The One That Got Away

When White House budget director Mitchell Daniels testified before the Senate Budget Committee this spring, he brought along a plump apple pie–an apt symbol for the government’s bountiful budget surplus, then estimated at some $275 billion. But when Daniels appeared before the panel last week, his estimate of the spare cash fell as low as $160 billion. The committee’s new Democratic chairman, Kent Conrad, served some baked goods too. He gave Daniels a modest pear tart with the words “shrinking surplus” inscribed in frosting.

The incredible shrinking surplus is suddenly at the center of Washington debate. Just last fall, the Capitol seemed awash in money–and plans to spend it. Candidate George W. Bush wanted major tax cuts, missile defense and other big ticket items. Al Gore talked up a hefty new prescription-drug entitlement and more money for education. As recently as a few weeks ago, there seemed to be enough funds for Treasury Secretary Paul O’Neill to say he hoped that the corporate income tax could be abolished in the not too distant future. But such hopes have been dashed. Bush’s chief economic adviser, Lawrence Lindsey tells TIME that O’Neill’s idea isn’t yet Administration policy and may never be.

Why the change? The economic slowdown and Bush’s tax cut have slashed revenue projections. Now the stage is set for fierce political battles over spending priorities. The Administration has already signaled that it may scale back the next round of G.O.P. tax cuts, which are now unlikely to include a capital-gains reduction. This will infuriate G.O.P. conservatives. Bush officials have also hinted at unspecified spending cuts later this year–something guaranteed to annoy politicians of all stripes. Just last week Bush’s 2002 defense request for $328.9 billion came under fire as potentially budget busting. Said an Administration official, referring to the the surplus: “We have to be very careful with this.”

The first thing the Administration needs to be careful to do is to win the war over who lost the surplus. Democrats blame Bush’s $1.35 trillion tax cut. Without that money, they argue, Bush could be forced to raid sacrosanct Medicare and Social Security trust funds. “This new Administration inherited the largest budget surplus in our nation’s history,” complains John Spratt, senior Democrat on the House Budget Committee. “Yet after only five months, the record eight-year string of improving budgets is over.”

Republicans, not surprisingly, take a more rosy view. They don’t deny that the surplus is shrinking, but they blame what they dub the Clinton economic slowdown. (Most economists blame the tax cut and the slowdown for the surplus shrinkage.) And the G.O.P. points out that even a reduced, $160 billion surplus amounts to the second largest ever. Republicans predict that Bush’s tax rebate will soon give the sluggish economy a lift, generating more growth and higher tax receipts. And they claim that the real goal of the Democrats is to repeal Bush’s tax cut. As Senator Pete Domenici, the ranking Republican on the Senate Budget Committee, put it, “If you really want to drive this country into the economic ditch, raise taxes during a slowdown.”

The biggest showdown will come over Medicare. Both parties agree that Social Security money shouldn’t be spent on other government programs. Otherwise, there might not be enough money for the baby boomers’ looming retirement. But the White House has signaled that extra funds built up in Medicare are fair game for bolstering the budget. Democrats are fuming; most G.O.P. lawmakers back Bush, but some, like House Budget Committee chairman Jim Nussle, seemed to box in their President by promising that Congress will “protect 100% of the Social Security and Medicare trust funds. Period.”

Of course, budget projections are notoriously fuzzy. A few years ago, no one foresaw the surplus. This year many experts were surprised it melted. About the best thing politicians can hope for is that these latest gloomy estimates will prove wrong.