[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
MID-SESSION REVIEW AND UPDATE OF THE BUDGET AND ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, SEPTEMBER 5, 2001
__________
Serial No. 107-17
__________
Printed for the use of the Committee on the Budget
Available on the Internet: http://www.access.gpo.gov/congress/house/
house04.html
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
PETER HOEKSTRA, Michigan Ranking Minority Member
Vice Chairman JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota KEN BENTSEN, Texas
VAN HILLEARY, Tennessee JIM DAVIS, Florida
MAC THORNBERRY, Texas EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia GERALD D. KLECZKA, Wisconsin
ERNIE FLETCHER, Kentucky BOB CLEMENT, Tennessee
GARY G. MILLER, California JAMES P. MORAN, Virginia
PAT TOOMEY, Pennsylvania DARLENE HOOLEY, Oregon
WES WATKINS, Oklahoma TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington CAROLYN McCARTHY, New York
JOHN T. DOOLITTLE, California DENNIS MOORE, Kansas
ROB PORTMAN, Ohio MICHAEL E. CAPUANO, Massachusetts
RAY LaHOOD, Illinois MICHAEL M. HONDA, California
KAY GRANGER, Texas JOSEPH M. HOEFFEL III,
EDWARD SCHROCK, Virginia Pennsylvania
JOHN CULBERSON, Texas RUSH D. HOLT, New Jersey
HENRY E. BROWN, Jr., South Carolina JIM MATHESON, Utah
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, September 5, 2001................ 1
Statement of:
Hon. Mitchell E. Daniels, Jr., Director, Office of Management
and Budget................................................. 6
Dan L. Crippen, Director, Congressional Budget Office........ 75
Prepared statement of:...........................................
Mr. Daniels.................................................. 8
Hon. Ken Bentsen, a Representative in Congress from the State
of Texas................................................... 49
Mr. Crippen.................................................. 78
MID-SESSION REVIEW AND UPDATE OF THE BUDGET AND ECONOMIC OUTLOOK
----------
WEDNESDAY, SEPTEMBER 5, 2001
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10 a.m. in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Sununu, Bass,
Gutknecht, Hilleary, Thornberry, Hastings, Granger, Schrock,
Culberson, Brown, Putnam, Spratt, McDermott, Bentsen, Clayton,
Clement, Moran, McCarthy, Capuano, Honda, and Matheson.
Chairman Nussle. Budget Committee will come to order.
I appreciate all of the members coming back slightly early
from the August recess to participate in this hearing today.
This is a full committee hearing on the Mid-Session Review
and Update on the Budget and Economic Outlook.
We have two witnesses before our committee today, the
Honorable Mitch Daniels, the Director of the Office of
Management and Budget, and Daniel L. Crippen, the Director of
the Congressional Budget Office.
Before I begin, let me make a couple of opening comments,
and I would ask unanimous consent that all members be allowed
to put in an opening statement, written statement, for the
record at this point. Without objection so ordered.
Let me start by saying thank you. When we started this
year, Mr. Spratt and I decided that we wanted to make this
committee a full-time committee. There has been times in the
past when the Budget Committee wrote the budget and went
through that whole budget process and then the focus seemed to
change, and we didn't always follow up with some of the
important economic information that occurs throughout the
year--as people know--and to review that and to have an ongoing
process of the budget throughout the entire fiscal year. We
made a commitment to ourselves this year, that we were going to
change that, which is easy for members to do, but not quite so
easy for the staff.
While we were out in our districts working, some of us
having a needed break from Congress, I took my kids to--in fact
my daughter Sarah is with me today, and she is helping me out
as an assistant. I took my kids to Springfield, Illinois, to
learn a little bit about Abraham Lincoln, that is where I used
my $300 check. You got yours, Henry. Spend it. Buy American,
will you, please? Stimulate that economy.
But while we were out doing those kind of things, the
Budget Committee staff, Republican side and Democratic side,
were very busy working, and I want to thank them for all of
their hard work.
You see here in the committee room a number of changes. We
have a new audio-visual presentation system that we will be
making use of today just as a demonstration, but for members'
purposes this will be available for use throughout the year.
The staff were busy analyzing the data that was coming in
from the Office of Management and Budget and the Congressional
Budget Office. They do a tremendous job while we are not here
to prepare us so that when we come back from a work period,
such as we were on, we can hit the ground running. I want to
acknowledge Rich Meade and Tom Kahn and all of the folks at the
Budget Committee, on both sides, who do a tremendous job for us
and thank them on behalf of all of the members.
I would also like to thank the staffs of the Congressional
Budget Office and the Office of Management and Budget for their
hard work in helping with all of this information. We are going
to have a lot of discussion today, some taking issue with some
of the information that they are going to submit. That is fine.
These are forecasts. That is in part what we are supposed to
do. But that doesn't mean that we don't acknowledge and thank
their hard work that they do in putting this hard information
together.
I would also like to just mention that during this past
week, the staff director for the Democratic side lost his mom,
and I just wanted to tell him on behalf of the entire
committee, that the entire Kahn family is in our thoughts and
prayers--that is not easy to have to go through.
Director Daniels went through that this year as well, and
while we are running through all of the politics, we have to
remember we are all human beings and we have families and it is
not easy to go through that.
You are in our thoughts and prayers, and we appreciate that
you would be back here working with us already today.
Now, what we are going to review today is similar to a
weather report. At least that is the way I like to look at it.
We have got some weather forecasters that try to do a good job
in predicting the future and letting us know exactly what the
weather is going to look like: Sunny, partly cloudy, stormy.
I related when I came back that my sister had gotten
married just a couple of weeks ago, and we hung on every word
for the weather report that was coming up for that Saturday
because she had an outdoor wedding. Well, it said it was going
to be partly cloudy, and it rained out the wedding, and so we
had to go inside. And then there was a power outage as a result
of that. So it was not only a storm, but it was a pretty big
storm. Even though we make forecasts, or we try to make those
forecasts, those forecasts are not always right.
These are projections that the Congressional Budget Office
has put forward, that the Office of Management and Budget has
put forward. What we know is--if we know anything--they are not
completely accurate, they are forecasts. They do the best job
they can in putting forth good information, and we try and base
our decisions on them, as we did in January and again in May.
These are forecasts and you can't bet the entire farm on them.
But you do have to make decisions based on them.
What we do know is that the budget is tight. That is
exactly where we want it to be, and that is exactly where we
need it to be because of the softening economy.
We have already heard, because of the tight budget, a lot
of hand wringing, and lot of whining. In fact, the ``D'' word
has come back into the lexicon of politics; the word
``deficit.''
The observation I would make is that the only deficit that
I see is the deficit between what people want to spend and what
we are going to spend under this budget. We need to stick to
this budget. We need to make sure that we enforce this budget,
and if we do we will be just fine.
Let's review a few things that happened this year. In front
of this committee in January, the Congressional Budget Office
came forward and reported three very important concerns. Number
one, they said that the economy was softening. They built into
their 10-year numbers, in fact, the word ``recession,'' which
has not yet occurred according to most economists, but they
built that into their numbers.
Second, they said that Washington was running the largest
surplus in American history, and that was a concern. And third,
that Federal spending was growing at twice the rate of
inflation. Up until that point in time, $100 billion were added
to the budget over the last 4 years alone.
We had been warning President Clinton about taxes being too
high and about spending being too excessive, and in part that
is why we built the budget that we did this year.
Before this budget panel we had heard from Director
Greenspan. As an example, Chairman Greenspan warned us that the
economy would soften, and it has done so. He said large
surpluses are as dangerous as large deficits. So we had four
budget goals that we put into this budget.
Number one, provide tax relief now. In a softening economy,
the family budget is as important, if not more important, than
the Federal budget. We agreed to take that into consideration.
In fact, our friends on the other side offered to help us with
regard to that and suggested that we do the rebate, and some
suggested we do it even faster in 2001 than we did.
But the fact of the matter is that we got $41 billion that
is heading out of town into the pockets of the American people
in order to deal with the economy and in order to get that
surplus into the pockets of families.
The second goal of the budget beyond providing tax relief
was to pay off the debt in the next 10 years, and in fact we
built that into this budget.
Third was to protect every penny of Social Security and
Medicare.
Number four was to restrain spending. These were the four
budget goals.
I believe that is what we have accomplished based on the
review that we have seen thus far. Number one, we have the
second largest budget surplus in history. And if you view the
chart that we have on our new fancy dancy screens, you can see
that from 1995, when we were running actual unified budget
deficits through today and beyond. We are running, not only as
can you see there for 2001 the second largest surplus in
history, but surpluses as far as the eye can see.
Secondly, we provided tax relief to the tune of $41
billion, and we got that out the door.
Third, we have provided already almost half a trillion
dollars of debt repayment; $479 billion of debt has already
been paid off. That is, if we went home today and did nothing
more, already $479 billion of the publicly-held debt has been
paid off, and that was the unthinkable as a goal or an
achievement just 10 years ago when I came to Congress.
Next, not one penny of Social Security or Medicare is going
to be used for anything except Social Security and Medicare. In
fact, the focus now I believe should turn toward modernization.
The worst enemy of Medicare is Medicare itself. If we don't
modernize Medicare--we heard at a GAO report that was right
before us just before we went on our district work period--it
will completely and totally engulf the budget. In fact, we need
to modernize Medicare and we need to consider some
modernization for Social Security from the Pay-As-You-Go
system, that we have right now into something that can in fact
achieve retirement security for generations to come.
So finally, the question is spending, and this is the
observation that I make on spending.
If you look at where we have wanted to be over the last 4
years and where we have ended up, we have got a problem. The
spending caps suggested a reasonable growth of spending, one
that has not been achieved during those 5 years, those last 4
years. As a matter of fact--as you can see there--this year
alone, in 2001, we have added about $100 billion of new
spending over what was projected--over what was budgeted
according to our budget agreement.
Now, you can't sustain that. In fact, you are not going to
pay off the debt, you can't protect Social Security, you can't
protect anything if in fact you continue to grow spending at
that kind of a rate.
When we passed the budget for this year, we decided that
the rate of growth needed to slow down to the rate of inflation
instead of twice the rate of inflation. So growth and spending
will continue, but it will grow at a much slower rate. All of
this fits within a budget that pays off the debt in the next 10
years, that provided the kind of tax relief that we have
provided that can help jump-start the economy, and can make
sure that we protect Social Security and can modernize Medicare
into the future.
So while there will continue to be hand wringing, in fact
not only hand wringing, it is even more ostentatious than that,
Senate Democrats wield power, feast on pork. Yesterday they had
a hearing over in the Senate saying that the budget was in
trouble. The next day the headlines confirmed that--but behind
the scenes the Senators were cutting up the pie and already
adding to it. So don't wring your hands about the budget on the
one hand and then add to spending on the other.
Spending is the problem here. We have seen it time and time
again. We saw it in 1981, when there was tax relief in a
sagging economy. Spending went up, and we ran deficits. We can
go down that road again. Spending can cause it, but we have to
control it if we want to stick within the budget that we have.
Today we are going to hear from the two experts in the
budget. Both have been before the committee before and we
appreciate the fact that they would come here and share their
expertise.
With that, I would like to turn to my friend and colleague
Mr. Spratt who just became a grandfather. Again.
Mr. Spratt. Again.
Chairman Nussle. We congratulate you on that, and welcome
back from the break.
Mr. Spratt. We are glad to have Sarah here today helping us
out.
Mr. Chairman, we come back to a very different situation
than the one we left just a few weeks before. When we left we
were talking about Medicare prescription drugs. We were talking
about a plus-up in the defense bill of $18.4 billion. We were
talking about a plus-up in education.
The Ag Committee has marked up a new farm bill that adds
about $74 billion to the farm program over the next 5 years.
What we have got now is a situation where none of this is
easily possible.
Director Daniels, if CBO is correct in its prognosis
forecasts and analysis of the budget over the next 10 years and
the economy, then we are in a situation where the Medicare
surplus--which we believe is a legitimate surplus--and the
trust fund surplus, will be invaded for the next 4 fiscal
years, including the current fiscal year.
In addition, Social Security, which you acknowledge should
be held inviolate, will be invaded this year and again in 2003
and again in the year 2004.
The key thing to understand is that the CBO baseline
factors in only inflation on top of existing spending; it is
running in place with respect to existing programs.
If we want to do the tax cuts that Mr. Daniels and
President Bush lay out in the appendices of this book, the
unfinished agenda with respect to tax reduction, which include
repealing the sunsets in the tax bill just passed, the cost and
revenues will be $314 billion. That is using their appendix,
their number.
If we want to do the Medicare projection drug proposal
which the administration is now advancing, they are proposing
$190 billion even though the chairman of the Senate Finance
Committee, Senator Grassley, said when that was proposed it was
inadequate. $300 billion is the minimum necessary, particularly
if there is going to be catastrophic coverage. If we put it in
at $190 billion, and if we just put in the $18.4 billion in
defense and make a few final minor adjustments, you can see
what happens to the bottom line. It goes red. With respect to
Medicare and Social Security, we have got an invasion of
Medicare and Social Security through 2005, Medicare through
2008.
So, none of the things that we were talking about on the
agenda that we thought were doable in the budget we had in
January are doable now. There may be a radical reversal of our
situation between July and September, particularly if CBO is
correct, because CBO only assumes that inflation will be added
and anything else has to come on top of that.
So we find ourselves really, Mr. Daniels, I believe, with
an inoperative budget. All of those items were anticipated as
part of this year's budget and they now seem to be impossible.
The Ag Committee was told that they would have $70 billion to
$75 billion to add to a new farm bill. That is not included in
your budget. It is not doable under the CBO projection or your
projection.
The Education Committee was told that there would be more
money for education. Mr. Bush, when he delivered his State of
the Union message, said, ``When you get my budget, you can look
at the accounts and you will see that the account that is
increased by the most is the account for education.'' .
It too will be squeezed. In both the CBO budget and your
budget, there is barely anything there for a significant
increment in education. So we have got a very, very different
situation from the situation we left just a few months ago. It
reminds us of how fickle these forecasts can be. I don't think
they are quite as unpredictable as a weather forecast, Mr.
Chairman, but I do think it counsels what we have been trying
to counsel since January; that is, caution and relying--
overrelying on these particular forecasts, having a substantial
margin of error built into any budget.
We appreciate your coming. We appreciate Dr. Crippen
coming. We look forward to the answers to our questions and we
believe that we have a serious problem on our hands. Over the
break, on three different occasions, the Democratic leadership
has written the President, and we received back, Mr. Daniels,
an answer back today, responding to concerns that we raised in
our letter.
You indicated that you wanted to avoid partisanship, and we
do too. This is too serious a matter to get into partisanship.
We have strongly held beliefs on both sides, but we need to
tackle this problem with real earnest and resolution.
We need to sit down and deal with it. We have got to get
past denial and recognize that we have got a problem. This is
not simply business as usual; we have got a problem. If the
economy gets any worse, then we have got an even bigger
problem. We don't want it to get worse. We don't want to do
anything that is counter-cyclical or counter to the best
interests of the economy in anything that we do, and therefore
what we do has to be deliberately chosen and we are ready to
engage in that respect.
Chairman Nussle. Thank you. Director Daniels, welcome back
to the Budget Committee. We will accept your testimony in the
record as it is written, and you may summarize as you see fit.
Welcome.
STATEMENT OF THE HON. MITCHELL E. DANIELS, JR., DIRECTOR,
OFFICE OF MANAGEMENT AND BUDGET
Mr. Daniels. Thank you, Mr. Chairman.
You want to swear me in, or do you take my word for it this
morning?
Chairman Nussle. I'll take your word for it.
Mr. Daniels. Mr. Chairman, I submitted for the record the
summary of the mid-session review that we at OMB issued during
the August recess, and let me make just a few very brief
comments before welcoming the committee's questions.
I think the format of your hearing is well chosen and
important today, because now the committee has the benefit of
two reports, independently arrived at about your fiscal
condition and our fiscal future, and I would just draw the
committee's attention to the remarkable coincidence between
them.
There probably has never been two reports, one from OMB and
one from the Congressional Budget Office, more similar than
these that my colleague Dan Crippen made much reference to in
his report and in his Senate testimony yesterday. I will just
cite a few examples that struck me as I read through both.
The 2002 surplus forecasts were equivalent within a third
of 1 percent. The outstanding debt at the end of the fiscal
year was equivalent within one-fifth of 1 percent. The 10-year
outlays, mandatory and discretionary and then total, were all
equal within less than 1 percent; likewise for receipts.
The Social Security surplus--just to pick another stunning
example--over 10 years the forecasts are equal within one-tenth
of 1 percent. And if you look behind the projections to the
assumptions on which they are based, they are in many cases,
inflation, long-term GDP and many other assumptions, not close
but identical.
This doesn't make these two forecasts right any more than
two of your local channels' weather forecasts are necessarily
right just because they are the same. But I do think it gives
the committee some confidence that we start from numbers of
integrity and numbers that have all of the accuracy that is
possible, even looking 1 year ahead, let alone 10.
