Who Swiped The Surplus?

It

seems like only a few months ago that the federal budget surplus was unfurling like a vast, star-spangled security blanket, a cushion of cash that stretched farther than the eye could see. Wait. It was only a few months ago. In April the White House projected a surplus of $281 billion for this fiscal year and $3.4 trillion for the next 10 years--enough to fund Bush's tax cuts and Congress's spending programs, missile defense and school reform, private Social Security investment accounts and a prescription-drug benefit for seniors, with a ton of money left over to pay down the national debt.

Too good to be true? You bet. Last week the White House conceded that $123 billion of this year's surplus had somehow evaporated. The $158 billion left over is almost entirely made up of Social Security tax receipts--which Bush and congressional leaders have vowed not to touch. And this week the Congressional Budget Office is expected to release even more pessimistic figures, showing the government will tap those funds before the year ends. Cue up the attack ads--the ones in which each side accuses the other of endangering the retirement security of elderly Americans.

Who killed the surplus? Not I, said the President. When George W. Bush gave his big budget speech last week--arguing that his tax cut was jump-starting the economy and that big-spending Democrats were squandering the surplus--he delivered it in Harry S Truman's hometown of Independence, Mo. At Harry S Truman High School. Under a portrait of Harry S Truman. The not-so-subliminal message: like Truman, the first President to push for health coverage for seniors, Bush would give 'em hell on behalf of older Americans.

Who killed the surplus? Don't look at us, said the Democrats, who were quick to blame Bush and cue up a few Truman visuals of their own. They rushed out a TV ad that aired in Washington, D.C., Missouri and Texas and featured Harry S at the desk with his famed THE BUCK STOPS HERE SIGN ON IT. "George W. Bush is in Harry Truman's hometown explaining his budget, and he's got a lot of explaining to do," the ad retorted. "Because the Bush budget violates one of Harry Truman's basic principles--protecting our seniors."

With that familiar scare tactic being trotted out yet again (no, the shrinking surplus doesn't imperil current Social Security recipients), it's tempting to turn off the whole sorry show and head back to the beach. But the dwindling surplus will have a real impact on ordinary Americans. To avoid cutting into the Social Security trust fund, Congress may have to slash farm subsidies, tax credits for the working poor and other social programs. A lack of surplus dollars to pay down the national debt helps keep mortgage and credit-card rates higher than they should be. And all those great-sounding programs Bush and Al Gore argued about last year--giving a drug benefit to seniors, letting people invest Social Security money in the stock market--just got pushed further into the future.

On the most basic level, the surplus matters because anyone who has ever tried to run a household or a small business understands the core issue: being disciplined enough to keep spending in line with income. "I run a business on a budget," says Jay Fox, 42, executive director of the Arkansas State Golf Association. "If our surplus was disappearing, it would be of concern to me."

Bush aides insist the surplus shrank mainly because of the slowing economy--a weakness the Office of Management and Budget, in a report last week, was careful to trace to the stock-market slide that started in March 2000. (Translation: Bill Clinton did it.) In truth, the lack of $46 billion of the missing $123 billion is attributable to lower general tax revenues because of the slowdown. "It's remarkable we have a surplus at all, given the yearlong slowdown," argues OMB director Mitch Daniels. The rest of the shortfall can be traced to Bush's military pay raise, the tax rebate and corporate-tax receipts that Bush delayed to make next year's figures rosier.

The Administration insists there is help on the way--those tax-rebate checks. "This was a perfectly timed tax cut," says Larry Lindsey, director of the President's National Economic Council, that "stopped a very precipitous fall." As the rebate stimulates consumer spending, he argues, it will increase the government's tax haul. The upshot: the surplus should come roaring back.

In the meantime, Bush says, Congress must exercise restraint on the 13 major spending bills being considered before the new fiscal year starts on Oct. 1. "Don't overspend," Bush cautioned Congress during a press conference near his Texas ranch last Friday. "One of my jobs as President is to make sure we keep fiscal sanity in the budget." But Democrats argue that it was Bush who started the insanity--with the same tax cut he is hailing as a cure-all. "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," Senate Budget Committee chairman Kent Conrad said last week. "He was wrong."