OMB numbers set stage for budget battle

By Manuel Perez-Rivas
CNN Washington Bureau

WASHINGTON (CNN) -- New budget numbers released Wednesday by the White House show a federal budget surplus that has decreased to $158 billion -- and stands only at about $1 billion when the portion devoted to Social Security is excluded.

The White House revelations, expected for some days, could act as a catalyst for a renewed battle over spending priorities, entitlement trust funds, and the state of the surplus when Congress returns to work in early September.

The numbers show that the new surplus estimate for fiscal year 2001, which ends September 30, is 43 percent lower than the $281 billion projected in April by the White House's Office of Management and Budget.

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White House budget officials say the decrease is due to the ongoing economic slowdown and the income tax cut passed earlier this year. The overall picture, however, remains positive, they say, adding that they believe the tax cut will speed a return to greater economic growth.

"The report we've issued this morning confirms that the nation has entered an era of solid surpluses, surpluses on the order of $160 billion, despite an economy that's been weak now for over a year and in decline for that time," said White House budget director Mitch Daniels. He noted this year's surplus remains the second largest ever.

Still, Democrats have seized on the diminishing surplus as a potential weakness in President Bush's political armor. They have sought to focus the debate on the lack of a substantive cushion beyond the Social Security surplus.

In the past week, the Democratic National Committee bought television ads accusing Bush of "raiding" Social Security and Medicare to cover other expenses and tax cuts, and Democratic officials revved up their criticism of White House budget practices.

"I believe President Bush's campaign promises are unraveling," said Sen. Kent Conrad, of North Dakota, the chairman of the Senate Budget Committee. "He claimed we could afford his massive tax cut, a major defense buildup, more money for education, while paying down the debt and protecting Social Security and Medicare. He was wrong."

Bush has countered by going on the offensive in recent days to warn against congressional overspending.

"This morning's report is both a good sign and a warning signal," said White House press secretary Ari Fleischer. "It's a good sign because, despite the slowdown, the budget is in strong shape. It's a warning signal because there are still people in Congress who want to spend more money and bust the budget."

The conflict is bound to intensify in the coming weeks. The Congressional Budget office is scheduled to release its budget numbers next week, and Congress will take up several unresolved annual appropriations bills when it comes back from its summer recess at the beginning of September.

Already, Bush has said he will keep a close watch for any excessive spending by Congress.

Lowered expectations

OMB's mid-session review of the federal government's numbers projects a surplus of $173 billion for fiscal year 2002, lower than the $231 billion projected in April. Over the long-term, the 10-year budget projection from 2002 to 2011 is $3.1 trillion. That 10-year projection, however, stood at $5.6 trillion earlier this year, before the impact of the tax cut.

Daniels said the nation's long-term fiscal outlook remains positive despite the shrinking surplus. OMB, he said, is counting on an economic turnaround later this year or at the beginning of next year. Even if the agency's forecasts for economic growth were off by half, he said, next year's surplus would still be "well over $100 billion."

"The nation is awash in extra money, and it's going to be," he said. "The real issues we're engaged in are how to maintain that kind of momentum and, of course, how to apportion that extra money most prudently for the long-term benefit of working Americans."

Yet because both President Bush and Congress have said they would not dip into the Social Security surplus to cover other spending, officials caution there will be little wiggle room left in the budget over the next few years.

Because of the commitment to protect Social Security, budget officials wrote in the summary of Wednesday's release, "the additional surplus available for new spending or tax relief in the next few years is limited. In order to fully reserve the Social Security surplus for debt reduction, any further initiatives beyond those included in this review will also have to be accompanied by offsets in other areas."

New concerns over the shrinking surplus have added a shrillness to the debate over the budget in recent days, with Democrats charging that the Social Security surplus remains intact only because of a change in accounting practices announced by the OMB last week.

In addition, Democrats said Wednesday, the long-term outlook presented by OMB is based on optimistic assumptions, including an economic growth rate of 3.2 percent -- higher than the private sector consensus of 2.8 percent for next year.

"To be forced to stake our economic future on accounting maneuvers and inflated growth estimates is a stunning reversal from the economic situation you inherited just seven short months ago," congressional Democratic leaders wrote in a letter to Bush on Wednesday.

In recent years, both Republicans and Democrats have sought to portray themselves as the protectors of Social Security, and the issue of the program's solvency has become more politically charged amid dire forecasts that the entitlement may not survive the looming retirement of millions of Baby Boomers.

Concern is such that the president has established a commission to study possible reforms of the program in order to ensure its viability. The President's Commission to Strengthen Social Security is still in the early stages of its work, and was holding an afternoon meeting Wednesday to hear testimony.

The effect of the tax cut

Efforts to insulate the Social Security trust fund from other government spending have become even more difficult as the nation's economic picture has clouded over the past year. A sputtering economy beset by job cuts and retrenchment on Wall Street has slowed government tax collections, eating sharply into the federal budget surplus.

Democrats say Bush's $1.35 trillion, 10-year tax cut has served to make the budgetary outlook worse, and has placed both the Social Security and Medicare trust funds at risk.

The tax cut, the White House has countered, will only help spur an economic recovery.

"This tax relief has laid the foundation for expanding economic growth," the president said in a speech Tuesday in Missouri. As Bush spoke, the Federal Reserve cut interest rates for the seventh time this year, trying yet again to awaken the stubbornly dormant economy.

"The biggest threat to our recovery is for the Congress to overspend," Bush said. "We have the funds to meet our obligations, so long as they resist the temptation to spend."

Democrats, who plan an intensive out campaign criticizing the president's budget policies, were quick to respond.

"Yesterday, the president said there would be enough money for people's highest priorities," Richard Gephardt, the House minority leader from Missouri, said in a statement released after the OMB estimates were released. "Despite a number of gimmicks, today's numbers strongly suggest he was wrong."

"For the president to claim that spending -- as opposed to the tax cut -- is at the root of the problem is simply to pass the buck," Gephardt said.