From these two virtually identical sets of data I would
single out just one that I think is of special importance and
relevance to the conversation this morning.
Maybe the single most important number in any such
projection is receipts for next year as we move through the
appropriations process that we hope will honor and give
expression to the budget resolution that the members of this
committee helped craft.
How much money will the Federal Government have to work
with next year? That number is identical within $1 billion out
of 2.135 trillion, the equivalent of a dime in 210-plus in
one's pocket.
I would submit that the committee can have some confidence
that we have--from the reinforcing nature of those two
records--some good and I think cautious idea about the
resources with which the Congress can work next year.
What conclusions then comes from those two essentially
identical reports? They are obvious, and the earlier
presentation made reference to some of them. Both confirm we
are dealing with the second biggest surplus in American history
and that it is going to get bigger in 2002 and in future years.
They confirm that the budget as proposed by the President
and the budget resolution that now sits before the Congress, if
not exceeded, will allow the funding of our Nation's
priorities--defense, education, debt reduction--all consistent
with the full protection of the Social Security surplus for
debt reduction.
So to me, the meaning of the two reports is clear. We
should proceed under the resolution, under the framework that
the two budget committees constructed to an orderly set of
appropriations bills for this fall that will govern the
Nation's spending throughout 2002.
Both reports confirm that the budget of the United States
and the fiscal condition of the Federal Government is in
excellent shape. It is the economy right now that is not.
To the end of improving it, to the extent insofar as
government policy can affect a $10 trillion economy, I
recommend to the committee the balanced policy the President
proposed. I think the budget resolution captures: A balanced
policy that includes regular debt reduction through record
surpluses, near-term stimulus through the bipartisanship tax
reductions of 2001, support for sustained growth through the
future rate reductions to come. All of this ensured by spending
restraint, moderating the growth of spending over the year as
we are here to talk about it this morning and the years ahead.
So thank you, Mr. Chairman and Congressman Spratt, for the
opportunity to be here, and I will submit the mid-session
review with those brief comments.
[The information referred to follows:]
Prepared Statement of Hon. Mitchell E. Daniels, Jr., Director, Office
of Management and Budget
summary
Despite a nearly stagnant economy, the government's finances are
remarkably sound. The budget's enormous surpluses have allowed us to
deliver significant tax relief to working Americans, providing badly
needed fiscal stimulus to counteract the year-long slowdown in the
economy. Even while weathering the slowdown and taking action on tax
relief, we continue to take in huge surplus revenues, and to use the
extra receipts to steadily reduce the nation's outstanding debt.
The current estimate for the 2001 surplus is $158 billion, the
second highest in history. This is lower than the $281 billion surplus
estimated in the April Budget. The lower surplus is due largely to the
year-long economic slowdown and the decision to incorporate immediate
fiscal stimulus, in the Economic Growth and Tax Relief Reconciliation
Act. The 2002 surplus projection is $173 billion, compared to April's
$231 billion estimate. Over the 10 years from 2002 to 2011, the surplus
totals $3,113 billion, down from the $3,433 billion estimated in April.
Both this year and next year, the overall budget surpluses are
equal to the surpluses generated by Social Security payroll taxes (and
interest earnings). The President and Congress are both committed to
preserving the Social Security surplus for debt reduction. As a result,
the additional surplus available for new spending or further tax relief
in the next few years is limited. In order to fully reserve the Social
Security surplus for debt reduction, any further initiatives beyond
those included in this review will also have to be accompanied by
offsets in other areas.
Tax Relief for Working Americans
From the Administration's first day in office, President Bush
worked to deliver on his campaign promise of meaningful tax relief.
This package, which was originally crafted to ensure long-term economic
growth and to return excess surplus funds to taxpayers, became even
more urgent as the extent of the economic slowdown became apparent.
Congress moved with exceptional speed in response to the President's
plan. On June 7, 2001 the President signed the Economic Growth and Tax
Relief Reconciliation Act of 2001.
This historic measure of tax relief reduces the bottom marginal tax
rate from 15 percent to 10 percent, delivering savings to every income
taxpayer, and reduces the top rate to a maximum of 35 percent. It also
doubles the child tax credit from $500 to $1,000, enhances incentives
for investment in education, eliminates the marriage penalty, phases
out the death tax, and encourages retirement saving.
Of immediate importance, the tax measure includes a rebate
provision that puts $38 billion in savings from the new 10 percent
bracket quickly and directly back in the taxpayers' hands. The rebate
checks, which taxpayers are receiving in the months of July, August,
and September, could not have come at a better time to invigorate
today's shaky economy. Economic growth has slowed steadily for over a
year to a point that it has nearly stopped. The rebate checks will help
prevent further deterioration by supporting consumer spending.
Reserving the Social Security Surplus for Debt Reduction
A strong bipartisan consensus has arisen in this country, and in
the Congress, to preserve very large surpluses as a threshold condition
of public finance. Both parties and both the Legislative and Executive
Branches, in this Administration and the previous one, have concurred
in maintaining a surplus at least the size of the Social Security
surplus.
Some would set the minimum surplus level even higher, using as a
target the artificial overage in the Medicare Part A trust fund. This
is a relatively modest difference, amounting to a question of whether
the minimum surplus should be more like 8.0 percent or 9.5 percent of
total receipts. It is also a difference that is completely irrelevant
either to the level of future Medicare benefits or to the health of the
trust fund financing those benefits, which will be exactly the same
size regardless of the level of the overall budget surplus. (For
further discussion, see the Medicare section of this document).
There are several reasons that the Social Security surplus makes a
good surplus target. First, unlike Medicare, which costs much more than
it takes in, Social Security is in true surplus for the moment. Second,
the Administration and a majority of Americans hope for reform that
converts a portion of Social Security receipts from mere IOUs to real
assets, owned by the worker who paid those taxes. At that point, the
notion of a Social Security ``lockbox'' will take on real, literal
meaning.
The final reason for choosing this surplus target is that it
permits the Treasury to achieve-with some room to spare-the maximum
amount of debt retirement possible. Over the next 10 years, Social
Security will take in excess funds of $2.5 trillion, whereas maximum
debt retireable without incurring unjustifiable premium expenses is
between $2.0 trillion and $2.2 trillion. This year, the Treasury will
eliminate well over $100 billion of existing debt, marking the fourth
year in a row of such reductions. Further, such reductions are
scheduled for each succeeding year. This is an important accomplishment
for which both political parties, both branches of government, and both
the current and prior administrations deserve credit.
The update of the budget outlook in this Mid-Session Review
foresees continued large surpluses above the size of the Social
Security surplus for all years in the budget horizon. The President is
determined to preserve surpluses at this level, and to continue using
these funds for the steady reduction of outstanding publicly held debt.
Changes in the Economic and Budget Outlook Since April
Since the President submitted his budget in April, the extent of
the economic slowdown has become more evident. In retrospect, its
length and depth are clear: the stock market began to fall in March,
2000; manufacturing employment in August, 2000; and GDP growth in the
third quarter of 2000. Overall, the economy has grown at only a 1.3
percent rate since the second quarter of last year, including an
estimated 0.7 percent annual growth rate in the most recently completed
quarter. As discussed in a subsequent section of this review, the
Administration-and other forecasters-believe that recent interest rate
cuts by the Federal Reserve, coupled with the fiscal stimulus from the
Economic Growth and Tax Relief Reconciliation Act, will spur the
economy back to solid, sustainable growth by next year.
TABLE 1.--CHANGE IN BUDGET POLICY SURPLUSES
[In billions of dollars]
------------------------------------------------------------------------
2001 2002 12002-2011
------------------------------------------------------------------------
April budget estimate of total 281 231 3,433
surplus..........................
Social Security surplus....... 159 175 2,583
Non-Social Security surplus... 122 56 850
Change since April:
Tax rebates and other enacted -40 -40 25
tax changes..................
Corporate tax timing shift.... -28 28 28
Medicare Reform policy........ 3 11 -37
Tax proposals................. ......... 3 43
Defense requirements.......... -4 -11 -198
Farm assistance and other -5 -1 1
policy.......................
Economic and technical -46 -44 -46
adjustments..................
Related debt service.......... -1 -6 -136
-------------------------------------
Total, change............... -123 -59 -320
Current policy surplus............ 158 173 3,113
Social Security surplus\1\.... 157 171 2,538
Non-Social Security surplus\1\ 1 575
------------------------------------------------------------------------
\1\ The 2001 estimate is adjusted to assign $5.6 billion in prior year
receipts to their correct year. See text box on page 9 and Appendix A
on page 49.
Economic weakness, coupled with the tax rebate action that is
designed to counteract that weakness, results in a lower surplus
outlook this year and next year. In the current year, economic
revisions and technical factors reduce the surplus $46 billion from the
April estimate, a difference of about 2 percent of receipts. Tax
rebates and related provisions account for $40 billion, a legislated
shift in timing of corporation income tax receipts reduces the surplus
another $28 billion, and supplemental spending for meeting national
defense and other needs uses $5 billion. This combination of factors
and a technical adjustment described below still leaves a very small
on-budget surplus for 2001.
In 2002, economic and technical revisions are slightly smaller than
in 2001. The effect of the tax relief provisions stays level at about
$40 billion, while the shift of corporate receipts is recaptured. The
net result is a small on-budget surplus.
One factor artificially reducing the 2001 on-budget surplus from
the April estimate is an upward revision to the Social Security trust
fund due to reestimates of payroll taxes paid in previous years. As
explained in the accompanying box, this practice has the effect of
inflating the current Social Security surplus by adding credits during
2001 for taxes actually paid and collected in 2000, 1999, and earlier
years. This reduces the apparent 2001 on-budget surplus by $6 billion.
Correcting this distortion by assigning the extra revenues to their
appropriate year makes clear that there is a small on-budget surplus in
2001. OMB will review with the Department of the Treasury the
possibility of prospective changes to record the adjustments in the
correct years.
Over the full 10-year budget horizon, the surplus outlook is
relatively unchanged from April. The unified surplus total for 2002
through 2011 is now estimated at $3,113 billion, down from the $3,433
billion estimated in the April Budget. The largest factor in the
reduction is incorporating the outyear implications of the
Administration's $18.4 billion defense amendment for 2002. This is the
first installment, totaling $209 billion, of investment in restoring
our national defense capabilities after years of neglect. The tax bill,
because it was scaled back during Congressional consideration,
increases the surplus slightly relative to the April Budget (which
assumed the President's proposals), while the 10-year economic and
technical adjustments reduce the surplus by $46 billion.
This update to the President's budget increases the resources set
aside for Medicare modernization, and an integrated prescription drug
benefit, to $190 billion over the period 2004 to 2011. This new
estimate is consistent with the Framework to Strengthen Medicare that
the President announced on July 12th and is $37 billion more than was
allocated in total to additional Medicare spending in the April Budget
submission over 10 years.
The President's April Budget proposed a program to help low income
seniors and those with particularly high prescription drug costs get
immediate assistance while Congress considered comprehensive reform.
However, with the President's support, a consensus is now building in
Congress which focuses on comprehensive Medicare modernization. The
President's Framework to Strengthen Medicare and his budget reflect
this emerging agreement, setting aside substantial resources to meet
this objective which could be implemented as soon as 2004. The
Administration is committed to continuing to work with the Congress on
enacting legislation to strengthen Medicare consistent with the
President's framework.
Although the Administration is committed to enacting comprehensive
Medicare legislation soon, the President believes we must help seniors
get the prescription drugs they need at an affordable price now. That
is why the Administration has begun the voluntary Medicare Prescription
Drug Discount Card program. This program will allow seniors access to
the same kinds of drug discounts that other Americans with good private
health insurance currently receive. The President believes that
seniors, who face the heaviest burden for prescription drug costs,
should not also have to pay the highest retail prices for drugs. The
discount card is not a substitute for prescription drug coverage in a
reformed Medicare system, but it will bring important relief to seniors
who need it beginning next year.
Of the current 10-year total surplus, $2,538 billion is from the
Social Security trust fund, down slightly from $2,583 billion in April.
As noted above, the Administration is devoting as much of this amount
as possible to the reduction of publicly held debt. After reserving the
Social Security surplus, the remaining 10-year surplus is $575 billion,
down from $850 billion in April,
with most of this difference attributed to the $198 billion
increase in spending on national defense and the additional commitment
to Medicare.
The Best Course Forward
The government's finances are extremely sound. Only persistent,
long-term economic weakness can threaten this position. Hence,
promoting a return to vigorous growth must be our common objective. The
best course forward is clear: first, we must contain spending over the
coming year.
Last year's appropriations, agreed to 8 months ago by the last
Congress and the last President, contained the largest oneyear spending
increase in history, about $50 billion over 2000. Obviously, a smaller
surge in spending last year would have ensured a larger surplus today.
The spending growth rates of 1999 through 2001 cannot be repeated if we
are to preserve the on-budget surpluses that we have all worked so hard
to create. Congress must limit this year's appropriations to the level
of the 2002 Budget Resolution, including the defense amendment recently
proposed by the President.
Second, Congress and the President must work together to continue
restraining total spending in the next few years. Businesses, states,
cities, and families do not hesitate to limit their spending when
revenues diminish. The fifty state governments recently reported that
collectively they are lowering spending growth from 8 percent last year
to a more sustainable 3-1/2 percent in 2002. Spending in the Federal
domestic agencies exploded during the last 3 years, including growth of
45 percent at the Department of Health and Human Services and 27
percent at Department of Transportation. These departments can benefit
from a period of digestion without great growth beyond these expanded
levels.
The Administration is prepared where necessary to extend the
principle of restraint to its own high priority initiatives. The
Administration continues to propose several tax initiatives from the
April Budget, with the effective dates delayed 2 years until January 1,
2004. In addition, the Administration proposes to fund other
initiatives that can not be delayed within the additional discretionary
resources provided in the budget resolution, and will work with
Congress to revise these proposals as necessary to ensure their
enactment.
There are a number of other items that may place demands on the
budget. Consistent with the requirements of the Budget Enforcement Act,
action on these or other items with additional costs to the budget must
be accompanied by provisions to offset the costs to ensure that no
automatic reductions are triggered. Alternatively additional
requirements could be funded within the discretionary levels agreed to
in the Congressional Budget Resolution including the defense amendment
recently proposed by the President. Living within these constraints
will ensure that the Social Security surplus is protected and can be
fully reserved for debt reduction. Examples of these further
requirements include:
Farm bill. The costs of the farm bill now moving through
Congress, which restructures farm programs through the next several
years, will have to be offset where necessary to maintain on-budget
surplus.
Tax provisions. Several long-standing tax credits and
other provisions expire at the end of 2001. The Administration supports
the extension of these provisions in a fiscally responsible manner and
looks forward to working with Congress to achieve that goal. These
expiring provisions include Archer Medical Savings Accounts, the work
opportunity tax credit, the welfare-to-work tax credit, provisions
dealing with the minimum tax for individuals, and the treatment of
active financial services income of foreign subsidiaries.
Response to natural disasters. A high level of disaster
related needs could require spending beyond the amounts assumed.
Railroad Retirement Investment Trust. The House-passed
Railroad Retirement and Survivors' Improvement Act (HR 1140) would
authorize a new Federal trust fund to purchase stocks and bonds. The
purchases could amount to $15 billion. Under long-standing budget
scoring rules, these purchases would be scored as outlays, the same as
purchases of stocks, bonds, and any other asset by all agencies within
the Federal Government. However, section 105 of the House-passed bill
directs OMB and CBO not to score outlays for these purchases.
Regardless of how the purchases are scored, Treasury would have to
pay for them in the same way-by using some of the budget surplus that
otherwise would be used to redeem debt held by the public. If all of
the purchases were made in 2002, they would exceed the non-Social
Security surplus by $14 billion. Treasury would have to use $14 billion
of the surplus generated by Social Security to finance the remainder.
This Mid-Session Review presumes a policy of fiscal restraint, but
restraint does not mean paralysis. The President's management
initiatives and the on-going review of programs at all levels will
result in our ability to do more with the same or similar resources. In
government, as in any business or family, the burden of proof must be
placed on spending proponents to demonstrate the ongoing value received
for whatever money is being spent today. Any healthy organization
constantly searches for ways to redeploy money from less efficient to
more efficient purposes, and it is past time for the Federal Government
to adopt this outlook. We expect that improvements in managing
resources that are already underway will pay greater dividends than the
exclusive focus on incremental new resources. Excellence is defined by
continuing to raise the bar of performance and achievement.
Table 2.--CURRENT SURPLUS TOTALS
[In billions of dollars]
------------------------------------------------------------------------
2001 2002
------------------------------------------------------------------------
Overall Surplus............................... 158 173
Social Security\1\........................ 157 171
Postal Service............................ -1 -3
On-Budget\1\ 2 4
-------------------------
1Non-Social Security.................... 1 1
Examples of potential further requirements:
Extend expiring tax provisions
Farm Bill
Funding for natural disasters
Railroad Retirement Investment
Trust
------------------------------------------------------------------------
\1\ The 2001 estimate is adjusted to assign $5.6 billion in prior year
receipts to their correct year. See text box on page 9 and Appendix A
on page 49.
