Bread & circuses.

LAST January when lawmakers returned to Washington, they faced a budget deficit of $124 billion and talked of little but the need to cut spending in order to balance the books. This year they are returning to Surplus City. The strong economy brought in more tax revenues and lowered social spending, producing a deficit of a mere $23 billion for fiscal year 1997 (which ended September 30) and a projected budget surplus for FY98 for the first time in thirty years.

But hold the champagne: this is not good news. Forget every GOP sound-bite you've ever heard about the imperative of balancing the budget -- even when Washington was obsessed about the deficit, the result was a budget deal that increased government spending as a percentage of GDP and created five new entitlements. If a bankrupt Beltway was so inhospitable to small-government conservatives, Surplus City will be a town without pity.

Indeed, if anything has been sinking faster than the deficit, it is the politicians' commitment to fiscal restraint. When Republicans took control of Congress in 1994, the federal budget was $1.46 trillion. The budget for FY98 is $1.7 trillion. Non-entitlement domestic spending for FY98 is increasing by $22.6 billion, four times the rate of inflation and the largest increase in eight years.

As the Cato Institute's Steve Moore reminds us, programs which Republicans slated for deep cuts or flat-out elimination just two years ago have enjoyed boosts in funding. Confronted with a sea of red ink, Congress still increased spending for the Corporation for Public Broadcasting, the World Bank, Goals 2000, bilingual education, and the Legal Services Corporation. The Low Income Home Energy Assistance Program was created by Jimmy Carter and targeted for elimination by Ronald Reagan, but, having survived, it received a 20 per cent increase from the GOP Congress.

What will happen now that the "restraint" imposed by the deficit has disappeared? The Washington Post reports that President Clinton, for his part, plans to increase social spending because his constituencies have been starved by his rigorous belt-tightening --"three years in which Clinton has nearly matched Republicans in their zeal for fiscal austerity." (Washington is a parallel universe where a budget increase of $226 billion over five years is "austerity.")

Congress last year did manage to curtail spending on Medicare in Washington's favorite time zone -- the "out years." But, if the economy remains strong, the "out years" promise to bring a budget surplus of more than $100 billion. This is more bad news.

Michael Horowitz, a Reagan budget official now at the Hudson Institute, considers the recent deficit-ridden past as the high-water mark for fiscal discipline. "Entitlement reforms and discretionary spending restraint seemed possible under conditions Republicans had created," he explains. Horowitz believes that Congress and the Administration would have reached agreement on structural reform of Medicare if the Congressional Budget Office hadn't discovered an extra $45 billion in the midst of the budget negotiations last spring. "Now the free-lunch theories of both parties are possible -- Congress can raise spending and cut taxes," Horowitz declares.

Larry Kudlow, who also served in the Reagan budget office, agrees. Because "the good economy buys them revenues and so buys them time," Kudlow thinks the temptation will be to ignore the problems that aging baby boomers will pose for retirement programs.

The problem is that when eliminating the deficit became the GOP's Holy Grail, the party conveniently abandoned arguments about reducing government in order to promote freedom. The deficit arguments were much easier to make than the freedom arguments, and even got a respectful hearing in places like the Washington Post.

Hence Republicans will be defenseless against Clinton's spending plans now that Washington can "afford" them. Some Republicans will try to dedicate part of any surplus to paying down the debt -- a way to continue deficit politics by other means. But they will find that their abstract goal is no match for spending schemes on behalf of kids and post-kids, the elderly and the near-elderly.

THE best way to combat new spending is by proposing tax relief. The surplus, after all, is not really of Washington's making -- so it shouldn't be Washington's to spend. Over the past 15 years, tax revenues have, on average, increased 7 per cent a year. In October and November 1997, revenues were up by 10.5 per cent. Even a 7 per cent growth rate would yield a surplus of $300 billion in 2002 -- if the money was not spent first.

This extraordinary revenue growth is the fallout from Reagan's tax cuts. Indeed, Washington's black ink is really the "Reagan surplus" (certainly a better way to memorialize Reagan than that new federal office building in downtown Washington). The economy has essentially been growing since 1982, and the end of the Cold War made deep cuts in defense spending possible (though not prudent).

Republicans will have to agree on an attractive tax-reduction plan -- like the one Messrs. Kudlow and Moore propose in this issue -- to thwart a bi-partisan majority in favor of new spending. The green eyeshades always ask how a tax cut is going to be "financed." In this case, from a) the surplus that hardworking Americans have provided; and b) spending cuts to reduce the overall size of government.

At least one veteran Reaganite lawmaker hasn't been co-opted by the obsession with the deficit. Rep. Bill Archer (R., Tex.), Chairman of the House Ways and Means Committee, recently told the New York Times, "I'm not a conservative because I believe in a balanced budget. I'm a conservative because I believe that a smaller government with less power means greater freedom and more opportunity for the American people."

Well said. But in Surplus City, Bill Archer is likely to be lonelier than ever.