Three Cheers for the Shrinking Surplus

The Congressional Budget Office recently announced that the federal surplus for FY 2001 will be $122 billion less than their previous projection. This has sparked controversy on Capitol Hill with many congressional Democrats insisting that President Bush revise his budget proposals. Lost in this political storm is the fact that the shrinking surplus should be applauded by advocates of limited government. Historically, budget surpluses have translated into higher spending. Whereas federal and state budgetary history demonstrates that budget deficits often provide elected officials with the incentive to cut expenditures.

For instance, when Republicans won a majority of seats in both the House and the Senate in 1994, congressional leaders were talking about terminating several federal programs and abolishing entire cabinet agencies. The Republicans failed in their efforts to achieve many of these limited-government ambitions. However, during their first year, they managed to enact some meaningful budgetary cuts. In the fiscal 1996 budget, non-defense discretionary spending was actually reduced by $11 billion in real terms. This marked the first such reduction since the Reagan Administration.

However, the situation changed. Between 1997 and 2000, with the Republicans in control of both houses of Congress, non-defense discretionary spending soared, increasing at an annual rate of 5.1 percent. In comparison, the average increase in non-defense discretionary spending for the budgets passed in 1993 and 1994, when Republicans were in the minority, was only 4.6 percent.

There are possibly many reasons for this sudden loss of fiscal rectitude among Republicans. But one factor that cannot be overlooked is the unexpected presence of budget surpluses. In fiscal 1998 the federal government ran its first surplus in 29 years and even larger surpluses followed. When their ideological fervor subsided, many committee chairmen in Congress could no longer resist the temptation to spend this money. Serious discussion about reducing expenditures was nowhere to be found.

This stands in stark contrast to the 1980s when spending reductions were at the forefront of many policy discussions. Then, there were some meaningful bipartisan efforts to find methods of reducing federal spending. In the early 1980s, President Reagan directed the Grace Commission to find methods of reducing fraud, waste, and inefficiency in government programs. In 1985 Congress passed the Gramm-Rudman-Hollings Act, which called for mandatory spending reductions every year to reach specified deficit targets.

Neither of those efforts was as successful as their proponents would have hoped. Many of the recommendations of the Grace Commission went unheeded and Gramm-Rudman-Hollings was abandoned in the early 1990s. However, the most important lesson to learn from these times is that fiscal conservatives could effectively use the deficit as a defense against new programs. The fact that non-defense discretionary spending as a percentage of the economy decreased during Ronald Reagan’s time in office provides evidence of this.

Likewise, data from the states also suggests that budget deficits often motivate elected officials to reduce spending. When William Weld was elected governor of Massachusetts in 1990, the Massachusetts miracle had collapsed and deficits were skyrocketing. However, even in fiscally liberal Massachusetts, Weld was able to sign a budget in 1991 that reduced spending by an impressive 6 percent. As a result, state expenditures per family fell by $400 during his first year in office. Similarly, in response to her state’s deficit situation, Arizona Gov. Jane Hull recently instructed her state agency directors to reduce their Fiscal 2002 budgets by 4 percent. Hull will likely call a special session of the legislature in November to focus on budget reductions.

Ideally, one would hope that elected officials not rely on the deficit as their primary defense against new spending. Instead, proponents of limited government typically oppose federal programs, in terms of the costs they impose on taxpayers, the perverse incentives they create for their recipients, and their ability to crowd out more efficient private endeavors. Still, in an age where meaningful discussion of spending reductions is all but absent, a shrinking surplus might provide the Bush administration with the political cover to propose spending reductions in future budgets.

Michael New is a research assistant and a data analyst for the Cato Institute’s Center for Representative Government.