TABLE 3.--APRIL AND MID-SESSION BUDGET TOTALS
[In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-2006 2002-2011
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
April Budget:
Revenues..................................... 2,137 2,192 2,258 2,339 2,438 2,529 2,643 2,771 2,910 3,058 3,233 11,755 26,370
Outlays...................................... 1,856 1,961 2,016 2,077 2,169 2,224 2,303 2,398 2,490 2,593 2,706 10,446 22,938
Surplus...................................... 281 231 242 262 269 305 340 373 420 465 526 1,309 3,433
Social Security.............................. 159 175 193 210 235 251 270 286 301 322 341 1,063 2,583
Non-Social Security.......................... 122 56 49 52 34 54 70 87 118 143 186 246 850
Mid-Session Review:.
Revenues..................................... 2,013 2,135 2,220 2,328 2,463 2,553 2,668 2,797 2,941 3,095 3,245 11,698 26,444
Outlays...................................... 1,855 1,962 2,025 2,111 2,208 2,272 2,354 2,447 2,543 2,648 2,761 10,578 23,331
Surplus...................................... 158 173 195 217 254 281 314 350 398 447 484 1,119 3,113
Social Security\1\........................... 157 171 192 211 236 249 266 280 293 311 328 1,059 2,538
Non-Social Security\1\....................... 1 1 2 6 19 32 47 70 105 136 157 60 575
Change:
Revenues..................................... -124 -57 -38 -11 25 24 24 27 31 36 13 -58 74
Outlays...................................... -1 2 9 34 40 48 51 49 52 54 55 132 393
Surplus...................................... -123 -59 -47 -45 -15 -24 -26 -22 -21 -18 -42 -190 -320
Social Security.............................. -2 -4 (*) 1 (*) -1 -3 -6 -8 -11 -13 -4 -45
Non-Social Security.......................... -121 -55 -47 -46 -15 -23 -23 -17 -13 -7 -29 -186 -275
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* = $500 million or less.
\1\ The 2001 estimate is adjusted to assign $5.6 billion in prior year receipts to their correct year. See text box on page 9 and Appendix A on page 49.
accurate accounting for social security
The President is committed to reserving the Social Security surplus
for debt reduction and Social Security reform. It is evident that there
is a widespread, bipartisan consensus that this is the right goal for
fiscal policy this year and in the years ahead.
Current estimates indicate the total budget surplus will be $158
billion in 2001, or about $1 billion more than the Social Security
surplus.
2001 SURPLUS ESTIMATES
[In billions of dollars]
Total Budget Surplus.............................................. 158
Social Security Surplus........................................... 157
______
Non-Social Security Surplus....................................... 1
On-budget Surplus................................................. 2
Postal Service Loss (off-budget).................................. -1
Non-Social Security Surplus....................................... 1
Given the heightened status, real and symbolic, of the Social
Security surplus, it is important to measure it accurately. Current
budget practices potentially confuse that measurement in two important
ways.
First, the shorthand approach of using the off-budget surplus as a
proxy for the Social Security surplus combines Social Security
transactions with those of the Postal Service, the only other ``off-
budget'' program. The Postal Service is supposed to break even at a
minimum, and in most past years it did. But in 2001 it is estimated to
lose approximately $1 billion, so the true Social Security surplus is
larger than the off-budget figure by that amount.
Second, a large correction to prior year estimates of Social
Security payroll tax collections will be booked in 2001, crediting the
trust fund balances with an additional $5.6 billion. This correction
reflects the fact that the Social Security surplus was larger than
previously thought in 1998, 1999, and in 2000. (There is a lag of a
year or more before the necessary information is available to determine
exactly what portion of tax proceeds stemmed from Social Security
payroll taxes). Counting this revenue as though it had been paid in
2001 overstates the Social Security surplus for this year.
Precise accuracy in determining the Social Security surplus in any
year requires comparing revenue to actual expenditures.\1\ In 2001, the
excess of Social Security revenues over expenditures is $157 billion.
---------------------------------------------------------------------------
\1\ This correction has been made in this report for the sake of
accuracy. Other official publications may use the historical method and
therefore report slightly different figures. OMB will review with the
Department of the Treasury the possibility of prospective changes to
record the adjustments in the correct years.
---------------------------------------------------------------------------
summary tables
Table 8.--ESTIMATED SPENDING FROM 2002 BALANCES OF BUDGET AUTHORITY:
DISCRETIONARY PROGRAMS\1\
[In billions of dollars]
------------------------------------------------------------------------
Total
------------------------------------------------------------------------
Total balances, end of 2002.................................. 767.1
Spending from 2002 balances:
2003..................................................... 288.7
2004..................................................... 161.8
2005..................................................... 100.6
2006..................................................... 68.9
Expiring balances, 2003 through 2006......................... .........
Unexpended balances at the end of 2006....................... 147.1
------------------------------------------------------------------------
\1\ This table is required by section 221(b) of the Legislative Re-
organization Act of 1970.
TABLE 9.--OUTLAYS FOR MANDATORY PROGRAMS UNDER CURRENT LAW\1\
[In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimate
2000 -------------------------------------------------------------------------------------------------------------
Actual 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Human resources programs:
Education, training, 10.3 9.0 14.5 15.0 15.5 16.0 17.0 17.8 18.6 19.6 20.7 21.8
employment and social
services...................
Health...................... 124.5 140.3 152.6 170.3 185.4 201.0 217.5 235.7 255.4 276.7 300.7 324.4
Medicare.................... 194.1 214.2 224.3 235.8 248.1 267.4 276.4 297.0 315.9 336.3 357.8 387.0
Income security............. 206.5 220.0 239.7 248.2 257.1 268.5 278.1 284.5 296.4 306.0 317.8 333.9
Social security............. 406.0 429.9 452.5 474.4 497.6 522.9 550.3 580.4 613.6 651.5 693.5 738.4
Veterans' benefits and 26.3 22.8 27.9 29.9 31.5 35.7 34.3 33.3 36.7 38.7 39.8 40.8
services...................
-----------------------------------------------------------------------------------------------------------------------
Subtotal, human resources 967.8 1,036.1 1,111.5 1,173.6 1,235.1 1,311.5 1,373.5 1,448.7 1,536.7 1,628.8 1,730.3 1,846.3
programs.................
Other mandatory programs:
International affairs....... -4.1 -6.3 -3.3 -3.2 -3.3 -3.2 -3.2 -3.1 -3.0 -2.9 -2.9 -2.9
Energy...................... -4.0 -3.3 -3.4 -3.2 -3.7 -3.6 -3.6 -3.5 -2.7 -2.4 -2.3 -2.3
Agriculture................. 32.0 23.5 15.2 11.6 10.9 10.2 9.6 9.3 9.4 9.6 9.5 9.6
Commerce and housing credit. -1.3 -6.8 6.3 5.6 5.4 4.6 3.8 5.4 4.7 5.3 5.0 5.1
Transportation.............. 2.1 2.2 1.8 2.0 2.0 1.9 1.9 1.9 1.9 2.0 2.0 2.0
Undistributed offsetting -42.6 -47.0 -48.5 -64.0 -64.2 -57.3 -59.2 -61.6 -64.5 -66.7 -69.8 -73.2
receipts...................
Other functions............. 0.8 1.0 3.2 2.7 4.1 3.5 3.5 3.6 3.7 3.7 3.8 4.0
-----------------------------------------------------------------------------------------------------------------------
Subtotal, other mandatory -17.0 -36.8 -28.8 -48.4 -48.8 -43.8 -47.2 -48.0 -50.5 -51.5 -54.8 -57.8
programs.................
=======================================================================================================================
Total, outlays for 950.8 999.3 1,082.7 1,125.2 1,186.4 1,267.7 1,326.3 1,400.7 1,486.2 1,577.3 1,675.5 1,788.6
mandatory programs
under current law......
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ This table meets the requirements of Section 221(b) of the Legislative Reorganization Act of 1970.
TABLE 12.--OUTLAYS BY CATEGORY
[In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
April estimates:
Discretionary:
Defense........................... 299.6 319.2 322.1 333.5 347.6 354.6 361.0 374.1 384.9 396.0 411.4
Non-defense....................... 349.8 372.5 389.7 397.8 406.8 415.8 425.5 435.3 445.1 458.4 465.1
-------------------------------------------------------------------------------------------------------------
Subtotal, discretionary......... 649.4 691.7 711.8 731.2 754.5 770.4 786.5 809.5 830.0 854.4 876.5
Mandatory:
Social Security................... 430.0 451.6 473.5 498.0 524.3 553.0 584.1 618.0 656.2 698.3 743.6
Medicare.......................... 216.0 226.4 238.6 252.2 279.1 292.2 314.0 335.6 358.4 384.3 419.2
Medicaid.......................... 128.9 142.4 152.7 166.0 180.5 196.4 213.6 232.2 252.6 274.6 297.9
Other............................. 225.6 260.3 264.3 267.8 285.7 284.8 296.2 312.3 323.9 336.2 349.4
-------------------------------------------------------------------------------------------------------------
Subtotal, mandatory............. 1,000.5 1,080.7 1,129.2 1,184.0 1,269.6 1,326.3 1,408.0 1,498.2 1,591.2 1,693.5 1,810.1
Net interest.......................... 206.4 188.1 175.2 161.5 144.7 127.2 108.9 90.3 69.1 45.7 19.8
-------------------------------------------------------------------------------------------------------------
Total, outlays.................. 1,856.2 1,960.6 2,016.2 2,076.7 2,168.7 2,223.9 2,303.4 2,397.9 2,490.3 2,593.5 2,706.3
Mid-session estimates:
Discretionary:
Defense........................... 304.0 329.9 335.7 357.0 366.6 376.8 385.3 395.8 406.9 418.5 430.5
Non-defense....................... 347.4 369.5 387.8 395.5 401.9 410.1 419.2 428.5 438.0 450.9 457.4
-------------------------------------------------------------------------------------------------------------
Subtotal, discretionary......... 651.4 699.4 723.5 752.5 768.5 786.9 804.5 824.3 844.9 869.4 887.9
Mandatory:
Social Security................... 429.9 452.5 474.4 497.6 522.9 550.3 580.4 613.6 651.5 693.5 738.4
Medicare.......................... 214.2 224.3 235.8 262.1 287.4 297.4 319.0 340.9 363.3 386.8 419.0
Medicaid.......................... 130.3 143.0 155.1 168.9 183.6 199.3 216.5 234.8 255.3 277.1 300.7
Other............................. 224.9 262.4 262.6 264.9 294.8 300.6 311.6 326.7 338.7 351.8 366.9
-------------------------------------------------------------------------------------------------------------
Subtotal, mandatory............. 999.3 1,082.2 1,127.8 1,193.5 1,288.8 1,347.6 1,427.4 1,516.0 1,608.8 1,709.2 1,825.1
Net interest.......................... 204.2 180.5 174.1 164.8 151.0 137.1 122.3 106.9 88.9 69.0 48.1
-------------------------------------------------------------------------------------------------------------
Total, outlays.................. 1,854.9 1,962.1 2,025.4 2,110.7 2,208.3 2,271.6 2,354.2 2,447.2 2,542.6 2,647.6 2,761.0
Difference:
Discretionary:
Defense........................... 4.4 10.7 13.6 23.5 18.9 22.2 24.3 21.7 22.1 22.5 19.1
Non-defense....................... -2.4 -3.0 -1.9 -2.3 -4.9 -5.7 -6.3 -6.9 -7.1 -7.4 -7.7
-------------------------------------------------------------------------------------------------------------
Subtotal, discretionary......... 2.1 7.6 11.7 21.2 14.0 16.5 18.0 14.8 14.9 15.1 11.4
Mandatory:
Social Security................... -0.1 0.9 0.8 -0.4 -1.4 -2.7 -3.8 -4.4 -4.7 -4.8 -5.1
Medicare.......................... -1.8 -2.2 -2.8 9.9 8.3 5.2 5.0 5.3 4.9 2.5 -0.2
Medicaid.......................... 1.4 0.6 2.4 2.9 3.1 2.9 2.9 2.6 2.7 2.5 2.8
Other............................. -0.7 2.1 -1.7 -3.0 9.1 15.8 15.4 14.4 14.8 15.6 17.5
-------------------------------------------------------------------------------------------------------------
Subtotal, mandatory............. -1.2 1.5 -1.3 9.5 19.2 21.3 19.4 17.9 17.6 15.8 15.0
Net interest.......................... -2.2 -7.6 -1.1 3.3 6.4 9.9 13.4 16.6 19.8 23.3 28.3
-------------------------------------------------------------------------------------------------------------
Total, outlays.................. -1.3 1.5 9.2 34.0 39.6 47.7 50.8 49.3 52.3 54.2 54.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
TABLE 13.--RECEIPTS BY SOURCE
[In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimates
-------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
April estimates:
Individual income taxes............... 1,072.9 1,078.8 1,092.3 1,117.9 1,157.0 1,196.6 1,255.2 1,330.4 1,410.2 1,499.6 1,598.2
Corporation income taxes.............. 213.1 218.8 227.3 235.5 244.2 252.2 259.9 268.1 275.8 283.5 294.3
Social insurance and retirement 689.7 725.8 766.0 806.0 855.8 896.4 942.0 984.4 1,030.8 1,087.9 1,145.1
receipts.............................
Excise taxes.......................... 71.1 74.0 76.3 78.3 80.5 82.3 84.8 87.3 90.0 92.8 95.7
Estate and gift taxes................. 31.1 28.7 26.6 28.3 24.9 22.5 20.4 15.7 13.4 0.7 0.7
Customs duties........................ 21.4 22.5 24.3 25.0 26.0 27.7 29.3 30.7 33.0 34.5 36.2
Miscellaneous receipts................ 37.6 43.1 45.4 47.8 49.3 51.0 51.6 54.1 56.8 59.5 62.4
-------------------------------------------------------------------------------------------------------------
Total............................... 2,136.9 2,191.7 2,258.2 2,338.8 2,437.8 2,528.7 2,643.3 2,770.6 2,909.9 3,058.4 3,232.6
Mid-Session estimates:
Individual income taxes\1\............ 1,014.3 1,024.2 1,068.0 1,115.9 1,171.1 1,215.2 1,281.0 1,356.0 1,439.3 1,529.6 1,627.1
Corporation income taxes.............. 155.4 229.1 221.3 231.0 258.7 259.3 264.2 270.9 277.9 285.8 295.3
Social insurance and retirement 689.4 721.9 768.7 810.1 860.3 897.7 941.5 982.8 1,027.2 1,082.9 1,139.2
receipts\1\..........................
Excise taxes.......................... 67.6 70.4 72.8 74.8 76.8 78.3 80.5 83.0 85.7 88.4 91.1
Estate and gift taxes................. 30.0 28.0 23.6 26.9 24.3 27.2 23.8 24.6 25.9 19.6 0.1
Customs duties........................ 19.8 21.5 23.2 24.2 25.3 26.8 28.0 29.2 31.3 32.5 33.7
Miscellaneous receipts................ 36.2 39.6 42.6 44.6 46.1 48.1 48.7 50.9 53.5 56.0 58.8
-------------------------------------------------------------------------------------------------------------
Total............................... 2,012.7 2,134.7 2,220.2 2,327.5 2,462.5 2,552.6 2,667.8 2,797.4 2,940.8 3,094.8 3,245.3
Difference:
Individual income taxes............... -58.6 -54.6 -24.3 -2.0 14.1 18.6 25.8 25.6 29.1 30.0 28.9
Corporation income taxes.............. -57.7 10.3 -6.0 -4.5 14.5 7.2 4.2 2.9 2.2 2.4 0.9
Social insurance and retirement -0.2 -3.9 2.7 4.0 4.5 1.3 -0.5 -1.6 -3.6 -4.9 -5.9
receipts.............................
Excise taxes.......................... -3.6 -3.6 -3.4 -3.6 -3.8 -4.1 -4.2 -4.3 -4.4 -4.4 -4.6
Estate and gift taxes................. -1.1 -0.7 -3.0 -1.4 -0.6 4.7 3.4 8.9 12.6 18.9 -0.5
Customs duties........................ -1.6 -1.0 -1.0 -0.7 -0.7 -1.0 -1.3 -1.5 -1.7 -2.0 -2.6
Miscellaneous receipts................ -1.4 -3.5 -2.8 -3.2 -3.2 -2.9 -2.9 -3.2 -3.3 -3.5 -3.5
-------------------------------------------------------------------------------------------------------------
Total............................... -124.2 -57.0 -38.0 -11.3 24.7 23.9 24.5 26.9 30.9 36.4 12.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The 2001 estimate is adjusted to correct for $5.6 billion in prior year receipts. See text box on page 9 and Appendix A on page 49.
