus will go to placing discretionary spending at a more realistic level. Furthermore, the budget resolution assumes that additional cuts in discretionary programs of nearly $200 billion over 10 years will be instituted, on top of the already unrealistic reductions assumed in CBOs projections. (These additional discretionary reductions would come in years after 2002.) Under the budget resolution, overall expenditures for non-defense discretionary programs would be cut 29 percent between FY 1999 and FY 2009, after adjusting for inflation.
The Clinton budget would add back somewhere in the vicinity of $500 billion over 10 years for discretionary spending, or most of what is needed to keep overall discretionary spending even with inflation. But the Clinton budget only uses $328 billion of the surplus for this purpose. The remaining funds would be raised through a series of offsetting cuts in entitlement programs and tax increases, such as a cigarette tax increase. Many, if not most, of these offsets are given little chance of passage on Capitol Hill. If these offsets are not passed and no more funds are provided from the surplus for discretionary programs than the $328 billion the Administration has proposed discretionary programs would, over the next 10 years, be cut approximately $250 billion below current levels, adjusted for inflation. (To compute the exact amount that discretionary programs would have to be reduced under this scenario requires data on the Administrations new budget framework that are not yet available.)
How Much of the Surplus is Available for Tax Cuts,
Medicare, and Social Security if More Realistic Assumptions Are Used?
If a more realistic assumption is used that overall expenditures for discretionary programs remain at the fiscal year 1999 level, adjusted for inflation a very different picture emerges of how much in surplus funds is available for tax cuts, shoring up Medicare and Social Security, and other initiatives. Under this more plausible scenario, the non-Social Security surplus would total approximately $260 billion over the next 10 years. Of this amount, roughly $205 billion would be available for tax cuts and Medicare. (At least $25 billion would be needed for the higher interest payments on the debt that would result from tax cuts or increases above the baseline in Medicare expenditures, while $30 billion is needed for Social Security administrative costs; see the box above)
It may be noted that to assume total discretionary expenditures in future years will be no higher than the level of non-emergency discretionary expenditures in FY 1999, adjusted for inflation, is to use a conservative assumption. A sizeable share of the FY 1999 discretionary spending that has been designated as "emergency" spending represents ongoing expenditures that policymakers will want to continue, rather than one-time expenditures to respond to short-term, unforeseen crises. The assumption we use here, however, assumes that all such "emergency" expenditures will end (or that other discretionary programs will be cut to enable them to continue). Furthermore, it is a foregone conclusion that defense spending will rise faster than inflation. Hence, for overall discretionary expenditures to remain even with inflation, as we assume here, non-defense discretionary programs would have to be cut. Finally, spending in some domestic discretionary areas, such as highways, is already slated to rise, and the House recently passed legislation to boost aviation spending as well. Thus, the assumption used here for discretionary program expenditures may itself be unrealistically low.
These findings have major implications for policymakers. For there to be sufficient surplus funds to finance the large tax cuts that some policymakers advocate, Congress must make cuts of unprecedented depth in the discretionary part of the budget over the next 10 years cuts substantially deeper than those that policymakers already are balking at passing this year.
1. Technically, OMB assumes discretionary expenditures that exceed the caps but also assumes mandatory program reductions and tax increases that offset the discretionary spending in excess of the caps.