DRAWING on a variety of different assumptions, America's Congressional Budget Office (CBO) has produced a range of projections for the economy's budget surplus—the excess of taxes over public spending—over the next ten years. Even the least optimistic of these forecasts expects a ten-year cumulative “on-budget” surplus of more than $800 billion. (The administration, using slightly different assumptions, expects a ten-year surplus of roughly $750 billion.) However you look at it, this is a lot of money. Will it really materialise? The short answer is no.

It is unfair to blame the CBO for the specious forecasts it produces: by and large, it does what the law requires it to. But, to begin with, the practice of adding together ten years' worth of surpluses is absurd. Why ten? Why not 100? Why not calculate the cumulative surplus over the entire millennium just beginning? The margins of error surrounding projections of the fiscal balance are enormous even when the forecast horizon is months away, never mind years.

Next come the assumptions. Even the CBO's least optimistic ones say that discretionary spending will stay constant in real terms. But this is in fact far too optimistic. Suppose the growth of defence spending were indeed held to the rate of inflation (a brave assumption), but that other kinds of discretionary spending grew as fast as they did in the (fiscally stringent) 1990s. The surplus would shrink to $300 billion. With a little further tinkering, guided only by supposing that the future will be quite like the past, the surplus can be sliced even thinner.

Whatever the exact numbers, the ten-year adding-up approach creates the false impression that the surplus is permanent. Again, this is incorrect. If future liabilities in Social Security, Medicare and Medicaid were properly accounted for (in the way a business accounts for such liabilities), the overall budget would be in deficit right now. If the present “cash” basis is not to be hopelessly misleading, it is important to remember that inescapable demographic trends will drive the officially measured budget strongly towards deficit in future years. In short, the present surplus is much smaller than it looks, and it has a powerful built-in tendency to shrink even more. The first condition for sensible analysis of the fiscal prospects is that the current optimism must be severely curbed.

Where do you go from there? Basic economic principles suggest that the public accounts should be in surplus during booms and in deficit during recessions. One tradition in economics favours this because counter-cyclical fiscal movements provide an automatic Keynesian cushioning of the economy, restraining demand in good times and supporting it in bad. Another tradition favours it because the distortionary costs associated with taxes are non-linear: they rise more than proportionately with the rates at which taxes are collected. It follows from this that taxes should be set at a level that balances the budget over the course of the whole cycle, and left there: a fluctuating budget balance, in other words, provides for microeconomically useful “tax-smoothing”. Both views favour leaving the surplus, such as it is, in place—using it, in other words, to retire public debt.

In a recent paper, Alberto Alesina of Harvard University discusses some alternatives, and the constituencies that support them*. On the face of it, a permanent cut in taxes is a bad response to a temporary budget surplus: it militates against tax-smoothing and it makes fiscal policy pro-cyclical. But what about the shrewder-sounding argument much favoured in the days of Reaganomics: that tax cuts, as well as being desirable in their own right, are a way of forming political coalitions that will then cut public spending. “Starve the Leviathan”, Mr Alesina calls it. And, as he says, looking back at the 1980s, the idea cannot be lightly dismissed.

The Reagan deficits emerged because his administrations cut taxes by more than they cut spending. As the deficits ballooned, Republicans in Congress held their ground, by and large, against big tax increases. In the end, the deficits were eliminated mainly by a combination of rapid economic growth, which boosted revenues at largely unchanged tax rates; low interest rates; and, yes, lower government spending, although Mr Reagan would not have liked the fact that it was defence spending that took the biggest hit.

Mr Alesina and a collaborator have devised a model which proves that, if the strategy is not carried too far, a conservative policymaker might sensibly abandon the benefits of tax-smoothing in return for the constraint that is thereby imposed on public spending. If you believe, moreover, that institutional failures of one kind or another bias the political system in favour of excessive spending, then excessive tax cuts can sometimes be the appropriate response.

This doctrine of two wrongs making a right is difficult to accept just now, however. Few of the advocates of big tax cuts have any good ideas, or indeed any ideas whatever, about where spending cuts under duress could actually be made. The prevailing mood among Democrats and Republicans alike is that the surplus provides scope both for tax cuts and spending increases; the only question is the mix.

In economic terms, the obvious candidate for spending cuts is Social Security. At the moment, however, most Republicans are promising to protect (“save”) this endangered national treasure with apparently unfeigned sincerity, no less than Democrats. How can avowed believers in small government plausibly hope to use lower taxes as a way to squeeze spending when even they cannot say where any such cuts should fall?

* “The Political Economy of the Budget Surplus in the United States”. NBER Working Paper 7496.