- The Washington Times - Tuesday, May 2, 2000

The booming economy is filling the Treasury's coffers with another "April surprise" of as much as $64 billion in unexpected revenues that could drive this year's budget surplus to a record $240 billion, Wall Street analysts project.

The surge in revenues from personal income taxes and capital gains taxes is so gigantic this year, "it's like an interplanetary extraterrestrial record," said Lawrence Kudlow, chief economist at Schroder & Co. and a Republican economic adviser.

The House's budget resolution assumes a surplus of only $176 billion. The latest estimates from analysts studying the Treasury's daily revenue flows put the surplus between $225 billion and $240 billion for the year ending Sept. 30, including a surplus of between $65 billion and $75 billion on top of what is designated to pay for Social Security.

The sheer size of the surplus will banish the public's lingering hesitation about using the non-Social Security surplus and "change the political debate this year," Mr. Kudlow said. He noted that the estimates could be increased since not all the receipts have been counted from tax filers who got a two-week extension from the April 15 deadline.

Top Republican budget aides expect Congress this year to spend about $20 billion of the projected increase in the surplus, but save most of it for tax cuts or other major programs to be enacted next year after the presidential election.

"We have assumed in our budget that any increase will go for tax cuts or debt reduction," said one top aide. "We have to walk a very fine line. If we were to come out right now and say the surplus will be as large as some private-sector people say, our appropriators will go wild. There's a lot of pressures around here to spend."

Mr. Kudlow and other analysts said that the huge boost in funds to spend, which budget estimators expect to be repeated in future years, ultimately gives Congress and the administration plenty of leeway to compromise on programs this year and next.

"Growth solves a lot of problems, and the normal tensions that occur in Congress will be ameliorated by this. If they want to spend a few extra dollars for education, they can do that and have plenty left over for tax cuts," Mr. Kudlow said.

A large portion of the surplus is attributable to the soaring gains from double-digit growth in the stock market in the last five years making the federal government a major beneficiary of the raging bull market.

"The booming stock market has created an investment boom, a capital gains tax boom and a budget surplus boom" that few people would have even imagined just five years ago, Mr. Kudlow said.

The economist suggested the unexpected surge in the surplus will do a lot to put off critics of Republican presidential contender George W. Bush's tax-cut plans, and will allow Vice President Al Gore to expand upon his own plans as well.

"I wouldn't be surprised if Al Gore raises his tax cuts," he said.

The mammoth surge of tax receipts is the fifth and apparently the largest in as many years. It is the result of the longest-running economic expansion in history, which has racked up record employment, solidly growing incomes and record gains in the markets.

Based on revenues received by the Treasury last month that are running 12 percent ahead of last year, L. Douglas Lee of Economics from Washington Inc. expects the surplus to range between $225 billion and $230 billion.

Many aspects of the booming economy besides the high-flying stock market are contributing to the growing surpluses that federal, state and municipal governments are enjoying. Some of them are likely to continue, and some are not, economists say.

The market's double-digit growth and the economy's hyperactive growth rate of between 5 percent and 7 percent since the middle of last year will not continue forever, most economists agree, though even a more subdued economic growth rate of between 3 percent and 4 percent will continue to produce sizable surpluses.

"It looks like the bulk of revenues is coming from ordinary wage withholding, reflecting the very tight labor markets and high levels of employment," said Mr. Lee. "Employment growth has been very large and sustained for a long period of time."

The nation's full-employment economy also is helping to cut government spending on social programs, such as unemployment compensation and welfare benefits, he said, providing a double-barreled benefit that drives up the surplus.

While Congress has been disciplined and avoided spending much of the growing surpluses until recently, the sharply higher estimates will increase the temptation to use the cash pouring in for favored programs from agriculture to defense, Mr. Lee said.

However, doing so could endanger the good mix of budgetary restraint and liberal monetary policy that has helped to generate the surpluses, he said, because any sudden surge in federal spending would increase pressures on the Federal Reserve to sharply raise interest rates.

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