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How (Not) To Spend a Budget Surplus

Discussions of government budgeting frustrate me. During the Bush-Gore presidential campaign, when it was still being reported that we would have budget surpluses from here to eternity, there was a great debate about what to do with all that extra money. Despite the fact that it was pretty clear the “surpluses” were the result of booming economic activity that could not go on forever — that revenues would eventually come down again — almost all the proposals from both candidates involved using those surpluses as down payments on increased entitlements of one form or another — on programs (including decreased tax rates) that would lock-in the fiscal consequences in perpetuity. California did something similar during the nineties, allocating a revenue windfall derived from a glut in capital gains to all manner of increases in spending on services that could not easily be revoked when the glut became a dearth.

Why is it that governments cannot seem to manage spending and revenue as the cyclical phenomena that they are? Why does government resist the notion of matching budgets to average rather than peak revenues, building reserves during boom times and drawing them down during bust times?

In part, I blame the anti-tax ‘conservatives’ who would never acquiesce to the notion that government should ever — boom or not — collect more in revenue than it spends. Even if politicians were willing to act so rationally, the anti-tax zealots would be demanding that the reserve be returned to the taxpayers from whom it came. But “reserves” can be managed by borrowing and paying back rather than by saving and drawing down, so that is not the primary problem.

More fundamental is that there are constituencies who demand government spending, and politicians are rewarded with votes for providing it. Hence revenue windfalls are simply too tempting to leave untouched.

Nonetheless there are worse and better ways to spend those windfalls. This letter to The Boston Globe was written in response to a suggestion that a budget surplus in Massachusetts should be allocated to increases in Medicare reimbursements. It was not published.

21 April 2005

Jack Connors, Jr. argues (12 Jun) that the current revenue surplus in Massachusetts should be spent on increased Medicare reimbursements rather than being returned to the taxpayers from which it derived. Despite his dismissive rhetoric — “Or we could give every man, woman and child $100 and watch what has been built over 200 years struggle for survival” — there are both practical and philosophical reasons one might favor returning money to the citizens rather than allowing the legislature to come up with creative ways of spending it, even given items in the state budget that are — at least in some views — under-funded.

But, even if you grant that shoring up shaky government budgets is the better use for the excess funds, using them to increase reimbursements for Medicare — or to fund benefit increases for any other entitlement program — is the worst possible use for the money. That is not because health-care and education and other government entitlements are not worthwhile. It is because any such benefit increase is effectively a promise of revenue in perpetuity — once benefits have been awarded they are politically impossible to take back.

It is one thing to allocate a persistent revenue stream to increases in entitlement spending; it is another thing entirely to increase such spending on the basis of a short-term revenue bubble created by unexpected economic circumstance. That is a certain road to future fiscal insolvency.

© Copyright 2005, Augustus P. Lowell


  1. Dennis C Van Parys Dennis C Van Parys

    I think that all surpluses should be put in to social security. it is about time that the Government start taking care of its seniors.

  2. Administrator Administrator

    Since that is something we are already on the hook for, that would certainly be one wise option — think of it as buying down future obligations.

    But given how much Social Security and Medicare currently are costing us — and the fact that they were always intended to be supplemental rather than primary retirement support — I don’t think it’s fair to presume that the government has been shirking in its responsibility toward seniors.

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