HOUSE TAX CUTS & SENATE SPENDING HIKES COULD WIPE OUT THE SURPLUS

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WASHINGTON — The
Concord Coalition warned today that a combination of House-approved tax cuts and
Senate-approved spending increases could wipe out the projected $3.1 trillion non-Social
Security surplus over the next 10 years.  Moreover,
if discretionary spending continues to go up every year at the 6 percent rate it has
averaged over the past three years, taxes are cut by the amount approved by the House and

WASHINGTON — The
Concord Coalition warned today that a combination of House-approved tax cuts and
Senate-approved spending increases could wipe out the projected $3.1 trillion non-Social
Security surplus over the next 10 years.  Moreover,
if discretionary spending continues to go up every year at the 6 percent rate it has
averaged over the past three years, taxes are cut by the amount approved by the House and
entitlements are increased by the amount approved by the Senate, then much of the 10-year
Social Security surplus could be eliminated as well.

      “It is astounding how quickly a surplus can
disappear.  It doesn’t take magic tricks.
All it takes is a large backloaded tax cut and total lack of restraint on spending.
We’ve seen both in recent weeks, which does not bode well for the upcoming budget
negotiations between the House and Senate. If they compromise their differences by taking
the House tax cuts and the Senate spending increases, it will be a fiscal nightmare. A far
better approach would be to scale back both the tax cuts and spending increases to a more
prudent level, particularly in the absence of any plan to deal with the huge fiscal
challenges of the coming senior boom,” said Concord Executive Director Robert Bixby.

  
     The
House budget resolution calls for a 10-year tax cut of $1.6 trillion, but holds the line
on spending. The Senate budget resolution contains a somewhat smaller tax cut but approves
of roughly $600 billion in new or expanded entitlements over 10 years. It also allows
discretionary spending to increase by 8 percent next year, which would likely add about
$240 billion to discretionary spending over 10 years even if increases were held to the
level of inflation for the rest of the decade. Along with higher debt service costs of
about $550 billion, all of this comes to $3 trillion over 10 years — approximately the
size of the non-Social Security surplus.

       
It is unlikely that discretionary spending will go up by 8 percent in FY2002 and fall back
to the inflation-only increases of roughly 2.8 percent assumed in the CBO baseline. For
that reason, it is impossible to fully assess the 10-year level of spending implied in the
Senate budget resolution.  But given the
increase approved for next year, it appears that the 6 percent average annual growth rate
experienced since budget surpluses first materialized in FY1998 will likely continue.
Assuming a 6 percent annual growth rate in discretionary spending over 10 years wipes out
$1.2 trillion of the surplus — nearly as much as the tax cut.Adding the tax cut, $600
billion in new entitlement spending and debt service costs to a 6 percent annual growth
rate in discretionary spending knocks off about $4 trillion of the $5.6 trillion total
surplus, which would dig deep into Social Security.

       
"Clearly, excessive tax cuts are not the only threat to fiscal discipline. Budget
conferees should avoid both a spending spree and a large escalating tax cut. We need to
remember that we’re dealing with highly uncertain 10-year projections. We also need
to remember that looming out beyond the 10-year budget window is the challenge of paying
for the retirement and health care costs of a much older population. Rather than making
commitments based on a surplus that may never materialize, policy makers should preserve
any surpluses that do materialize to help meet long-term challenges. For example, members
of both parties have expressed support for a system of individually owned retirement
accounts, either as part of Social Security or as a supplement. There will be no money
left to fund this promising idea if the entire projected surplus is devoted to other
purposes,” Bixby said.


FIVE STEPS
THAT COULD WIPE OUT
THE
NON-SOCIAL SECURITY SURPLUS


Total
Surplus:  $5.6 trillion
Non-Social
Security Surplus:  $3.1 trillion
Step
One

House-approved
tax cut:

-$1.6 trillion
Step
Two

Senate-approved
mandatory spending:

-$600 billion
Step
Three

6%
annual growth in discretionary spending 2002-2011:
-$1.2
trillion
Step
Four

Additional
tax cuts:*
-$400
billion

Step
Five

Increased
debt service costs:
-$750 billion
Grand
Total:
-$4.5
trillion
Total
Social Security Surplus Used For Other Purposes:  $1.4
trillion
* assumes
$300 billion for alternative minimum tax reform and $100 billion for extension of expiring
tax breaks
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