Advocates Say Estimates Are Overly Optimistic
Despite moves by the Federal Reserve Board to cut interest rates because of a potential economic slowdown, the Congressional Budget Office released new budget estimates on January 31 pointing to a record $5.6 trillion surplus over the next ten years (2002-2011). CBO projects that the economy will slow slightly in 2001 and then regain its strength in 2002 and beyond. According to the report the surplus will reach $281 billion in FY 2001, the current fiscal year which began last October 1, and $313 billion in FY 2002, the coming fiscal year which starts on October 1 of this year.
The estimates include both Social Security and non-Social Security surpluses. According to the report, surpluses in the Social Security program will be $2.5 trillion over the next ten years, $125 billion in FY 2001, and $142 billion in FY 2002. Non-Social Security related surpluses will reach $3.1 trillion over the next ten years, $156 billion in FY 2001, and $171 billion in FY 2002.
The estimates assume that discretionary spending will grow at the rate of inflation. In all, absent any other new tax or spending legislation, the total projected surpluses will be sufficient to fully repay by FY 2006 the publicly-held national debt, which was $3.4 trillion at the end of FY 2000.
The Center on Budget and Policy Priorities released an analysis of the CBO forecast the same day, however, that argues that the CBO numbers are overly optimistic. According to the Center, while CBO separates out Social Security surpluses in its calculations, it does not do so for Medicare. Medicare surpluses account for about $400 million of the $3.1 billion non-Social Security surplus over ten years.
Moreover, while CBO assumes that discretionary spending will grow by an amount equal to inflation, it does not assume a corresponding increase to account for increases in population. For example, if education spending grows only by an amount sufficient to offset inflation, but the number of students increases, the amount spent per-pupil will decline under CBO’s assumptions. Adjusting for population growth would trim roughly another $300 million from the non-Social Security surplus over ten years.
CBO also does not include a number of other policy changes that are politically likely, including: extending expiring tax credits and adjusting the Alternative Minimum Tax (AMT) to ensure that it does not affect a significant portion of the middle class; continuing payments to farmers who are suffering continued economic hardship; and accounting for interest payment adjustments associated with these changes. All together, according to the Center, these more realistic assumptions would reduce the ten year, non-Social Security surplus from $3.1 trillion to $2.0 trillion.
The Center also estimates that the true ten year cost of the Bush tax plan is closer to $2.1 trillion , not $1.6 trillion as is commonly reported in the press. The difference is due primarily to higher debt payments and interactions with the AMT that are not included in the $1.6 trillion cost estimate. Taken together, the true cost of the Bush tax plan ($2.1 trillion) is greater than the non-Social surpluses that truly can be expected to occur over the next ten years ($2.0 trillion), leaving no money for programmatic expansions like the prescription drug and education proposals that Bush has already submitted to Congress (see related stories, this issue).
Bush was nevertheless pleased on the day the new estimates were released. “I was pleased to see the CBO number. I think it helps further the case that there’s enough money to pay down debt, to meet priorities and to give some of the money back to the people who pay the bills; that’s the taxpayers,” Bush said in a meeting that day with congressional leaders, according to the Associated Press.
Some Democrats disagreed. “I don’t believe that you can do all three of those in an appropriately balanced way,” said Sen. Kent Conrad (D-ND), the leading Democrat on the Senate Finance Committee, after the meeting.