(MONEY Magazine) – In recent years, fiscal restraint and balanced budgets were perceived to be the ultimate measures of good government. The government ran a budget surplus from 1998 to 2000. Overnight, all that has changed. Now the mantra, regardless of party affiliation, seems to be: spend, spend, spend!

Within days of the attacks on the World Trade Center and the Pentagon, Congress had approved a $40 billion emergency spending bill to rebuild New York City and fight terrorism. A week later, legislators passed a $15 billion bailout for the airline industry, including $5 billion in cash and $10 billion in loan guarantees. There was little dissension among the usually antagonistic group of lawmakers.

All the fiscal advances the government has made of late have given us the flexibility to act decisively in the current crisis. In effect, the surplus is serving as a rainy-day fund-- one that we're fortunate to have right now. But as the appropriations pile up, it has become clear that the previously forecasted budget surplus of $176 billion for this fiscal year will become another victim of the disaster.

Even before the terrorist attacks, economists feared a recession. Now, a recession seems certain. As the economy weakens further, annual revenue--from things like import tariffs and income and estate taxes--could drop by $75 billion, to $2.06 trillion. At the same time, federal outlays--both mandatory and discretionary--will rise well above the $1.96 trillion initially expected by the nonpartisan Congressional Budget Office at the end of August. After the thousands of recent layoffs, federal welfare benefits, a mandatory item, will increase. And Congress has already agreed to grant President Bush an additional $18 billion in discretionary defense spending.

The total tab could move higher. Prolonged military action against terrorist networks would cost billions of dollars. Additionally, there's talk of expanding unemployment benefits, particularly in the hard-hit tourism and airline industries. "Right now there is an ongoing debate as to what are the ultimate numbers," says legislative consultant Richard May of Brownstein Hyatt & Farber. "There are lots of items on the budgetary blackboard, related directly to the tragedy of Sept. 11."

An economic stimulus package currently making the rounds in Congress will also take a big bite. No package had been approved by mid-October, but the President was urging tax cuts and additional spending initiatives worth at least $60 billion. The proposal could include Amtrak subsidies, fiscal aid to state coffers, investment tax credits and increased unemployment benefits--all designed to rev up the economy in the long run. "I would say the range of the stimulus package is $50 billion to $100 billion on top of what's already been allotted," says Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee. "But it's important that any plan be tied to long-term fiscal discipline."

That's because there are ramifications to such spending. By cutting into the surplus, the government limits its ability to pay down its debts, which were nearly $5.6 trillion at the end of fiscal 2000. Budget analyst Stanley Collender of Fleishman-Hillard says that prior to the events of Sept. 11, the U.S. was on track to pay down a good portion of its publicly held debt (61% of the total national debt) by 2011, thereby reducing annual interest expenses by between $100 billion and $200 billion. (The government paid $362 billion in interest last year.) But with spending now up in the wake of the attacks, the government once again faces a future of budget deficits.

--A.C.