Economics Update (October-December 1998)

Budget Surpluses, Spending and Taxes Should Be Considered Together

B ecause the federal government last had a budget surplus in 1969, projected surpluses for fiscal year 1998 and each of the next 10 years are being viewed as cause for celebration. Policymakers are eagerly debating ways to use these surpluses — some calling for lowering taxes, some for increasing spending, and others for retiring federal government debt.

In an article in the Atlanta Fed's Economic Review (Third Quarter 1998), Gerald P. Dwyer Jr., vice president in charge of the financial section of the Atlanta Fed's research department, and R.W. Hafer, a professor in the economics department of Southern Illinois University at Edwardsville, discuss the importance of considering both spending and taxes in the present and future when analyzing the federal government's budget.

Dwyer and Hafer first look at the federal government's unified budget for fiscal years since 1950. The unified budget consolidates the spending and revenues of all federal government agencies and trust funds to reflect the government's transactions with the rest of the economy. The authors show that the projected surpluses for the next 10 years are based on expected slower growth in spending than in receipts. They interpret these surpluses as largely reflecting taxes paid now to finance expected increases in future spending, in particular for Social Security.

A budget surplus or deficit is not an adequate summary of how federal government spending and taxation affect the economy, Dwyer and Hafer contend. Instead, a surplus or deficit is a result of choices concerning spending and taxation, choices that have substantial implications for how resources are allocated in the economy. The authors conclude that any analysis of fiscal policy that neglects current and future spending, taxes and tax rates is woefully deficient.

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