PROJECTIONS of federal budget surpluses continue to grow and so does the inexorable urge among politicians to cut taxes.
Even though the surpluses have yet to materialize, Republicans are calling for as much as $1 trillion in tax cuts over the next decade, an imprudent strategy.
Recently, the normally cautious Congressional Budget Office knuckled under to GOP pressure and raised its projected federal surplus in the coming decade to $1.55 trillion from $671 billion. After decades of staggering deficits, this reversal is most welcome.
Yet we must remember the surplus is illusory. Excess cash from the Social Security trust fund is covering the deficit that still exists throughout the federal budget. Today's surpluses will be needed to finance ballooning Social Security and Medicare benefits that the baby boom generation will start collecting in about 15 years.
There is good reason to resist tax cuts. If a family or business were burdened with such massive debt, financial experts would recommend taking one essential step -- reducing the amount of debt.
Last year, the federal government spent $244 billion -- a stunning 15 percent of the budget -- on debt service. Thus, shrinking the national debt should be the first order of business.
We have experienced the benefits of lower government borrowing. We have low inflation, low interest rates and a healthy economy with record levels of employment and income. Further debt reductions can create a long-term beneficial cycle. As the amount owed drops, the interest on the remaining balance also declines, which leaves more money to further reduce the debt. Every dollar spent on debt reduction frees up money for private investment.
As the government spends less on debt service, it has more cash to cover entitlement benefits, pay for other programs or even cut taxes.
With less government debt, interest rates could drop to lower levels. Barring any unforeseen external problem -- rising energy prices, Europe catching the Asian economic virus -- the nation's boom could be prolonged.
From a political standpoint, debt reduction doesn't offer the same election-year benefits as tax cuts. The payoffs may not be as tangible and immediate, but the impact would be more widespread and long-lasting -- the very essence of sound fiscal policy.
Pub Date: 7/21/98