Balanced Budget? Not Really
A budget is really and truly balanced when its income equals all its current and expected expenses. If you get $100 in income and expect to receive a bill for $100 which you have to pay, but spend the money now because the bill has not arrived, is your budget balanced? No, it is not, because the $100 you owe is a liability that has to be offset with income if your budget is truly balanced.
This principle applies to the federal budget too. President Clinton says that the budget of the federal government will be balanced and in surplus during the next few years. The deficit this year is project at only $5 billion. But the future surplus is a bookkeeping fiction, the result of how the government does its accounting. The operating budget is balanced because revenue from trust funds such as social security is included in the total, and social security now has a big surplus. Next year, the trust-fund surpluses are projected to total $184 billion. These funds will go to the $1.7 trillion general budget, but since these are not operating tax monies, the federal government is really borrowing this money. So the real deficit is $184 billion. With this realistic accounting, there will be no real budget surpluses.
Each $100 in social security surplus funds coming in today is money owed to recipients in the future. Likewise, surplus funds from the highway trust fund are offset by liabilities, namely the highway repairs and improvements that the money should be spent for in the future. In proper accounting, these revenues are not positive but neutral: the assets are offset by liabilities. Even though it is one government agency borrowing from another, because of the unfunded liabilities, the operating budget of the U.S. government will continue to be in deficit.
President Clinton at least recognizes that the so-called "surplus" should be used to finance the social security system (that the social security system is unstable in the long run and should be reformed is a another issue). What would really happen in that case is that in borrowing money from the social security administration but not spending it, the government would be reducing its debt. It would be buying back its treasury bonds, or equivalently, issuing fewer as they renew. That's why debt reduction should be the prime policy for the fictitious budget surplus.
This does not mean that tax reform should be abandoned. Not at all. Changing the tax system is a separate issue, and should be pursued as well, for the sake of the economy and for justice. For example, the marriage penalty should be eliminated. It is hypocritical for politicians to make pompous exclamations about family values while they punish people for being married by making them pay more taxes than single people with the same income.
Of course the best long-run reform for the budget and for taxes is to shift from taxing productive action to obtaining revenue from the rental value of land. If that were done, then there would be little difference between taxation and government borrowing, since future liabilities would become present-day obligations of landowners, and there would be tremendous political opposition to future liabilities that, when added to current spending, exceed the rent. The public collection of rent would be the greatest budget balancer ever. But until that glorious day comes, could we at least try to get some honest accounting in the federal budget?