Budget Surpluses and the End of Fiscal Restraint

The era of fiscal restraint has ended, as the politics of surpluses have replaced the politics of deficits. The politics of deficits made its mark, fundamentally changing the nature and role of federal finances. The dramatic shift from cash flow deficits to surpluses involved reducing spending to its lowest portion of GDP since the 1960s and increasing tax receipts to an historically high share. The spending reductions were selective and uneven, dramatically altering the composition of spending by reducing the government's purchases of goods and services that directly absorb national resources, while significantly increasing the share of spending for entitlements and income redistribution. True tax reform in the 1980s (the Tax Reform Act of 1986), which lowered tax rates and broadened the base but had little effect on tax receipts as a percent of GDP, gave way to a series of tax hikes in the 1990s. The combination of legislated tax hikes, lower inflation, robust economic growth and capital gains has generated a bulge in tax receipts. Even though current law projections of mounting cash flow surpluses are too optimistic--they assume sustained high tax receipts as a percent of GDP and adherence to the legal caps on discretionary spending--they redefine the thrust of the fiscal debate