TABLE 14.--OUTLAYS BY AGENCY IN BILLIONS OF DOLLARS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
April estimates Mid-session estimates
2000 -----------------------------------------------------------------------------------------------------------------------
Actual 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Legislative Branch............................................ 2.9 3.1 3.3 3.4 3.4 3.4 3.5 3.2 3.3 3.4 3.4 3.4 3.5
Judicial Branch............................................... 4.1 4.3 4.9 5.0 5.1 5.2 5.3 4.3 4.9 5.0 5.1 5.2 5.3
Agriculture................................................... 75.7 69.6 63.2 61.4 61.9 63.8 65.9 72.1 65.7 63.6 64.5 65.6 66.7
Commerce...................................................... 7.8 5.5 5.2 5.4 5.3 5.4 5.5 5.4 5.2 5.4 5.3 5.4 5.5
Defense-Military.............................................. 281.2 283.9 303.4 306.2 317.2 331.0 337.7 288.3 313.9 319.6 340.5 349.8 359.9
Education..................................................... 33.9 36.7 45.2 49.6 50.6 51.9 53.3 36.9 45.5 50.2 51.4 52.5 54.0
Energy........................................................ 15.0 16.7 17.2 17.5 17.7 18.1 18.4 17.3 17.3 17.5 17.7 18.2 18.4
Health and Human Services..................................... 382.6 430.5 468.8 498.8 532.7 566.7 594.1 428.3 457.1 486.7 532.7 574.4 602.1
Housing and Urban Development................................. 30.8 37.3 34.8 34.9 33.5 33.4 33.6 35.9 34.4 34.8 33.6 33.7 33.7
Interior...................................................... 8.0 8.7 9.3 9.6 11.1 10.1 10.3 8.2 9.1 9.7 11.4 10.4 10.6
Justice....................................................... 19.6 20.7 22.5 25.4 23.9 23.3 23.6 20.9 21.7 25.4 24.0 23.3 23.6
Labor......................................................... 31.4 38.2 42.0 42.3 43.1 44.8 46.7 39.4 43.7 44.3 45.1 46.2 48.3
State......................................................... 6.8 9.3 9.7 9.7 9.9 10.1 10.4 8.3 10.0 9.7 10.0 10.2 10.4
Transportation................................................ 46.0 50.6 54.9 56.9 59.2 61.7 63.4 50.5 54.6 55.2 54.9 56.3 57.5
Treasury...................................................... 391.2 388.5 381.5 385.1 388.2 388.9 390.3 387.0 380.9 388.0 395.2 399.9 406.7
Veterans Affairs.............................................. 47.1 45.2 51.5 53.5 55.7 60.3 59.5 45.0 51.0 53.5 55.7 60.3 59.5
Corps of Engineers............................................ 4.3 4.6 4.4 4.2 4.3 4.3 4.2 4.4 4.2 4.0 4.1 4.1 4.2
Other Defense Civil Programs.................................. 32.9 34.4 35.4 41.2 42.4 43.7 44.9 34.4 35.6 41.5 42.7 43.9 45.1
Environmental Protection Agency............................... 7.2 7.5 7.6 7.6 7.6 7.6 7.6 7.3 7.5 7.6 7.6 7.6 7.6
Executive Office of the President............................. 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Federal Emergency Management Agency........................... 3.1 3.1 3.2 3.0 2.7 2.4 1.9 3.4 3.2 2.9 2.9 2.3 1.9
General Services Administration............................... (*) 0.6 -0.2 0.3 0.4 0.4 0.3 0.6 -0.2 0.3 0.4 0.4 0.3
International Assistance Programs............................. 12.1 11.4 12.1 12.4 12.5 12.4 12.7 11.3 12.0 12.3 12.5 12.7 13.0
National Aeronautics and Space Administration................. 13.4 13.8 14.2 14.7 15.1 15.4 15.8 13.8 14.2 14.7 15.1 15.4 15.8
National Science Foundation................................... 3.5 4.0 4.4 4.5 4.7 4.7 4.8 4.0 4.3 4.5 4.7 4.7 4.8
Office of Personnel Management................................ 48.7 51.0 53.4 56.3 59.5 62.8 66.0 51.0 53.7 56.7 59.8 63.1 66.3
Small Business Administration................................. -0.4 -1.0 0.7 0.6 0.5 0.5 0.6 -1.0 0.7 0.6 0.5 0.5 0.6
Social Security Administration................................ 441.8 463.0 488.2 511.5 537.4 567.7 595.5 462.6 489.2 512.6 537.2 566.6 593.1
Other Independent Agencies.................................... 10.6 4.9 19.0 16.8 17.1 17.8 17.7 1.4 18.7 17.6 18.5 18.2 18.5
Allowances.................................................... ........ ........ 2.4 3.9 4.7 5.4 5.7 ........ 2.4 3.3 4.0 4.9 5.3
Undistributed Offsetting Receipts............................. -172.8 -190.2 -201.8 -226.0 -251.0 -254.9 -275.8 -189.5 -201.7 -225.4 -250.0 -251.6 -271.0
---------------------------------------------------------------------------------------------------------------------------------
Total....................................................... 1,788.8 1,856.2 1,960.6 2,016.2 2,076.7 2,168.7 2,223.9 1,854.9 1,962.1 2,025.4 2,110.7 2,208.3 2,271.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* = $50 million or less.
TABLE 15.--OUTLAYS BY FUNCTION
[In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
April estimates Mid-session estimates
2000 -----------------------------------------------------------------------------------------------------------------------
Actual 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National defense.............................................. 294.5 299.1 319.2 322.1 333.1 347.2 354.0 303.6 329.8 335.5 356.5 366.0 376.2
International affairs......................................... 17.2 17.5 21.0 21.3 21.5 21.6 22.2 16.6 21.4 21.4 21.7 22.1 22.6
General science, space, and technology........................ 18.6 19.7 20.8 21.4 22.2 22.6 23.1 19.7 20.7 21.4 22.2 22.6 23.1
Energy........................................................ -1.1 -0.7 -0.3 -0.1 -0.6 -0.4 -0.3 -0.3 -0.4 -0.1 -0.6 -0.4 -0.3
Natural resources and environment............................. 25.0 27.4 27.5 27.7 28.0 28.4 28.7 26.6 27.1 27.6 28.1 28.7 29.0
Agriculture................................................... 36.6 25.9 18.6 15.0 14.0 14.1 14.5 28.9 20.7 16.8 16.2 15.5 14.9
Commerce and housing credit................................... 3.2 -0.8 6.9 4.7 3.6 3.5 2.3 -5.2 6.4 5.5 4.9 4.0 3.2
Transportation................................................ 46.9 51.1 55.0 57.5 59.7 62.1 63.8 51.0 54.8 55.7 55.3 56.8 57.9
Community and regional development............................ 10.6 10.6 11.7 11.3 10.8 10.5 10.1 10.8 11.8 11.3 11.1 10.5 10.2
Education, training, employment, and social services.......... 59.2 65.3 76.6 81.3 82.6 84.7 87.2 64.2 75.5 82.1 84.0 85.4 88.0
Health........................................................ 154.5 175.3 201.5 224.4 243.3 250.7 264.8 173.8 190.7 212.0 231.7 251.8 271.1
Medicare...................................................... 197.1 219.3 229.9 242.1 255.9 282.8 296.0 217.4 227.7 239.3 265.8 291.1 301.2
Income security............................................... 247.9 262.6 275.7 285.9 295.9 308.8 317.1 265.1 286.5 296.7 306.2 318.4 328.6
Social Security............................................... 409.4 433.6 455.1 477.1 501.6 528.1 556.8 433.5 456.1 478.0 501.3 526.7 554.1
Veterans benefits and services................................ 47.1 45.4 51,6 53.6 55.8 60.4 59.6 45.1 51.1 53.6 55.8 60.4 59.6
Administration of justice..................................... 27.8 29.4 32.3 35.4 35.5 35.2 35.8 29.7 31.4 35.4 35.5 35.2 35.8
General government............................................ 13.5 16.8 16.3 16.7 18.4 17.4 17.6 17.2 16.5 16.9 18.6 17.6 17.8
Net interest.................................................. 223.2 206.4 188.1 175.2 161.5 144.7 127.2 204.2 180.5 174.1 164.8 151.0 137.1
Allowances.................................................... ........ ........ 2.4 3.9 4.7 5.4 5.7 ........ 2.4 3.3 4.0 4.9 5.3
Undistributed offsetting receipts............................. -42.6 -47.7 -49.4 -60.4 -70.6 -58.9 -62.4 -47.0 -48.7 -61.0 -72.4 -59.9 -63.8
---------------------------------------------------------------------------------------------------------------------------------
Total....................................................... 1,788.8 1,856.2 1,960.6 2,016.2 2,076.7 2,168.7 2,223.9 1,854.9 1,962.1 2,025.4 2,110.7 2,208.3 2,271.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TABLE 16.--DISCRETIONARY BUDGET AUTHORITY BY AGENCY
[In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
April estimates Mid-session estimates
2000 -----------------------------------------------------------------------------------------------------------------------
Actual 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Legislative Branch............................................ 2.5 2.7 3.0 3.0 3.1 3.1 3.2 2.8 3.0 3.0 3.1 3.1 3.2
Judicial Branch............................................... 3.7 4.0 4.6 4.5 4.6 4.7 4.9 4.0 4.6 4.5 4.6 4.7 4.9
Agriculture................................................... 17.1 19.3 17.9 18.8 19.0 19.4 19.8 19.3 17.9 18.8 19.0 19.4 19.8
Commerce...................................................... 8.7 5.1 4.8 5.3 5.3 5.4 5.5 5.0 4.9 5.3 5.3 5.4 5.5
Defense-Military.............................................. 287.3 296.3 310.5 319.0 327.9 337.1 346.6 301.9 328.9 337.9 347.4 357.1 367.1
Education..................................................... 29.4 39.9 44.5 45.5 47.0 48.1 49.1 40.1 44.6 45.5 47.0 48.1 49.1
Energy........................................................ 17.8 19.7 19.2 19.7 20.3 20.7 21.2 20.0 19.2 19.7 20.3 20.7 21.2
Health and Human Services..................................... 45.5 53.9 56.7 61.7 63.3 64.9 66.5 54.1 56.8 61.8 63.4 65.0 66.7
Housing and Urban Development................................. 21.1 28.5 30.4 32.2 33.3 34.6 35.7 28.4 30.4 32.2 33.3 34.6 35.7
Interior...................................................... 8.5 10.2 9.8 10.0 10.2 10.4 10.6 10.3 9.9 10.1 10.3 10.5 10.7
Justice....................................................... 18.8 20.9 19.9 21.9 22.0 22.3 22.8 20.9 20.0 22.1 22.2 22.4 22.9
Labor......................................................... 8.8 11.9 11.3 11.8 12.1 12.4 12.6 11.7 11.4 12.0 12.3 12.6 12.8
State......................................................... 7.8 7.5 9.1 9.3 9.5 9.7 9.9 7.5 9.1 9.3 9.5 9.7 9.9
Transportation................................................ 14.5 18.4 16.3 17.3 17.7 18.1 18.5 18.5 16.3 17.3 17.7 18.1 18.5
Treasury...................................................... 12.5 14.0 14.7 15.0 15.4 15.7 16.1 14.2 14.7 15.0 15.4 15.7 16.1
Veterans Affairs.............................................. 20.8 22.4 23.4 23.9 24.4 25.0 25.6 22.3 23.2 23.7 24.3 24.8 25.3
Corps of Engineers............................................ 4.1 4.5 3.9 4.0 4.1 4.2 4.3 4.7 3.9 4.0 4.1 4.2 4.3
Other Defense Civil Programs.................................. 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.2 0.2
Environmental Protection Agency............................... 7.6 7.8 7.3 7.4 7.6 7.2 6.6 7.8 7.3 7.4 7.6 7.2 6.6
Executive Office of the President............................. 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Federal Emergency Management Agency........................... 3.9 2.4 2.2 2.3 2.3 2.4 2.4 2.4 2.2 2.3 2.3 2.4 2.4
General Services Administration............................... (*) 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
International Assistance Programs............................. 13.6 12.9 12.8 13.1 13.4 13.6 13.9 13.0 12.9 13.2 13.5 13.8 14.1
National Aeronautics and Space Administration................. 13.6 14.3 14.5 15.0 15.4 15.7 16.1 14.3 14.5 15.0 15.4 15.7 16.1
National Science Foundation................................... 3.9 4.4 4.5 4.6 4.7 4.8 4.9 4.4 4.5 4.6 4.7 4.8 4.9
Office of Personnel Management................................ 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Small Business Administration................................. 0.9 0.3 0.5 0.6 0.6 0.6 0.6 0.9 0.5 0.6 0.6 0.6 0.6
Social Security Administration................................ 5.7 6.0 6.4 6.5 6.7 6.8 7.0 6.0 6.4 6.5 6.7 6.8 7.0
Other Independent Agencies.................................... 5.8 6.3 6.0 6.0 6.3 6.3 6.4 6.3 6.1 6.0 6.2 6.3 6.4
Allowances.................................................... (*) (*) 5.3 5.4 5.6 5.7 5.8 (*) 5.4 5.0 5.1 5.3 5.5
---------------------------------------------------------------------------------------------------------------------------------
Total....................................................... 584.4 634.9 660.6 685.1 702.7 720.1 737.9 642.1 679.8 704.0 722.2 740.1 758.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TABLE 17.--DISCRETIONARY BUDGET AUTHORITY BY FUNCTION
[In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
April estimates Mid-session estimates
2000 -----------------------------------------------------------------------------------------------------------------------
Actual 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National defense.............................................. 300.8 311.3 325.1 333.9 343.2 352.7 362.5 317.1 343.7 353.0 362.8 372.7 383.1
International affairs......................................... 23.5 22.7 23.9 24.4 24.9 25.5 26.0 22.7 24.0 24.5 25.0 25.6 26.1
General science, space, and technology........................ 19.2 20.9 21.2 21.9 22.4 22.9 23.5 20.9 21.2 21.9 22.4 22.9 23.5
Energy........................................................ 2.7 3.1 2.8 2.9 3.1 3.2 3.3 3.1 2.8 2.9 3.1 3.2 3.3
Natural resources and environment............................. 24.6 28.7 26.4 27.0 27.6 27.6 27.4 28.9 26.4 27.1 27.6 27.7 27.5
Agriculture................................................... 4.7 5.1 4.8 5.2 5.2 5.3 5.4 5.1 4.8 5.2 5.2 5.3 5.4
Commerce and housing credit................................... 5.1 0.7 -0.3 -0.1 -0.4 -0.5 -0.5 0.6 -0.1 -0.1 -0.4 -0.5 -0.5
Transportation................................................ 15.2 18.9 16.8 17.8 18.2 18.6 19.0 19.0 16.8 17.8 18.2 18.6 19.0
Community and regional development............................ 12.2 11.0 10.4 10.7 10.9 11.1 11.3 11.6 10.4 10.7 10.9 11.1 11.3
Education, training, employment, and social services.......... 44.4 61.1 65.4 67.1 69.0 70.7 72.3 61.1 65.7 67.4 69.4 71.0 72.7
Health........................................................ 33.8 38.9 41.0 45.7 46.9 48.1 49.4 38.8 40.9 45.6 46.8 48.0 49.3
Medicare...................................................... 3.0 3.4 3.5 3.5 3.6 3.7 3.8 3.4 3.5 3.5 3.6 3.7 3.8
Income security............................................... 31.6 39.5 42.8 45.1 46.7 48.3 49.6 39.7 42.9 45.1 46.8 48.4 49.6
Social Security............................................... 3.2 3.4 3.5 3.6 3.7 3.8 3.8 3.4 3.5 3.6 3.7 3.8 3.8
Veterans benefits and services................................ 20.9 22.5 23.5 24.0 24.5 25.1 25.7 22.4 23.3 23.8 24.3 24.9 25.4
Administration of justice..................................... 27.1 30.0 29.8 31.9 32.3 32.8 33.5 30.0 29.8 31.9 32.3 32.8 33.5
General government............................................ 12.4 14.0 14.8 15.0 15.4 15.7 16.0 14.2 14.8 15.1 15.4 15.7 16.1
Allowances.................................................... ........ ........ 5.3 5.4 5.6 5.7 5.8 ........ 5.4 5.0 5.1 5.3 5.5
---------------------------------------------------------------------------------------------------------------------------------
Total....................................................... 584.4 634.9 660.6 685.1 702.7 720.1 737.9 642.1 679.8 704.0 722.2 740.1 758.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TABLE 18.--MID-SESSION BASELINE TOTALS
[In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discretionary:
Defense.................... 304.0 317.1 325.5 336.8 351.0 357.5 363.7 376.5 387.3 398.4 413.9 3,627.8
Non-defense................ 347.4 368.6 387.3 398.0 406.2 416.4 427.8 439.2 450.7 462.6 474.9 4,231.6
------------------------------------------------------------------------------------------------------------------------
Subtotal, discretionary.. 651.5 685.7 712.7 734.7 757.2 773.9 791.5 815.7 838.0 861.0 888.8 7,859.4
Mandatory:
Social Security............ 429.9 452.5 474.4 497.6 522.9 550.3 580.4 613.6 651.5 693.5 738.4 5,775.1
Medicare................... 214.2 224.3 235.8 248.1 267.4 276.4 297.0 315.9 336.3 357.8 387.0 2,946.0
Medicaid................... 130.3 143.0 155.1 168.9 183.6 199.3 216.5 234.8 254.9 276.7 300.3 2,133.1
Other...................... 224.9 262.9 259.9 271.8 293.8 300.3 306.9 321.9 334.6 347.5 362.8 3,062.5
------------------------------------------------------------------------------------------------------------------------
Subtotal, mandatory...... 999.3 1,082.7 1,125.2 1,186.4 1,267.7 1,326.3 1,400.7 1,486.2 1,577.3 1,675.5 1,788.6 13,916.7
Net interest............. 204.2 180.2 173.1 162.7 147.1 130.6 112.8 93.8 72.1 47.7 19.7 1,139.8
------------------------------------------------------------------------------------------------------------------------
Total, outlays................. 1,855.0 1,948.7 2,011.0 2,083.8 2,172.0 2,230.9 2,305.0 2,395.8 2,487.4 2,584.3 2,697.2 22,916.0
Receipts....................... 2,012.7 2,135.3 2,221.5 2,333.5 2,476.1 2,573.1 2,693.0 2,826.6 2,972.6 3,142.9 3,383.4 26,758.0
------------------------------------------------------------------------------------------------------------------------
Surplus........................ 157.8 186.6 210.5 249.8 304.1 342.2 388.0 430.9 485.2 558.6 686.2 3,842.0
On-budget surplus\1\....... 1.9 18.0 18.2 38.9 67.8 92.0 122.2 150.3 191.4 247.3 357.7 1,303.8
Postal service surplus..... -1.3 -2.6 0.1 0.2 0.8 1.2 -0.1 0.7 0.9 1.1 1.4 3.7
Social Security surplus\1\. 157.1 171.2 192.2 210.6 235.5 248.9 265.9 279.9 293.0 310.2 327.1 2,534.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The 2001 estimate is adjusted to correct for $5.6 billion in prior year receipts. See text box on page 9 and Appendix A on page 49.
