Hypothetical money tops US debate agenda

By Alan Deans

New York view

Put a pot of money in front of people and a squabble can be guaranteed.

I gained an early lesson when flatting as a student in Wellington. The food kitty had fattened because some of our household were on holidays. Should we lash out on steak, buy a case of beer or a creamy dessert? The winning option was to back a dead-cert running the next day at New Plymouth. When we won, we could throw a big party. The horse lost.

Similar choices confront America's 250 million citizens as politicians bicker about what to do with a projected Budget surplus. It could become enormous, the Congressional Budget Office says, assuming that the economy bubbles along with no major shocks.

Projections are that Washington will be swimming in a $US2.9 trillion surplus during the coming decade. Those who find a trillion hard to imagine, then try $US2,900 billion. For those who have never seen a billion in one place - let's face it, who has? - it is the same as $US2.9 million million. That is enough to put a million on the nose of every nag that has ever run in any race in New Zealand, and still have enough for pizza.

Congress has gone into late summer recess, but controversy continues about what should be done with such a massive sum. The Republican-controlled Senate and House of Representatives have approved $US792 million in tax cuts that they hope will be a certain vote winner in next year's presidential election.

From the remaining surplus, $US1.9 trillion is to be set aside for social security purposes. The balance of about $US200 million would be used for modest spending plans.

The Republican package of tax cuts offers something for everyone, including a cut of one percentage point on every marginal income tax rate and reductions in inheritance, capital gains and business taxes. In a nation where people simply hate the idea of giving governments any funding at all, it is certain to be popular.

But the Democrats are painting the law as irresponsible, saying it would threaten spending on health, education and welfare, especially if the surpluses do not eventuate. Bill Clinton says he will use his veto power to stop it being enacted, a move that many see simply as a grandstanding attempt to differentiate the policies of two essentially middle-ground parties.

Talk is in the wind of a compromise. Give some money in tax cuts - $US200 million to $US300 million in Clinton's view - some more in new spending, but also make a major effort to repay the national debt. The latter choice is being championed by the president and many prominent economists as a sound use for the huge kitty. It would help underwrite the ongoing prosperity of the nation rather than giving it back to taxpayers to spend.

Clinton has a policy similar to that pursued by the Nationals under Jim Bolger during the 1990s. If a government can maintain its discipline, there are big benefits in repaying debt. New Zealand has found that its newfound financial strength helped it recover quickly from the Asian economic crisis. The downside is that voters have to trust that future governments will not splurge.

There is an air of unreality about the debate, however. An appropriations bill currently before Congress would spend all of next year's projected surplus and call into question future sums over and above that earmarked for social security.

Should congress rein-in ballooning outlays, however, the margin left for politicians to play with still could evaporate. It seems sensible to assume that spending will continue to grow at historical rates. If so, 60 per cent of the $US1 billion non-social security surplus will disappear and make it impossible to pay the Republican tax cuts.

The problem engrossing the most powerful nation in the world, then, is not only how to spend money that does not yet exist, but how to spend funds that might never exist. It is all rather Disneyesque. In keeping with American tradition, it does demonstrate a healthy propensity to fully debate a contentious topic, even if it is hypothetical.

One option that has slipped into the background is to use the surplus to help fund a broadening in private savings. American households currently spend more than their income, an alarming situation that cannot continue for long.

If the Government granted income tax cuts, but required the funds to be invested in approved savings schemes, then it would kill two birds with one stone. Taxes would fall and savings would rise, while many lower and middle income earners would be introduced to the benefits of accumulating wealth for their own retirement rather than relying on Government handouts. It would also help with some social security problems.

* Alan Deans is New York correspondent for the Australian Financial Review.