Adventures in surplus land

his will be the fourth consecutive year the federal budget will have a surplus. This simple statement is remarkable considering that only nine years ago, the deficit was at a record high of $290 billion and was projected to keep climbing. The last time the U.S. budget showed four consecutive surpluses was in the late 1920s, and only eight surpluses have been on the books since 1930.
After years of trying to get rid of the federal deficit, lawmakers are at a loss for how to plan for the latest trend-surpluses.T

Even more impressive is that these surpluses, which were so hard to achieve through most of the late 20th century, are now projected to be the norm through the early part of the 21st century. Indeed, the Office of Management and Budget and the Congressional Budget Office are projecting a surplus for at least the next 10 years.

No one in Washington, on Wall Street or in academia predicted such a feat. Just a few years ago, had anyone predicted 13 consecutive surpluses, they would have been dismissed as being hopelessly out of touch with fiscal reality. Now, the question is how much longer the streak will last. Deficits were thoroughly embedded and no one expected the situation to turn around so rapidly and completely. That is why dealing with surpluses has created such confusion and upheaval in Washington.

Who Said It Would Be Easy?

The politics of the budget surplus are as difficult as the politics of the deficit. Some would expect Congress and the White House to start the annual budget debate by joining hands and singing "Kumbaya," yet managers still are facing tough questions about funding for their programs. In fact, the challenge for federal executives is far greater now than it was before. Political, procedural and economic rules of past budget debates no longer apply. The surplus has set a different scene for the budget debates in Washington than anyone ever anticipated.

Fiscal Wishes
The most surprising and difficult question that now has to be answered is what to do with the surplus.

With so few surpluses to encourage them, economists have done little theoretical work to guide policy-makers. Furthermore, the work that has been done hasn't been taken seriously. Deficits were so pervasive, seemingly omnipresent and so apparently resistant to even the toughest measures that planning for annual surpluses made little sense. If the question was discussed at all, it happened over wine and cheese in some graduate school professor's office rather than in a House or Senate office building.

Surpluses appeared far more quickly than anticipated, compounding the problem of what to do with them. The 1997 budget agreement projected that the budget would be balanced in five years-by the end of fiscal 2002. Had that happened, Wall Street, academics, voters and politicians would have had time to discuss the surplus and arrive at a consensus. But the deficit turned into a surplus in 1998, five years ahead of schedule, leaving no time for such a discussion.

Under old budget politics, House and Senate members knew that no matter what else was happening, the budget agreement had to project a shrinking deficit. "There is no similar commonly accepted outcome when it comes to the surplus," says former House Budget Committee Chief of Staff Rick May. Now a lobbyist with Davidson and Co. in Washington, May says members of Congress are "very uncertain how to proceed, and that makes the outcome of the budget debate much harder to predict."

Representatives and senators seem to be coalescing around five options for what to do with the surplus:

  • Spend more overall.
  • Spend more on just one program or area.
  • Spend less.
  • Tax less.
  • Pay down the national debt. A sixth option-do nothing with the surplus until we figure out what is needed to fix Social Security-is also discussed from time to time.

Does Size Matter?

The main economic issue is whether a bigger surplus is always better. Economists have wildly divergent views on the subject. Many believe the best policy in the current economic environment in Washington is to pay off publicly held debt faster, especially if that leads to lower interest rates.

Others say using the surplus for a tax cut or for increased spending on investment-like programs, such as education or transportation, would be a far better way to guarantee long-term economic growth.

Considerable debate also has emerged over whether changes in fiscal policy, such as higher or lower surpluses, should be used to fine-tune the economy when the Federal Reserve can alter interest rates more easily and with a faster impact.

The bottom line is no one is quite sure where the debate should end up. "Everyone always knew that the final budget deal had to show the deficit being lower," May says. "That eliminated a number of options and gave us the ability to tell some people and groups that they could not have what they wanted." But with a surplus, the debate begins with no agreement about the outcome and "people are far less willing to take no for an answer," May says.

While this issue may seem to be mostly academic, it has some practical implications for federal managers.