TABLE 19.--FEDERAL GOVERNMENT FINANCING AND DEBT
[In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimate
2000 --------------------------------------------------------------------------------------------------
Actual 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Financing:
Unified budget surplus.................... 236 158 173 195 217 254 281 314 350 398 447 484
Financing other than the change in debt
held by the public:
Premiums paid (-) on buybacks of -6 -11 -10 ....... ....... ....... ....... ....... ....... ....... ....... .......
Treasury securities\1\.................
Changes in: \2\
Treasury operating cash balance....... 4 -2 -5 ....... -5 ....... ....... -5 ....... ....... -5 .......
Checks outstanding, deposit funds, 3 -4 1 ....... ....... ....... ....... ....... ....... ....... ....... .......
etc.\3\..............................
Seigniorage on coins.................... 2 1 1 2 2 2 2 2 2 2 2 2
Less: Net financing disbursements:
Direct loan financing accounts........ -22 -31 -4 -17 -18 -17 -16 -16 -16 -16 -16 -15
Guaranteed loan financing accounts.... 4 -1 -1 1 (*) (*) 1 1 1 1 1 1
-----------------------------------------------------------------------------------------------------------
Total, financing other than the -13 -48 -17 -15 -21 -16 -14 -19 -14 -14 -18 -13
change in debt held by the public..
-----------------------------------------------------------------------------------------------------------
Total, amount available to repay 223 110 155 180 196 239 267 295 337 385 429 471
debt held by the public..........
Change in debt held by the public: \4\ \5\
Change in debt held by the public....... -223 -110 -155 -180 -196 -239 -267 -295 -337 -385 -155 -35
Less change in excess balances.......... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... -274 -436
-----------------------------------------------------------------------------------------------------------
Change in net indebtedness............ -223 -110 -155 -180 -196 -239 -267 -295 -337 -385 1129 -471
Debt Subject to Statutory Limitation, End of
Year:
Debt issued by Treasury................... 5,601 5,727 5,829 5,935 6,040 6,125 6,201 6,266 6,303 6,310 6,568 6,963
Adjustment for Treasury debt not subject -15 -15 -15 -15 -15 -15 -15 -15 -15 -15 -15 -15
to limitation and agency debt subject to
limitation\6\............................
Adjustment for discount and premium\7\.... 6 6 6 6 6 6 6 6 6 6 6 6
-----------------------------------------------------------------------------------------------------------
Total, debt subject to statutory 5,592 5,717 5,819 5,926 6,031 6,115 6,192 6,256 6,294 6,300 6,558 6,954
limitation\8\..........................
Debt Outstanding, End of Year:
Gross Federal debt: \9\
Debt issued by Treasury................. 5,601 5,727 5,829 5,935 6,040 6,125 6,201 6,266 6,303 6,310 6,568 6,963
Debt issued by other agencies........... 28 27 27 26 25 23 22 20 20 20 20 20
-----------------------------------------------------------------------------------------------------------
Total, gross Federal debt............. 5,629 5,753 5,855 5,961 6,065 6,148 6,223 6,286 6,323 6,330 6,588 6,983
Held by:
Debt securities held as assets by 2,219 2,453 2,711 2,996 3,296 3,618 3,959 4,317 4,691 5,082 5,495 5,926
Government accounts....................
Debt securities held as assets by the
public: \5\
Debt held by the public............... 3,410 3,300 3,145 2,965 2,769 2,531 2,264 1,969 1,632 1,248 1,093 1,057
Less excess balances.................. ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... -274 -710
-----------------------------------------------------------------------------------------------------------
Net indebtedness\10\................ 3,410 3,300 3,145 2,965 2,769 2,531 2,264 1,969 1,632 1,248 819 348
--------------------------------------------------------------------------------------------------------------------------------------------------------
* = $500 million or less.
\1\ This table includes estimates for Treasury buybacks of outstanding securities only through 2002. These estimates assume that Treasury will buy back
$35 billion (face value) of securities in 2001 (in terms of settlements) and $40 billion in 2002. The premiums paid on buybacks are based on
experience to date and the interest rates in the economic assumptions.
\2\ A decrease in the Treasury operating cash balance (which is an asset) would be a means of financing a deficit and therefore has a positive sign. An
increase in checks outstanding or deposit fund balances (which are liabilities) would also be a means of financing a deficit and therefore would also
have a positive sign.
\3\ Besides checks outstanding and deposit funds, includes accrued interest payable on Treasury debt, miscellaneous liability accounts, allocations of
special drawing rights, and, as an offset, cash and monetary assets other than the Treasury operating cash balance, miscellaneous asset accounts, and
profit on sale of gold.
\4\ Indian tribal funds that are owned by the Indian tribes and held and managed in a fiduciary capacity by the Government on the tribes' behalf were
reclassified from trust funds to deposit funds as of October 1, 1999. Their holdings of Treasury securities were accordingly reclassified from debt
held by Government accounts to debt held by the public, which affected the change in debt held by the public without affecting borrowing or the
repayment of debt.
\5\ The amount of the unified budget surplus that is available to repay debt held by the public is estimated to be more than the amount of debt that is
available to be redeemed in 2010 and subsequent years. The difference is assumed to be held as ``excess balances.'' (``Excess'' means in excess of the
amounts held for operational and programmatic purposes). The debt held by the public is the amount of Federal debt securities held by the public. The
net indebtedness is the debt held by the public less the excess balances.
\6\ Consists primarily of Federal Financing Bank debt.
\7\ Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than zero-coupon bonds) and unrealized discount
on Government account series securities.
\8\ The statutory debt limit is $5,950 billion.
\9\ Treasury securities held by the public and zero-coupon bonds held by Government accounts are almost entirely measured at sales price plus amortized
discount or less amortized premium. Agency debt is almost entirely measured at face value. Treasury securities in the Government account series are
measured at face value less unrealized discount (if any).
\10\ At the end of 2000, the Federal Reserve Banks held $511 billion of Federal securities and the rest of the public held $2,899 billion. Debt held by
the Federal Reserve Banks is not estimated for future years.
Chairman Nussle. Thank you, Director Daniels.
Let me begin with a pretty basic question. What happened to
the surplus? When you came before the committee earlier this
year and through all of the projections, we were seeing huge
surpluses. What happened to those surpluses?
Mr. Daniels. The first thing that happened is something
that needed to happen. A surplus of 275 or $281 billion,
depending on which set of numbers you look at, was vastly
bigger than it should have been, vastly bigger than the Nation
had any use for, and therefore a bipartisanship majority acted
to leave much of that with the taxpayers who earned the money
in the first place.
I have often then described the remainder of the shift from
the baseline of February or April to today in this way. We
started with a 14-cent overcharge of the American people, 14
cents at least of revenue collected out of each dollar for
which there was no expenditure need. About 2 cents of that was
returned to taxpayers in the first installment of tax relief.
About 2 cents of that did not materialize because of the
economic slowdown. About a cent and a half was spent by the
Congress on the defense supplemental, urgent needs in defense,
and on agricultural income support. And a cent and a half is
still there, but was moved into 2002 during the tax relief bill
writing. So we still have 8 cents in 2001 remaining; still the
second largest surplus ever and still at, by our calculations,
the level of surplus attributable to Social Security.
Chairman Nussle. Does one penny of Medicare that comes in
through the FICA taxes, is that used for anything else besides
Medicare?
Mr. Daniels. No, sir. All of the cash coming in from
Medicare and another $50 billion besides is required to pay the
bills of Medicare.
Chairman Nussle. So Medicare is actually, as you have
discussed before, running a deficit throughout the budget?
Mr. Daniels. Well, I prefer to use the word ``shortfall''
or to at least say that it does not run a surplus. Like most
programs of the Federal Government, it is a consumer of general
revenues.
I think probably the most accurate thing to say is that the
surplus is fictional. But I would simply observe that it does
cost more than it takes in.
Because we maintain the 50 year old and/or 40 some year
old--and I would say archaic division between hospital costs
and the rest of health care in Medicare--we do for the moment
at least maintain a trust fund attributable only to the
hospital portion. Now that trust fund of course will grow this
year by 30 some billion dollars of bonds exactly as it would
have under any surplus outcome.
Chairman Nussle. Does one penny of Social Security that
comes in, the same way, used for anything else besides Social
Security?
Mr. Daniels. It is used for debt reduction and the cash
financing of the Federal Government. Some of it is used
depending on what snapshot, and what window you take a snapshot
of or through. But some of it is used for loans to students
under the--in the last few years the Federal Government went
into the banking business of making direct loans to students,
and that is a consumer.
The biggest use by far, most of it is used for debt
reduction. This year we actually used 10 billion of it, because
we are prepaying the national mortgage. About $10 billion of it
was used in premiums to bring in debt that was not due.
Chairman Nussle. According to the projections that you have
there before you, that you are presenting to us today, does the
change in the surplus figures that you have, even though we are
still running the second largest surplus in history--we are not
running the first largest surplus in history any longer--are we
still able to pay off the debt that matures and pay off the
publicly held debt that you can pay off as we committed to as
part of this budget over the next 10 years?
Is that still possible under this budget plan, according to
your projections?
Mr. Daniels. Absolutely.
Our estimate and CBO's and the Fed's are all on top of each
other as somewhere between 2 and the 2.2 or 2.3 trillion is
possible without punitive penalties over the time period, and
the surplus is available to do that.
The Social Security surplus alone is $2.55 trillion, let
alone the remaining budget surplus. So the answer to that
question is indisputably yes.
Chairman Nussle. That is on top of the $49 billion that we
have already paid toward the publicly-held debt over the last 4
years now?
Mr. Daniels. Yes, that is correct. At the September 30th
turn--OK, incidentally, our projection is for exactly the 3.300
trillion balance. That is down from 3.8 just a few years ago
and headed south at a rapid rate, as you know.
I have observed elsewhere we are going to pass an important
landmark in 2002. The interest cost to the Federal Government,
the carrying charge, so to speak, of the national debt will
drop into single digits for the first time in over a quarter
century.
The burden of the debt, as the debt is coming down, is
shrinking fast and will be down to 9 cents on the dollar; and,
of course, it was in the high teens just a few years ago.
Chairman Nussle. Finally, what is your advice and the
advice of the President of the United States with regard to
spending as we move into the very important final month of the
appropriations process for 2002? As we move through those
appropriations bills in the House and Senate, what is your
advice in order to stay within this budget and not do any more
harm to the economy that has already been done? What is your
spending advice with regard to this final stage?
Mr. Daniels. The President's advice would be that the
Congress should honor the budget resolution, that it should not
exceed it. He will be a participant, if necessary, in trying to
see that it is not exceeded. But, if we live within it, we will
grow spending at a moderate rate. We will make a major first
step toward the repair of our national defenses, which I think
a bipartisan majority believes is overdue and necessary.
We will take a big step forward in--education, medical
research and other key priorities, were marked out in the
President's budget; and it seemed to have bipartisan support in
the Congress. Those things we can do as long as we do restrain
spending growth to the level that the resolution calls for; and
I think from many conversations with Members and particularly
leaders of the appropriations process, we are on track to do
that.
Chairman Nussle. As the President's chief budget watchdog,
if appropriations go outside the boundaries, are you prepared
to advise the President to veto spending bills that bust the
budget?
Mr. Daniels. I always start the answer to this hypothetical
question by----
Chairman Nussle. I didn't ask whether he would. I was
asking whether you would give him that advice.
Mr. Daniels. Well, I do like to start by saying that we
hope that the advice need never be given and that we can work
with the Congress, as I think we have every opportunity to do,
to knit together the budget under the resolution and without
that kind of a disagreement.
But there has been at least the one occasion already this
year where there were suggestions of spending we thought was
beyond what was necessary, and we did give that advice, and I
think the President was prepared to act on it if it had finally
proven necessary.
Chairman Nussle. Thank you.
Mr. Spratt.
Mr. Spratt. Mr. Daniels, as you know, CBO is the
scorekeeper as far as Congress is concerned. When we look at
the implications of spending initiatives and tax cuts both, we
look to CBO and to the Joint Tax Committee for our estimates.
CBO has sent us a forecast that is very different from
yours in terms of what can be accommodated. You call the
differences minuscule, but by our calculation, under CBO's--if
I understood your proposal, you have got $767 billion in tax
cuts, $315 billion in tax cuts is still to come--and other
spending proposals like Medicare that add up to $767 billion
that cannot be done, if CBO is correct, without further
degradation of the bottom line, without further digging into
the Medicare surplus and into the Social Security surplus and
aggravating what is becoming a structural on-budget deficit.
Now, let me turn first to the question, ``Where did the
surplus go?''
You have got a deceptively simple chart that is table 1 in
your booklet. It is on page 4.
Table 1 shows that when you sent your April estimate up
with your budget, we had a surplus in April, just last April,
of $281 billion. The Social Security surplus was $159 billion
of that. So the non-Social Security surplus in April was $122
billion. That was after factoring in the budget proposals that
had been made through April.
You then show the changes that have occurred since April.
And if you add up the changes due to legislation, they come to
$76 billion. If you add up the changes due to economic and
technical adjustments, they come to $46 billion. So about 38
percent of the disappearance of the surplus is attributable to
economic and technical adjustments, about 62 percent is due to
policy changes such as the transfer of corporate tax payments
from this year to next year, the rebate, farm assistance, the
supplemental, the defense supplemental, all things that the
Bush Administration and the Congress for the most part
supported.
So most of those changes were really policy changes, were
they not, two to one, as opposed to economic and technical
changes; is that correct?
Mr. Daniels. Yes, sir.
Mr. Spratt. So the budget surplus was dissipated two-thirds
by policy changes that the Bush Administration supported, and
when the measures came to them, they signed. And all of the
spending in prior years, the spending increase from 2000 to
2001, is subsumed in that $281 billion surplus in April.
In other words, when that surplus was calculated at $281
billion, it included all of this cost growth in prior years. We
still had a big surplus, $281 billion, $122 billion after
Social Security, notwithstanding the increases in discretionary
spending in the prior year, that is correct, isn't it? I am not
misreading this chart.
Mr. Daniels. No, sir. I am waiting to see wherein we
differ.
Mr. Spratt. Well, so you agree with me.
Another interesting thing is, under economic and technical
adjustments, table 1, the amount comes in total to $46 billion
this year; and over the 10-year period of time, there are some
puts and takes, pluses and minuses, but it never gets bigger
than $46 billion over the 10-year period of time from 2002 to
2011. So most of the degradation in the surplus we are seeing
in the out-years is not attributable therefore to economic and
technical factors; is that correct?
Mr. Daniels. That is correct.
Mr. Spratt. That is policy, too. And the main policy that
you factored in here is the tax cut; is it not?
Mr. Daniels. That would be the single largest.
Mr. Spratt. I beg your pardon?
Mr. Daniels. Yes. That would be the single largest change.
Mr. Spratt. Your letter today to Mr. Gephardt says, ``Since
April there has been a decline in the budget surplus due
largely to the economic slowdown.''
But the line of questioning we just went through indicates
that 38 percent was due to the economic slowdown, some of that
is technical, some of it is economic, and 62 percent was due to
other factors, namely enacted legislation and policy proposal
that the administration supported. Is that correct?
