The incredible shrinking budget surplus

White House, Democrats at odds on causes, solutions

By John King
CNN Washington Bureau

WASHINGTON (CNN) -- Not long ago, the government was projecting a surplus of $275 billion for the budget year that ends in September. Now, that projection is down to $200 billion.

And a shrinking federal budget surplus means a sharper debate over taxes and spending priorities.

The White House says the reason for the shrinkage is simple: A slowing economy means the government takes in less money in taxes.

But Democrats say the big Bush tax cut is at least partly to blame -- and they warn the administration will have no choice but to dip into Medicare funds to pay other government expenses this year.

"What the Democrats have is a good point that we probably decided on this tax cut in a hasty fashion," said Robert Reischauer, president of the policy think tank Urban Institute. "We should have waited to see how the economy was going to unfold over the course of this year and what other demands were going to be placed on the budget."

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The White House, however, says all Medicare money will go to Medicare, and that there will be no budget crisis if Congress shows discipline.

"So this is a wake-up call to the Congress not to spend tax dollars," said White House press secretary Ari Fleischer. "Because if they spend and go back on a spending spree, the Congress risks tapping Social Security's money, and Congress should take no step that would put Social Security within reach."

The tax cuts, Fleischer said, should "give a boost to the economy."

MESSAGE BOARD Taxing and spending

"The key to having increased revenues coming into the government is from growth, and the best way to secure future growth is as a result of the tax cuts," he said.

Real problems in years to come?

Taking the Bush tax cut into account -- and if all Social Security and Medicare receipts are set aside -- there is still a projected surplus of $1 trillion over the next decade.

Congressional Republicans and Democrats alike are looking to spend more, however -- the difference lying only in where the money would be spent.

Reischauer, who was Congressional Budget Office director from 1989 to 1995, cautioned real difficulties are not likely to surface until later.

Fleishcer contends the tax cuts should "give a boost to the economy."

The administration is looking to spend at least $250 billion more on defense. A Medicare prescription benefit could cost at least $300 billion. And an education bill before Congress proposes $150 billion in new spending over the next 10 years.

Those three plans alone would account for $7 of every $10 of the projected surplus -- and that does not take into account billions more in additional tax cuts and spending initiatives before Congress or emergency needs for things such as farm aid and disaster relief.

"The tax cut we put in place for next year is relatively modest," Reischauer said. "We probably can swallow that OK, but over the years the size of the tax cut grows exponentially."

Fiscal uncertainty

This debate will only intensify as Congress debates government spending levels over the summer and into the fall. By then, even as the president tries to hold the line on spending, the administration hopes for at least a little evidence that its tax cut is giving the economy a jolt -- and bringing more money into the treasury.

It could go either way, Reischauer said.

"There's huge uncertainty associated with all of this," he said. "The economy could surprise us all and come back to life in the second half of the year ... or the economy could weaken substantially, and we could find ourselves not really worrying about whether the Medicare surplus has been breached. ... What we'd be worried about is reviving the economy."