Budget Surpluses: Economic Effects of Debt Repayment, Tax Cuts, or Spending - An Overview

Publication Date: July 1998

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Government

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Abstract:

Updated projections released on July 15 by the Congressional Budget Office (CBO) indicate budget surpluses rising from $63 billion (0.9% of GDP) in FY1998 to more than $100 billion (1.3% to 1.5% of GDP) from FY2002 through FY2005 and over $200 billion (1.8% to 1.9%) from FY2006 through FY2008.1 Tax cuts or spending increases now being discussed would erode these estimates. Surpluses would increase national saving, reduce federal debt and release funds for use by private investors and other levels of government. Part would be transferred abroad, but domestic investment should rise by a sizeable fraction of the surpluses, and economic growth should quicken slightly. Transferring surpluses to Social Security or to related retirement accounts could have much the same effect. If projected surpluses occurred, the interest share of federal outlays and the federal-debt/GDP ratio would decline by 2006 to below the levels of the mid-1970s.

Eliminating surpluses through tax cuts would channel funds partly to increased consumption, but the interest share of federal outlays and the debt/GDP ratio would fall substantially with balanced budgets even without surpluses. Eliminating surpluses through increases (or smaller cuts) in federal entitlement spending would foster consumption, but using them to fund investment projects could boost economic growth somewhat, provided that the investments had social rates of return rivaling those of private investments. Surpluses are expected to vanish after 2010; tax cuts or spending boosts not then repealed or offset would increase future deficits.