Mr. Daniels. Yes. I think it is the same as the analysis
that I gave, in my simple-minded way, by reducing it to cents
on the Federal dollar. The single biggest contributor by a
small amount is the economic slowdown. But if you aggregate the
other choices made, I would agree with you on a bipartisan
basis you get a slightly larger amount. You know we should all
acknowledge that the last cent and a half here, the corporate
tax shift is money that is still going to come in.
Mr. Spratt. But 62 percent is due to other factors, only 38
percent to the economic slowdown?
Mr. Daniels. Fair enough.
Mr. Spratt. All of that working out on the long term, even
though we have got a decline in the bottom line and an invasion
of the Medicare and Social Security trust funds into the
future, that by and large is not attributable to these economic
and technical factors, too, because you are assuming that
beginning next quarter this economy rebounds at a pretty smart
rate, 3.2 percent I believe.
Mr. Daniels. We are. Let me interject. I know--because we
have discussed this before--that you misspoke a moment ago,
that the Trust Funds are never invaded. The trust funds are
never affected. The trust funds are at exactly the same size
that they would be under any other policy mix. So, I think, as
you had put it before, I think in the correct way, Social
Security revenues and so forth.
Mr. Spratt. I thought you were drawing a distinction
between the Social Security Trust Fund and the Medicare Trust
Fund. Page 1 of your mid-session review says, ``In order to
fully reserve the Social Security surplus for debt reduction,
any further initiatives beyond those included in this review
will have to be accompanied by offsets in other areas.''
Mr. Daniels. No disagreement there. I used the word
``surplus.'' That is the right word to use. Since we are
rummaging around my report, if you will look at page 13, table
4, we make the point which is sometimes overlooked or
misunderstood that under any surplus projection the current
projection--this just happens to be 2002. It wouldn't make any
difference what year we use or much larger ones. Total Medicare
spending on benefits will be exactly the same. Every penny will
be paid. The Trust Fund balance will be exactly the same, and
it will increase by exactly as much and so forth.
So I am just--I don't mean to pick on words, but I do think
that they are important here. You are absolutely right when you
speak of the surplus and whether we are going to be able to
protect as much of it as you think is wise. I didn't want
anyone confused that the trust funds were any smaller than they
deserve to be.
Mr. Spratt. Well, the difference is, if you have a spending
initiative that is not offset, then you will borrow the money
from Social Security to fund that initiative. Sure, Treasury
will give a bond to the Social Security trustees in return for
that borrowing, but that will be to the extent of the value of
that bond, that much less debt that will be paid down in that
particular year.
Mr. Daniels. Well, now we are at the right point. The
question is finally that last increment of debt to be paid down
and how much is enough, how soon.
Mr. Spratt. I am reading your own language, and I take it
you do believe differently with respect to the Social Security
Trust Fund, that we should only use it for the buy down of
outstanding debt.
Mr. Daniels. Yes, that is the President's position.
Mr. Spratt. OK. Let me ask you about the Medicare Trust
Fund, and we have disagreed about this from the first day you
testified here. The administration has taken one position; the
Congress--both parties have taken, up until now, a different
position.
If you look at your forecast again on table 3, page 8, OMB
shows that your budget--if I am reading this correctly--will
invade the Medicare Trust Fund, every year through 2006.
Now, this particular rendition of your budget includes the
$18.4 billion addition for defense, but it doesn't include any
follow-on increment, nothing for transformation. In fact, you
say, ``Pending the completion of the defense strategy review,
this review assumes a current services budget for DOD in the
out-years based on the proposed 2002 level.''
My question to you is: You also described this as a first
installment. But I look out 9 years, waiting on the other shoe
to drop, and I don't ever see it drop. I don't see the second
increment, the increment that will go to fund transformation.
Where does that come? How is it paid for?
Mr. Daniels. Well, it will come if and when the President
approves the recommendations from the Defense Department or
elsewhere for any increases. It can come from two places,
probably from a combination of two. One, of course, which is--
somehow usually brushed by in these conversations is the
embedded base of spending in the Federal Government. You know,
all of the numbers on the chart behind you assume that the
entire $1.9 trillion edifice of spending just lumbers on
absolutely untouched and grows with inflation.
The numbers which mostly I can read as I look across and
see minus 40, minus 38, 40, 41, 42 and so forth, these amount
to 2 percent of the revenue, less than that by then, of the
Federal Government. And, you know, this should not be beyond
your ability to manage.
So one place that any increases come from is from the
redeployment from old, outmoded, duplicative, perhaps failed
programs to new.
Also, there remains under either projection here hundreds
of billions of dollars of on-budget surplus uncommitted. Even
after the defense increase, the Medicare prescription drug
increase, that is already incorporated into our numbers, there
is almost $600 billion on-budget surplus uncommitted so far and
available to be distributed among all of those programs.
Mr. Spratt. That is only if we use OMB instead of CBO's
forecast?
Mr. Daniels. That is right. The differences between the two
are very small, even here. It is not particularly a
disagreement about receipts. The largest single difference
between our professionals' forecast and the CBO forecast, has
to do with the cost of Medicare.
CBO sees the cost of today's Medicare program growing more
rapidly, $224 billion more over the 10 years, than we do. And
when we get a chance I know our folks and theirs will want to
counsel back and forth about who is right.
Mr. Spratt. The extra money you are talking about also
includes the Medicare surplus, which gets back to the
fundamental disagreement between us. We have to recant and
abandon all of our commitments that we have made over the last
couple of years, legislation brought to the floor, statements
made in earnest. We have to trash those in order to have that
additional money to spend. We have got to spend the Medicare
surplus to have that kind of walking-around money that you are
talking about.
Mr. Daniels. Well, it is not my place to recommend how
folks deal with those things. I would say that the commitment
that was made in time of deficit, in time of real deficits,
just yesterday--really a few years back, although I must say,
and it has been written a thousand times now in all of the
newspapers that can I find, that is fiction. But, you know,
some fictions are useful; and I think this was one because it
did help bring greater discipline. But it doesn't make it, at
least in our reading, any less fictional when you really look
at what Medicare takes in and costs.
Mr. Spratt. Regardless of the administration's position, my
counterparts on the other side of the aisle, wrote into the
budget resolution a provision with respect to defense and the
farm bill. It effectively gave the chairman substantial
authority, unprecedented authority, to adjust the budget
allocations to those two programs by whatever amount he deemed
advisable and wise after looking at Rumsfeld's report on
transformation, in the case of defense.
But we put a limit on it. They put a limit on it. That is,
we limited him from invading the Medicare Trust Fund.
So now the chairman of the Armed Services Committee and the
chairman of the Budget Committee have a hard decision to make.
If they add the $18.4 billion additional funding for defense
which the administration is seeking, they have got to take it
out of the Medicare Trust Fund. That is where it will come. It
will mean a deeper, more lasting invasion of the Medicare Trust
Fund. So they have got to not just recant political rhetoric,
they have got to violate the written letter of the budget
resolution that we--that the Congress--adopted just months ago.
How do you resolve that? Are you saying to the Congress
that we should ignore the Medicare Trust Fund since it is not a
Trust Fund, it is an artificial overage, as you put it, in the
resolution and go ahead and pay for the defense increases out
of the Medicare Trust Fund?
Mr. Daniels. First of all, I would reassure the chairman as
he thinks about his decision, whatever he is doing does not
affect the Medicare Trust Fund as the chart behind you
indicates. It doesn't say anything about the level of the Trust
Fund. It talks about the surplus, the part attributable to
that.
It is my happy opportunity to let Chairman Nussle know that
if the budget resolution is funded all of the way, as the
President would recommend, the Medicare Trust Fund next year
will be $234 billion.
If for some reason Congress decides not to fund it and not
to fund any of the defense requests, the Medicare Trust Fund
next year will be $234 billion. It will have no affect
whatsoever on the level of the Trust Fund, let alone benefits
paid.
I just think we do need to be precise about this, so as to
not lead any recipients or supporters of that program in any
confusion.
I do understand the point you are making, that there will
have to be an active decision made to make an additional
request, and I very much respect the position of the chairman
and others who have said they want to see a real showing of the
justification and the strategy and so forth. I believe those
things are in the works and that showing will be made, but that
is a position I think we all respect.
Mr. Spratt. Let me make one final point and then we will
turn to others. On several occasions in your report and in your
testimony, you refer to explosive spending increases to the
biggest one-time increase in discretionary spending, 2001 over
2000. Let me just say to counter that and see how you respond
to this; on page 5 of your mid-session review, you state that
last year's appropriations include the largest 1-year spending
increase in history, about $50 billion over 2000. I take it
that is budget authority. Isn't it true that BA, budget
authority, for advanced appropriations more than doubled from
2000 to 2001, from $11 billion to $23.5 billion, and that kind
of artificially inflates the number for 2001?
Mr. Daniels. Well, advanced appropriations have multiplied.
It is certainly true. It is one of the--as we see it--unwise
practices that we are working hard to try to corral and curb
along with earmarks, for example, and the misuse of the
emergency designation. So, yes, that was a contributing factor.
It does lead to real spending, but I agree that it certainly
was a factor in generating this very large----
Mr. Spratt. So that we can have an apples-to-apples
comparison, this simple bar chart here shows you if you back
out advanced appropriations and supplementals and just deal
with regularly appropriated discretionary spending, from the
year 2000 to the year 2001 the increase was $38 billion, 6.7
percent. This year from 2001 to 2002, your first fiscal year
will be--full fiscal year will be 2002--the increase is $44
billion. That is using budget authority. Do you dispute that?
Mr. Daniels. No, but it makes in my judgment, one very
fundamental error. You say if we don't count supplementals.
Multiple supplementals of the last year amounted to--I have to
check--$20-odd billion or more. The President has said this
year we were going to be much more guarded about that, and of
course the only supplemental that has passed and was signed was
that essentially for defense, about $6 billion.
So, two things: Number one, I think the 2001 level is
dramatically understated. I don't think it is fair not to count
the supplementals. Also, when you do put the supplemental that
was passed this year into the base for the preceding year, it
brings that 7.2 percent down to a little under 6. I understand
the adjustments you are making, but I think that one is not a
fair representation.
Mr. Spratt. Let us look at it differently, and this will be
the last question. Look on page 36, if you will, of your mid-
session review, table 12. You have the mid-session estimates
there of discretionary outlays, actual spending. This year,
fiscal year 2001, you are estimating actual spending at $651.4
billion. About 2 or $3 billion of that is in supplementals, the
defense supplemental. Next year, your estimate of outlays is
$699 billion. If you deduct the supplemental from this year,
that was your policy, and just look at what the level of
spending was as appropriated. You have got a $50 billion
increase from this year to next year. So while you are decrying
the $50 billion increase from 2000 to 2001, in effect you have
got the same thing, with an outlay increase in your budget
request from this year to next year.
Mr. Daniels. First of all, of course, the Congress votes
that budget authority outlays can move around based on--and not
in lockstep with the spending Congress votes for--the timing of
when the program finally spends.
I think the general comment I would make about the spending
of last year--and I think we have been fairly consistent in
this--is the President has taken note that there were very
rapid increases. Chairman Nussle's earlier chart showed the way
in which spending took flight above and beyond the caps that
were in law as soon as the surplus arrived about 3 years ago. I
think when we have noted that, it is less for the purpose of
looking in the rear-view mirror than really for purposes of
saying that we can--because there was an awful lot of new
spending done last year, and the previous couple, we can
moderate the rate of growth of spending in a lot of these
programs; in many cases I believe, very much a need for
digestion, a pause and reflection on what all this new
spending--how effective it has all been. And I think that is
the main reason to draw attention to it.
Mr. Spratt. I don't disagree with that, and I think every
dime we spend ought to be scrutinized and heavily justified.
But nevertheless, when you look at these numbers, you are not
exactly pulling in the reins yourself. You have got a
substantial increase this year over next year in your own
budget, and defense is part of it. You are--
Mr. Daniels. That's correct, sir, we----
Mr. Spratt [continuing]. Billion in defense over and above
this year.
Mr. Daniels. I think when the budget was presented this
year, we talked in terms of reasonable growth, not cuts and
freezes and that sort of thing. The Nation does have needs, and
clearly in defense probably more than other areas; probably
education behind it. The President supported a significant step
forward, but the budget presented, even as amended, year over
year, is about 5.9 percent above the final 2001 number, and
that does reflect a moderation in the growth rate that preceded
it.
Mr. Spratt. Let me just say in closing, with respect to the
numbers that the Chairman showed, putting the caps, I was one
of the budget principals who helped negotiate the Balanced
Budget Agreement of 1997. When we set the out-year caps, we
knew they were extremely tight. We were resolved to adhere to
them if necessary. As it turned out, we were in unified surplus
the first year out of the box; 1998, we had a unified surplus.
As a consequence we, de facto, abandoned those and went back to
budget reality for out-year spending. So those were
unrealistically low caps to start out with.
Thank you very much, Mr. Daniels.
Chairman Nussle. Mr. Sununu.
Mr. Sununu. Thank you very much, Mr. Chairman. I very much
appreciate the closing remarks of the ranking member, and in
general agree with some of the points he was making with those
final slides. We can debate about the budget mechanics, but
whether the increase year on year from 2001 to 2002 is 5\1/2\
percent or 6\1/2\ percent or even, as one of his slides
suggested, 8 percent, I think the point is there. It is a
pretty significant increase over last year, and in that regard
it completely undercuts the point he was making at the
beginning of his presentation that somehow we can't possibly
adhere to the 2002 budget arrangement, the caps, the limits,
the appropriated levels; that we have to reopen the budget for
some reason at this point.
I don't think there is a need to do that. Certainly in the
35 years of deficit spending that occurred before I became a
Member of Congress, there was never a discussion about
reopening the budget because we are running a deficit. We have
had surpluses now for 4 consecutive years, and I think we did
put together a budget that is reasonable. And if we hold to the
limits of the 2002 budget agreement, we will have resources to
increase education spending by the 10 or 11 percent that the
President included in his budget. We will have resources to
invest in research and development, new medical or scientific
breakthroughs, to begin rebuilding our defense infrastructure.
That doesn't mean that we won't have difficult choices to
make during the appropriations process. I think that is to be
expected--it seems to me it is more clear than ever in hearing
this discussion--that Chairman Nussle's point about spending
being the problem, spending driving deficits, is very much the
case; because even in an environment where we allow for a 5
percent or 6 percent or 8 percent increase in discretionary
spending, for some in the House that is not enough, that there
is never enough. And there we get back to one of the
fundamental arguments for cutting taxes in the first place is
to control the revenue flow.
We still have record revenues. We have CBO and OMB agreeing
on the collection of revenues, but more tax collections than
ever in the history of the United States. I think we ought to
recognize that we cannot grow the Federal budget faster than an
average family is growing their budget, that we do have to live
within our own means.
I would like to touch on two points that were also raised,
the causes of the change in the surplus level.
First, the economic slowdown. I don't think there is anyone
in this room, anyone in Congress or around the country who is
pleased that we have such a significant economic slowdown. In
fact, as the President recognized the slowdown in the economy
at the beginning of the year, there were some people that
criticized him for doing that; he is talking down the economy,
he is somehow precipitating this slowdown. We see now that his
comments and concerns were right on the mark; that the economic
slowdown is the biggest single cause in the reduction in
revenues and the smaller surplus.
At the same time, the second biggest contributor to the
decrease in the surplus has been the tax relief package which
we have even heard today come under some criticism. But I
haven't heard anyone recommend that we increase taxes, and I
think those that finger-point at that particular policy
decision ought to be willing to state clearly and unequivocally
whether they think we ought to be increasing taxes now or not.
I think that would be a horrendous decision, a terrible policy
prescription, just at a time when the economy is slowing down.
As I traveled through August across New Hampshire, the
biggest single issue I heard raised with the tax relief was why
in the world isn't this tax relief package permanent? How can
it possibly be that the House and Senate act on a tax package
that isn't permanent? I think if we do anything for the economy
and for consumers, we ought to implement right now, as soon as
possible, legislation that makes that tax relief that we passed
into law several months ago permanent.
Even so, we do have a situation today where the surplus
will be somewhere between $150 billion and $160 billion at the
end of this fiscal year, the second largest surplus in history.
The chairman pointed out we will have paid down almost $500
billion in the public debt, and in contrast to the 35 or so
years of deficit spending, I think that is pretty dramatic.
Finally, the question persists, why are we setting aside
these surplus in the first place? What are we trying to achieve
in setting this money aside? Yes, we are paying down debt. That
is important. I think it is important to control the size of
our public debt. It does help strengthen our budget. But
ultimately, the reason to have these resources this year and
next year and the following years is to help us pay for and
fund the strengthening and modernization of Social Security and
Medicare.
The director made one mistake which I am inclined to point
out, and that was with regard to the age of Medicare. The
Medicare is 36 years old. I happen to know because we are the
same age. I have changed a little bit in 36 years, but as the
director pointed out, Medicare really hasn't.
So I would like to close with a question for Mr. Daniels
about these programs.