Until some agreement about what to do with the surplus is commonly accepted, the annual budget debate in Washington will take even longer than the lengthy deficit reduction debates of the past. Before decisions about specific programs can be finalized, Congress and the White House have to agree on how much of the surplus, if any, is available.

The lack of a consensus about the surplus, the narrow majorities in the House and Senate, and the unwillingness of members to walk away from the budget debate empty-handed will make passing a congressional budget resolution and appropriations, tax and other budget-related legislation difficult and time-consuming.

As a result, federal agencies are far less likely to get their budgets approved by the start of the fiscal year.

What Budget Process?

The tremendous uncertainty about what to do with the surplus is exacerbated by a federal budget process that was not designed to deal with the issue.

"Congress does not really have a budget process . . . it has a deficit reduction process," says Tom Kahn, Democratic staff director of the House Budget Committee. Since at least 1985, when the procedures of the Balanced Budget and Emergency Deficit Control Act (known as Gramm-Rudman-Hollings) were put in place, the primary purpose of the congressional budget process has been to reduce the deficit. Gramm-Rudman-Hollings was followed by two other deficit reduction procedures-the 1987 Balanced Budget and Emergency Deficit Control Reaffirmation Act and the 1990 Budget Enforcement Act. The 1997 budget agreement extended the Budget Enforcement Act restrictions and limits through the end of fiscal 2002.

These laws were intended to guide congressional and administration budget decisions toward one end-reducing the deficit. Only extraordinary circumstances, such as war or recession, could interfere with that goal. What happens when the primary problem the budget process was designed to solve no longer exists? As evident in the past few years, the rules no longer provide any meaningful guidance to lawmakers and the process breaks down as Congress and the White House feel free to ignore procedures they believe are no longer appropriate.

The current budget process still has limits-or caps-on the amount that can be appropriated. The caps were revised in 1997 to cut spending and eliminate the deficit by the end of fiscal 2002. But with the surplus projected to exceed $250 billion in fiscal 2001, limiting spending has become unpopular. Last year, Congress ultimately approved close to $100 billion more than the law allowed.

The "pay as you go" rules, which limit tax cuts or entitlement increases, also have gone by the wayside.

PAYGO, as the rules are called, prohibits the surplus from being used as an offset to tax cuts and entitlement increases. However, last year's increases in Medicare were paid for by reducing the projected surplus. And all current talk about paying for proposed tax cuts revolves around reducing the surplus.

The lack of rules means many options are available to Congress and the White House as the debate unfolds, which is a problem for federal managers. Far more big-picture questions have to be answered before the coming year's appropriations can be passed.

The negotiations leading to these big decisions would be far from easy under any circumstances. But the economic and political environment of great uncertainty about what to do with a surplus, and no clear majority willing to solve that problem, could make the process downright chaotic.

How Bad Could It Be?

Last year offered a good example of just how messy and confusing the budget debate can become in the midst of a surplus.

Congress passed its budget resolution by the statutory deadline, but funding decisions were changed later in the year, as an additional $35 billion or so was added for different programs.

Some appropriations were adopted early in the year. But those bills never seemed final, even after the President had signed them. Supporters of these agencies saw additional money being made available and wanted some for their programs.

A record 21 continuing resolutions were needed before final funding decisions for all the agencies were enacted.

Current budget rules technically remain in effect for the fiscal 2002 debate, but the decision to ignore them last year essentially eliminates them even as a guide, let alone an actual limit on what Congress might do this year.

When Will It End?

All of the factors that have led to the surplus culture in Washington seem likely to remain in place this year and perhaps for many years to come. In fact, the budget turmoil of the past few years is likely to get worse before it gets better because the most important limits under the 1990 Budget Enforcement Act will expire after fiscal 2002. With no consensus on what to do with the surplus, few expect Congress and the White House to agree on a process that limits their options.

For federal managers, this means each year's budget debate will be quite an adventure.

Stan Collender is senior vice president and managing director of the Federal Budget Consulting Group at Fleishman-Hillard Inc. He is also author of The Guide to the Federal Budget (Century Foundation, 1999) and writes the "Budget Battles" column for and