The size of the surplus: To what extent does the size of
the surplus, whether it is $150 billion this year or 180, does
it affect the long-term strength or health of these programs,
and what are the real issues that are contributing to long-term
weakness in Medicare or in Social Security? I am concerned that
with all the discussion about whether the surplus will be $152
billion or $160 billion and whether it is the second largest in
history or the largest in history, we lose sight of the need to
take up serious substantive legislation on these issues. And I
hope you can address that point.
Mr. Daniels. It would be really quite tragic if the process
were to procrastinate on the reform of either Social Security
or Medicare. On other occasions I pointed out, I think that may
be the single biggest problem with the misconception that we
have a Medicare surplus. It could lead people to believe that
any program with a surplus is doing just fine, thank you, and
the political process does have a tendency to wait for crises
to act. That would be very, very unfortunate in this case
because, as we all know, action to reform a long-term
entitlement program can be much more moderate, much more
gradual, if taken in a timely fashion as opposed to waiting
until the wolf is at the door.
So I would remind the committee that this President has
committed himself to the reform of both programs, and we all
know how difficult that will prove to be to reach agreement on
that. But I sure hope that there will be bipartisan commitment
to get about that business.
Mr. Sununu. What about all of the discussion or concern
about the tax relief package, that somehow is a part of the
problem; and the suggestion, I suppose, that repealing that
package or raising taxes would help solve some problems? What
effect would a significant tax increase right now have on the
long-term solvency of the Social Security program, for example?
Mr. Daniels. It wouldn't move the solvency date by 1 day or
1 year, just as it wouldn't mover the benefit level. And it
wouldn't move the size of the trust fund----
Mr. Sununu. Let me interrupt you there. I don't know if
that is correct, because if a tax increase were to have a
negative effect on economic growth, economic growth is one
thing that really can hurt the solvency for Social Security and
move it back; isn't that right?
Mr. Daniels. That is correct. I was going to move on to say
that there are really only two things I think that matter in
terms of the long-term viability of those programs. One is
economic growth and anything that bends the trend line--again,
CBO and OMB as well as most private forecasters, we have
identical and most have very similar expectations for long-term
real growth--anything that bends that trend line down will have
a very deleterious effect on those programs pretty quickly. So
higher taxes anytime, particularly at a time of near stagnation
like now, we think would be very ill advised.
The other thing that matters is reform. The biggest thing
that matters is whether we can put those programs on a viable
footing on a day when we have a much lower ratio, much lower,
of people paying to people taking out.
Mr. Sununu. Thank you, Mr. Chairman.
Chairman Nussle. Mr. McDermott.
Mr. McDermott. Thank you, Mr. Speaker. I----
Chairman Nussle. No. Mr. Chairman. I haven't gotten a
promotion yet.
Mr. McDermott. With your skillful way, I am sure you will
be there shortly.
I spent half a month in August in my district and I am
happy to report--I want to say something positive before I get
going--that the checks are arriving in my district. A lady sent
me a $1.65 check and said, you use this anyplace you think it
will do any good. Another one sent me the letter that said she
didn't get any tax rebate at all. She had this letter and down
at the bottom it said zero. She said how can that be? I pay
taxes.
I want to understand, you have got John here who is a
country lawyer, and I actually come from corn and pig farmers
in Illinois, in the Speaker's district. I just came from a
family reunion in Oswego, and the people there when they pay
their taxes, they think of it in terms of three shells. They
put one shell, that is, the Social Security part on their
paycheck. And then they have the Medicare part on their
paycheck. And then they have their income taxes. And you have
been real careful with how you have used your language. The
President said in his speech, anybody who pays income taxes is
going to get a tax cut. Now, people at this family reunion
couldn't figure out, if they paid these other two into Medicare
and Social Security, why they didn't get anything. I explained
to them those are trust funds. You have got to keep that money
separated from the regular income tax money.
What you are telling us today is that these numbers on this
driver's eye chart up here, if we move anybody from that
Medicare money, any money that came into the Medicare fund, and
we put it over here in the general government fund, it really
is still over there. It is still under this one, right? And you
say if you take any money out of that which was paid in for
Social Security and it winds up over here in any kind of
general government, it is still under here really; you just
can't see it.
Well, I will tell you something. You should go to a county
fair, because they have got a game like this, and they put a
pea under here and they move it around real fast, and you can
win if you can figure out under which shell that pea really is.
And if I understand you correctly, what you are saying is we
really have only one bag of money. These trusts don't really
mean anything. What you want the American people to believe
now, after all this talk about lockboxes and all that stuff, is
suddenly it is all under one. Don't worry about your Social
Security, don't worry about your Medicare, we don't have any
trust funds or anything, we will take care of it out of this
one. Is that what you are telling the people? There is no place
where their money is being taken from? I know you are putting
bonds under here. That is what you want them to believe. That
isn't raiding the Social Security when you take it and put a
bond under there and say someday you come collect the bond when
you need it. Is that what you are saying to people?
Mr. Daniels. Well, Congressman, first of all, I think your
metaphor is probably an interesting one, because there is
certainly a shell game quality to the way Social Security has
been presented for a long time. If people have believed, for
instance, that they had any money that they owned, that they
were actually putting money away for their own retirement,
obviously there was no pea under that shell. But I think our
understanding has begun to improve about this.
Mr. McDermott. Do you mean they were stupid in the first
instance and now they have gotten educated? What are you saying
about people? They were led to believe that by the United
States Government.
Mr. Daniels. Well, I hope that was inadvertent, because it
was never true, ever, that a person was putting money aside for
his or her own retirement. But I don't think that is the
question you are really asking. And the answer simply is--I
mean to the multiple questions you asked--we are treating the
trust funds as we always have, always, from the inception of
the programs. They are growing by exactly what they are
entitled to grow. But it is not cash in the drawer. It is
bonds, future promises, as it always has been; nothing has
changed.
Mr. McDermott. Let me stop you right there, because you and
I know, maybe the American public doesn't understand what the
baby boom generation is all about, but you and I know that at
the end of this budget period in 2010, all the people born
since the Second World War are going to show up looking for
their money under this Social Security Trust Fund. And when we
talk about surplus, we are talking about right now, yes, we are
raising more because we want to have it there when we get to
2010 and try to pay for those people.
Mr. Daniels. What do you mean ``it,'' Congressman, it won't
be there? If by ``it'' you mean the money coming in the door,
it won't be there. Only bonds will be there, exactly the same
as the number under any set of policies----
Mr. McDermott. But wouldn't it be better to leave it
there----
Mr. Daniels. If the government continues to gather in
vastly more money than it needs to pay its bills--it doesn't go
under a mattress, doesn't go into your shell, doesn't go into
some box, locked or unlocked. It goes to pay the debt to the
extent we can, and that is it. The Social Security Trust Fund
in 2010 will be exactly the same size as it would be if there
had never been a tax cut or if there had never been a
rebuilding of our defense. They are completely unrelated. And
that is the truth.
Mr. McDermott. You are basically saying that we have one
bag of money from which we can pay all this stuff. Now, what I
don't understand is how you are going to pay--I sit on the Ways
and Means Committee. I don't understand how you are going to
pay for tax extenders or the energy bill we passed out. The
budget had $9 billion for energy. We passed out $33 billion
with no offset. The House leadership would not let us put an
offset on the floor. So I don't understand where--the
difference between 33 and 9 is, in my calculation, $24 billion.
Where does that come from?
Mr. Daniels. Well----
Mr. McDermott. Where are we going to pay for that?
Mr. Daniels. Well, there are a lot of ideas and bills
around. The bill----
Mr. McDermott. But you are representing the President. He
has the veto. He will end this process. What are you going to
recommend to him?
Mr. Daniels. I am going to recommend that total spending,
whatever its compensation, be held to the level of the budget
resolution. It so happens that by doing that, we believe the
Nation's needs can be met, and among those the goal that will
be fulfilled is the full protection of the Social Security
surplus for next year for debt reduction. So that would be my
recommendation and----
Mr. McDermott. So you are going 1 year at a time, if I get
it? I listened real carefully to your words. You said, I am
going to recommend that you have enough money to pay for Social
Security next year. So you are worried about 1 year at a time
and----
Mr. Daniels. Excuse me. I thought you were asking about the
budget that is in front of us and the appropriations decisions
that are in front of us which applied to fiscal 2002.
Mr. McDermott. But these implications of this budget run
out for 10 years, don't they?
Mr. Daniels. All are subject, as you know, to human will
and leadership, and I made this point when I thought there was
an inference that we were locked into baseline increases for
this entire $2 trillion Federal edifice. We are not. We can
change all of that. And, by the way, we should. No business I
know, no nonprofit enterprise I know, just automatically
assumes in everything that is unquestioned, grows it by
inflation, and then worries about if you can pay for the new
needs. And we have got to get a----
Mr. McDermott. The only thing I can say in closing is this:
We shut the government down. The chairman and his fellows
thought it was important to shut the government down in 1995
because we were using OMB numbers and we had to use CBO
numbers. If we couldn't get it based on CBO, we were going to
have this country without any financial operation. And we went
by that.
I now hear people saying that your budget, which implies
has all kinds of policy in it--Dr. Crippen's budget does not
have policy. It just goes by the law. Yours has all kinds of
manipulations which gives you a 1 billion surplus this year and
1 billion next year and a 4 billion the third year and 6 the
fourth. That is like landing a 747 on a dime. The reason they
make those runways 9,000 feet long is because you can't be sure
you are going to get them down right on the spot you want them
on. But you are saying that is budget numbers--if we rely in
this committee on CBO, we are going to have some trouble with
your budget in my view.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Bass.
Mr. Bass. Thank you, Mr. Chairman, and thank you, Director
Daniels, for coming here today.
We need to remember, as you mentioned in your opening
remarks, that we have budget surpluses that are larger than we
have ever had in American history. We have a lot to be grateful
for, although there are some problems and some challenges
facing this committee and the Congress and the administration
that were not anticipated earlier on this year. I hope that we
can work with you in a constructive manner over the next few
months to develop changes, if necessary, to construct a budget
that would reflect reality.
Now, I would only point out that complaining for
complaining's sake is not how I would define a constructive
approach for dealing with the problems that we face today. The
fact is for the last 35 years or so--or since I was 13 or 14
years old--the trusts didn't mean anything. They didn't mean
anything to the administrations at the time, sixties,
seventies, eighties. They didn't mean anything to the Congress.
And now all of a sudden they seem to mean everything.
I also harken back to the four or five, five or six late
nights that I have spent in this room working up a budget in
which we discussed and debated tier 1 and tier 2 and tier 3
amendments, all of which, every one of which, were offered by
my friends who are now so concerned about the disappearing
surplus. Had all those amendments passed--and fortunately none
of them did--two thirds of the loss of surplus, or probably
more than that, would be due to increased spending. There would
be economic issues to deal with, probably very little tax
relief, and we would be in the same position we are in today.
The fact is that this Congress has moved forward in a
bipartisan fashion with the administration to try to deal with
the economic slowdown proactively through a rebate program
which I think will work. We do have some problems which have
been brought up and will be continuing to be brought up by the
other side which I think we can work out.
Director Daniels, I look forward to working with you in a
positive and constructive manner to make sure that we do
everything we possibly can to bring about an economic
turnaround in this country; that we try to keep the lid on
spending to the greatest extent possible; and that we get the
business of complaining about something that we have all been
working on over the last 6 months, on both sides of the aisle,
out of the way and start looking toward the future.
I really have no other observations, Mr. Chairman, and I
will yield back to you.
Chairman Nussle. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Daniels, it is always good to see you. You talked about
overcharge, and I think there is another word we need to talk
about and that is ``overpromise.'' Looking at your budget, the
administration has a choice to make. They have a choice of
whether or not they are going to keep the commitments that the
President made last year and the commitments he made when he
addressed Congress this year, or whether or not they are going
to have to come forward and admit that they can't meet those
commitments.
I look at your mid-session review and, yes, we can
accomplish what you say we can accomplish and not go into these
trust funds if the administration goes back and says, well, we
are not going to plus-up DOD, we are not going to reform
Medicare, we are not going to reform Social Security, we are
not going to increase funding for education--as the President
said he wanted to--we are not going to fund prescription drugs.
And, in fact, your own document cuts back what the Congress
said they were going to do for prescription drugs in the budget
resolution that the Republicans passed. On top of that, that
the economy in the next 6 months is going to grow at an 100
percent faster growth rate than it has in the previous 12-month
period. I am not aware of anybody in the mainstream school of
thought on Wall Street, in academia, or in the Washington, D.C.
area, who believes that the economy is going to turn around
that fast. I hope it does and I know all of us hope it does,
but I don't think we are going to go from 1.7--if we get to 1.7
GDP growth rate this year--to 3.2 percent GDP growth rate next
year. I think that is quite a loaded assumption.
So I think the administration is going to need to come up
and tell Congress--and pretty darn quick--what priorities of
the President it wants and how it intends to pay for those
priorities.
I also must take issue with your comment regarding the
trust funds because if you look at your own document, on one
page you say the trust funds don't exist; on the other page,
you take credit for how this administration is increasing the
amount of dollars that are in the trust fund, even though that
is a matter of ongoing law. It is a mandatory program. It is
not anything you did. It is not anything we did. It is
something that, quite frankly, was started 30-some-odd years
ago. But you all trumpet that fact, and then you turn around
and say it doesn't exist.
It does matter--and I am going to give you a very
bipartisan approach as to why it does matter--whether or not
you spend against the Medicare and/or Social Security Trust
Fund, which, if we use the CBO numbers, is exactly where you
are heading. I think you would agree with this because I think
this is as much a Republican as Democratic theory of why it
does matter. And you are right, it isn't going to affect the
amount of money that is in the trust fund; but what it is going
to affect is the amount of public debt in the future that our
children and grandchildren are going to have to pay off, and
without doing one thing for Medicare, without doing one thing
for Social Security, to extend the solvencies of those
programs. What we are doing under the budget that the President
has submitted and the spending that the President himself
wants, without any action by Congress, would be to increase the
public debt, increase the mortgage that our children are going
to have to pay, without fixing these programs at all.
So, yes, it does matter. You cannot just say we have plenty
of money, the surplus numbers are going to be the same, we are
just not going to pay down as much debt. But we are borrowing
today to spend today under the President's budget, and I think
that is a serious problem.
We use CBO's numbers--which is what we in the Congress do--
and as my colleague mentioned, we had serious debates over
this. The government was shut down twice in my first term in
Congress over this issue. The prior administration agreed to
use CBO numbers. If we use CBO numbers, you all are in the red,
and that is just on a current services budget. But if we
include the defense plus-up that we know the President wants,
if we include what the President agreed with Congress earlier
this year on prescription drugs in Medicare reform, the $300
billion program, not the $149 billion program that you all are
talking about now, if we take all of the things you said we
want, we are in the red.
How do you intend to pay for those, not just this year but
over the next 10 years, and when are you going to send that up
to Congress? When are you going to send us, particularly as it
relates to the coming fiscal year, the cuts that the
administration wants Congress to make to make the budget
balance?
Mr. Daniels. Thank you, Congressman. There are several
important questions in there. I think I caught them all. Let me
first say that I don't think you heard me say the trust funds
don't exist. Of course they exist. It is what they consist of
that some people occasionally mistake, and they only consist of
government bond's promise to pay in the future. It is a
privileged promise and one people can rely on, but that is what
it is. Sometimes I try to help people straighten out the
confusion that suggests that they get bigger or smaller
depending on our on-budget decisions or the size of those
surpluses. As I think I illustrated again today, they don't.
Let me answer your question about assumptions and so forth.
Let's untangle this for you, because I do think it is an
important question. We are still pretty low-tech, too. But
looking at the left side of the chart, the green bar refers to
our assumption for next year, 3.2. It is above the median of
the blue-chip forecasters but sort of within that range. And it
is below the sort of the top quartile, quintile, I guess; 10
out of about 47. Meanwhile, CBO is just on the other side of
the median on the low end, but also I would say kind of in the
mainstream, well above the bottom fifth.
But none of that really matters or should matter to this
committee because of the bars on the right side. They are
somewhat more guarded about economic growth. Some people act as
though that were the direct driver of the revenues. It isn't.
It is just one of the variables. We are more conservative about
how much revenue will be collected per dollar of economic
growth, so----
Mr. Bentsen. If I might just interject, because if you look
at your mid-session review and your long-term numbers, you
actually argue, after we have seen this downturn in the economy
and in virtually all indicators--even productivity numbers are
off from a year before--you are projecting an actual increase
in your mid-session review of about 74, $75 billion in long-
term receipts. Where does that come from? I mean, the spread
between your GDP assumptions and your other assumptions on just
the baseline alone shows a spread of about half a trillion
dollars between you and CBO over the next 10 years. Those are
pretty big numbers.
Mr. Daniels. Actually, the receipts difference--as Dan's
testimony points out, and you can ask him about this when he
gets here--is less than a percent over the whole time period. I
think the basic difference between our economists and theirs
has to do with how fast the snap-back is and whether the lost
ground is eventually recovered. The difference is very small,
and it is zero for next year, which I think is the question
that may be most important for now. You know, some would have
thought, not an unreasonable conjecture, if you knew only that
we saw a little higher growth for next year, you would think we
were expecting a lot more money to spend. We are not. We are
projecting exactly the same amount of money, 2135, that CBO
comes to. All I can tell you is that both organizations are
populated by very serious career professionals, and through
somewhat different combination of assumptions, have given this
committee of Congress really the same forecast for next year as
to how much money is available. I would hope that Congress
takes some comfort from that.
By the way, this amounts, apples to apples, to about a
little over 3 percent increase in revenues over what we are
getting this year. That is about the growth rate of this year;
and this was a pretty crummy year, relatively speaking, for
revenue growth.
These forecasts, I think, are pretty darn cautious as to
how much money will be there, how much surplus will be left
after we subtract spending.
Let me go to a couple other questions that you asked.
Please be careful about saying things like we are borrowing
today. We are not. We are reducing borrowing. People are
already beginning to talk about what happens when there are not
enough Treasury bonds to keep the markets liquid; but we are
reducing borrowing, paying down well over $100 billion of debt
on a net basis. You said something about debt increasing over
the time period. No. We are talking about how much and how fast
debt will come down----
Mr. Bentsen. That increase is relative to the amount it
otherwise would have been reduced. The fact is that there will
be debt in the future, and rather than pay it down more
rapidly, you do borrow against it. You are leveraging the trust
funds, and that is not--I am not alone in that thought. Ask
Chairman Greenspan his viewpoint on that. I think he has been
very clear on that thought.
Mr. Daniels. Sure. And I think we can have honest debate,
and we should year by year, on what is the right amount, how
fast is it necessary to bring it down. I would just say that
from the President's standpoint, we seek a balanced program
that includes historic levels of debt reduction but also
includes tax relief that we hope will restart and then sustain
economic growth, without which this will all become a very
different discussion if we don't have economic growth. And so,
what we ought to discuss is, is $170 billion enough to bring
down debt, or is for some reason 75 or 80 a better number?
My only view is that you are really fooling around with
margins there, and debt reduction is not the only objective;
and, if carried too far, we can make a real mistake. We cannot
tax our way to a better fiscal future. We cannot tax our way
through a sustainable Medicare system, for instance. If you pay
down all the debt we can a year earlier and have not reformed
Medicare, for instance, you haven't done anything, because that
money will be borrowed back in a flash and you will be
hopelessly in arrears before you know it.
So thank you for an important series of questions----
Mr. Bentsen. Finally, but also in order to fund your
programs, assuming CBO's numbers are correct, the President's
priorities, not Congress's, what cuts do you all intend to send
up to the Hill to fund those?
Mr. Daniels. None. None in the 2002 context because our
data--and I think CBO is right on top of it--says that we can
fund the budget resolution levels and maintain Social Security
surpluses for debt reduction----
Mr. Bentsen. Then are you going to declare a recession or
declare war, because CBO says you go into Social Security by I
think $9 billion and----
Mr. Daniels. Oh, you are talking about 2001, the year we
are just concluding, which is the budget that the President
inherited, and we talked about this before. We won't know for a
month or two whether we are just above or just below that line.
But in either case, it has nothing to do with the President's
budget.
[The prepared statement of Mr. Bentsen follows:]
Prepared Statement of Hon. Kenneth E. Bentsen, Jr., a Representative in
Congress From the State of Texas
I am pleased that the House Budget Committee will have the
opportunity to question Office of Management and Budget (OMB) Director
Mitch Daniels, as well as Congressional Budget Office (CBO) Director
Dan Crippen about their new economic forecasts released during the
August district work period.
Today is not about assessing blame. It is about the Congress and
the White House coming together to evaluate these new forecasts and
begin appreciating their ramifications with respect to the President's
domestic and foreign spending priorities. I am stunned at how much the
Nation's fiscal picture has changed in four short months. Recall that
in April, the OMB surplus projections were $281 billion for this fiscal
year and $3.4 trillion for the next 10 years, which they portrayed to
be more than enough to fund Bush's tax cut and new spending
initiatives, while staying the course on debt reduction.
Today, our Nation must come to terms with a new fiscal reality. By
OMB's own admission, $123 billion of this year's surplus had somehow
vanished, leaving a $158 billion surplus, almost entirely made up of
Social Security tax receipts. We now expect that in Fiscal Year 2001
alone, all of the Medicare Trust Fund ($29 billion) and $9 billion of
the Social Security surplus will be consumed to fund government
operations, according to the CBO, the Congress' official budget
analysts. Moreover, looking ahead, the CBO estimates that all $170
billion of the Medicare surpluses and $30 billion of the Social
Security surpluses will need to be diverted to meet our current
obligations over the next 5 years.
At this critical juncture, with much of the Appropriations process
still ahead, it is vital that President Bush identify where spending
will be cut in order to make room for his initiatives, including a
$18.4 billion boost to defense an enhanced Federal role in education as
well as Medicare reform. Will farm subsidies have to be slashed? What
about tax credits for the working poor or housing programs? What about
prescription drugs? What about the missile defense shield?
Additionally, I am growing increasingly concerned about recent
statements from Congressional Republicans that signify an about-face
regarding Congress' commitment to protecting the Medicare Trust Funds.
On four separate occasions over the past 2 years, the Republican
leadership has shepherded legislation to the floor that not only
dedicates the Social Security surplus but also the Medicare surplus to
debt reduction. At this time of weakened economic performance, I am
deeply concerned by the apparent willingness of Congressional
Republicans' to retreat from their commitment to paying down the
national debt. This departure from the path of debt reduction, in
addition to the ``incredible shrinking surplus,'' perpetuates economic
uncertainty within the financial markets, potentially doing real damage
to today's sluggish economy.
Finally, it clearly appears that the President and his allies
overcommitted and cut the budget and fashioned the tax cut too close to
the margin on the basis of overly optimistic economic assumptions. Now,
the President's budget has us borrowing against Social Security and
Medicare, increasing our long term public debt and leaving not a penny
for fixing those programs.
I am eager to hear where the administration plans to make the
budgetary adjustments to meet our current obligations and their own
spending priorities while adhering to the Congressional mandate for
debt reduction and protection of the Social Security and Medicare trust
funds.
Chairman Nussle. Mr. Spratt.
Mr. Spratt. One clarification for the record. When you said
that you are requesting still the existing 302(a) allocation
for discretionary spending, do you mean that, plus the 18.4
billion?
Mr. Daniels. Yes, sir; I am sorry, I probably spoke too
casually. The budget resolution, but I do mean to include the
supplemental request----
Mr. Spratt. On top of that.
Mr. Daniels. Yes, sir.
Chairman Nussle. Mr. Gutknecht.
Mr. Gutknecht. Thank you, Mr. Chairman.
I must say that listening to the testimony and looking at
the charts, I feel reassured. Frankly, some of the overheated
rhetoric we heard over the last several weeks coming out of
Washington I think has been unfair and in some respects
misrepresented what is happening with the budget. One of things
I would like to really make clear is that we heard the term, we
had a $280 billion surplus and now that surplus is gone. I just
want to make it real clear we never really had $280 billion in
the bank. Wasn't it a projected surplus?
Mr. Daniels. That is correct.
Mr. Gutknecht. So in some respects, I think all of this
discussion has been, as I say, unfair.
I want to come back to something else that was said earlier
about the shutdowns, because I think even there, there was some
misunderstanding of what happened. For those who weren't here,
the shutdowns, in my opinion--and everybody is entitled to
their own opinions, we aren't always entitled to our own
facts--but the shutdowns weren't so much about CBO versus OMB.
It was really ultimately about spending. And, as I recall, the
last number of years where we have had budget impasses--in
fact, I think the budget that we are all concerned about today,
the 2001 fiscal year budget, the final numbers were agreed to,
if I recall, after last year's election. In fact, I think it
was in December when we finally came to an agreement. And if I
recall what the pivotal differences were, the President wanted
to spend more money than the Congress wanted to spend; and, as
a matter of fact, that goes back to 1995. The debate was never
that the President was trying to slowdown the spending of the
Congress. The problem was that the President continually wanted
more money for the administration's proposals than the Congress
wanted to give him.
Now, you weren't here, Mr. Daniels, and you don't have to
comment on that, but that is the way I remember it. One of the
reasons I am reassured by your testimony is that it sounds to
me--and I hope this is true--that this administration intends
to be pulling the rope in the opposite direction. You are going
to be trying to slowdown the growth in spending that perhaps
Congress wants to authorize and appropriate.
I want to come back to two points that I thought were very
important and hopefully didn't slip by members of this
committee. The first was that I think you made the point that
this year we will be paying a premium for debt reduction of $10
billion. Is that correct? Did you say that?
Mr. Daniels. I did.
Mr. Gutknecht. In other words, we are paying down debt
faster than the debt is actually coming due.
Mr. Daniels. We are paying down some debt that is not yet
due; that is correct.
Mr. Gutknecht. And so we are paying a $10 billion premium
to do that. That is interesting, especially in light of some of
the overheated rhetoric.
Mr. Daniels. Let me just interject. Not to leave any
confusion, these are prudent premiums. These are simply present
value premiums more or less for debt that is not yet due. We
are not yet at the point, which at some stage we will reach
under these projections, where you have to pay penalties to get
people to turn over their bonds early. So I don't want any
confusion----
Mr. Gutknecht. But in any event----
Mr. Daniels. These were prudent repurchases.
Mr. Gutknecht. All right. But in any event, we are paying
off the debt as fast as it comes due right now.
The second point I think is important as well, that our
former colleague, Mark Newman, probably had the best regression
analysis of anybody I have ever seen, and I remember what he
would project in terms of revenue growth over the next 10 years
or however long you wanted to go. I found it interesting that
you are actually only using a little over 3 percent revenue
growth, year to year, for next year. Could you put that in the
context of how much Federal revenue has grown? Do you have the
numbers, or would one of your staffers have the numbers of how
much revenue has grown to the Federal Government over the last
10 years?
Mr. Daniels. I don't have it on the top of my head, but it
would be well in excess of that, certainly, for the last few
years where revenue growth was very, very rapid and surprised
everybody with how rapid it is.
By the way, in case anybody is rummaging through the
tables, for apples to apples purposes, I put the corporate tax
receipts 2 days earlier, where they otherwise would have
fallen, just to make sure we had an accurate capture of how
rapid a growth--underlying real growth, we were expecting. That
is why I get 3.3 or some such number.
Mr. Gutknecht. My point is if I look at it historically, I
think over the last 10 years we have averaged almost 6 percent
revenue growth----
Mr. Daniels. In that area.
Mr. Gutknecht. Perhaps you or Mr. Crippen can confirm that.
So to look at only slightly more than 3 percent revenue growth
next year, it seems to me you are using conservative numbers,
and the real goal here is to get the economy growing again, and
as the economy grows--and I think it will--we are going to find
a lot of the discussion we are having today is almost
irrelevant next year. We are still going to have to control
spending. That is going to be a big fight.
But I feel very reassured that you and your team down at
your administration have done a good job. I think you are on
top of this, and we would appreciate a little help and
cooperation if it looks as if we do have a little bit of a
problem before the end of the fiscal year. It seems to me that
is very manageable. You can slow some of the spendout rates. It
may well be some defense contractors may have to wait for a
week to get paid.
There are other things you can do administratively, and
frankly if you need some help from us in the Congress, I think
most of us would be willing to help symbolically to make
certain that we don't wind up in the situation that some people
have talked about. And, again, thank you.
Chairman Nussle. Mr. Clement.
Mr. Clement. Thank you very much, Mr. Chairman, Mr. Spratt,
members of the committee.
Director Daniels, I know you have got a tough job advising
the President on the budget and all that, and we appreciate
your being here.
I have had town hall meetings in Tennessee during the
break, and they are very concerned about the economy, the
softness in the economy, the layoffs. They are concerned about
the direction of our country and feel like the present
administration needs to show more leadership, more direction,
more vision, maybe more initiatives. The fact is, here the
Federal Reserve Board wrenched up those interest rates, about
six or more interest rate increases, and then started bringing
them down. But when they started bringing them down, it was too
little too late. The tax cut doesn't seem to be kicking in or
stimulating the economy much. I know you are saying that by the
fourth quarter, as I understand, we are going to have a
turnaround. But what stimulation are we going to have between
now and then to bring that turnaround?
Mr. Daniels. First of all, Congressman, I think the folks
in your town hall meetings are showing a lot of common sense.
They are concentrating on the real issue, which is how is the
economy doing; what, if anything, can the Federal Government do
to hasten its recovery? And, as I have said many times, it is
the economy that is struggling, not the finances of the Federal
Government.
The first observation I would make is that the rebate tax
relief for which the Congress voted is only about halfway out
the door so far; so I think it is too soon to know how much
effect it will have or won't have. I think we have just passed
over the halfway mark and therefore probably more than half the
effect, whatever it will be, has yet to come. There is usually,
economists tell me, a long time lag on interest rate
reductions, so we would hope that there will be effects yet to
be seen from the last couple three of those. But I think that
if the President were here, he would tell you that he
associates very much with the concern that you have reported,
and if what has occurred now doesn't show sufficient signs in
time, then we will be looking for more action.
Mr. Clement. Director Daniels, let me also ask you about
transportation. I am on the Transportation Committee, and the
administration's mid-session review indicates that outlays for
the highway programs have been reduced for 2003 and beyond to
reflect lower-than-expected revenues to the Highway Trust Fund
referred to on page 26. But, given the economic benefits of
highway construction and maintenance, such as job creation, do
you think it makes sense to plan such a dramatic decrease in
Federal funding for highways?
Mr. Daniels. I don't know, Congressman. Of course, spending
on transportation has gone up very, very sharply due to the
direction of Congress to require full use of trust fund
revenues; so spending rose with those, and rose to meet those
levels and will still be very high, I think, under any
projection. But we would welcome your input and that of others
as future budgets are put together about these--what I would
call baseline forecast levels that you are looking at,
recognizing that this may be one form of spending that has some
more economic effect than others.
Mr. Clement. Let me mention also about veterans--being a
veteran myself, and I feel like at times I am on the endangered
species list because we have fewer and fewer veterans serving
in the U.S. Congress--but the conference report on the budget
resolution included additional direct spending for veterans'
programs that the President's budget does not. Would the
President veto a bill to improve veterans' benefits that is
accommodated within the congressional budget resolution, and
would he require that spending be offset; and is the White
House considering additional cuts to veterans' programs other
than eliminating the loan program?
Mr. Daniels. Of course, the President did propose well over
a billion dollars in additional spending for veterans this
year, and I recognize it is a good chance that Congress will
increase that further. I won't speculate on what, if anything,
the President might do, but I would just say given his
commitment to veterans, it is highly unlikely that certainly
any bill within the budget resolution could not meet with his
approval.
Mr. Clement. Now, I know the chairman mentioned a while ago
and Mr. Spratt talked about the weather. Naturally I want
clement weather rather than inclement weather, you understand
that. And I want to improve the economy and all, that is
critically important for all of us.
But you are saying in no uncertain terms--because the folks
at home ask me this all the time--are we or are we not tapping
into the Social Security Trust Fund? Because some of us are
awful proud of turning that corner and having surpluses rather
than deficits.
I know some want to always be talking about the Clinton
Administration and blame everything on that. But we have a new
watch now--we have the Bush Administration. You have to take
responsibility for what actions or what happens in the Bush
Administration.
Are we or are we not going to tap into that Social Security
Trust Fund? Because my folks at home and now people all over
the United States do not want to tap into the Social Security
Trust Fund because that is a sacred contract between
individuals and the Federal Government.
Mr. Daniels. You can and should tell them that there will
never be one dollar tapped out of the Social Security Trust
Fund. It will grow by every dollar that it is entitled to and
you can tell them that President Bush, as President, has
promised every penny in Social Security benefits will be paid,
and we are doing that now with no trouble at all. And we have
$150-odd billion left over.
And the very recent--those are the sacred permanent
commitments, I would say, and they will be kept, and I am sure
both parties and certainly this administration is determined to
keep them.
There is a very new commitment, a couple or 3 years old,
not 60--got to be careful. Sununu is here. He will call me on
this--not 60-plus years old, but a couple or 3 years old, that
says, ``Let's make sure that our total surplus is as big as the
Social Security surplus and we will use that money for debt
reduction, and that we intend to do.''
Mr. Clement. Thank you.
Chairman Nussle. Mr. Thornberry.
Mr. Thornberry. Thank you, Mr. Chairman. Director, I
appreciated your answer to Mr. Clement's first question,
because I do think the key question before us is how do we get
the economy going again. I am somewhat amused by reports, press
reports that come out that say, oh, it is obvious the rebates
are not working, when as you just say they are maybe halfway
out the door.
But, the real story, the rest of the story is we do have
limited tools in the tool box to deal with the economy, both
Congress, the administration, and the Federal Reserve. I
appreciate your comments that the administration will look at
other tools if it appears at the appropriate time that this tax
relief is not working as we would like it to do to stimulate
the economy.
I think that the key point that has been made so far is to
clear up some of the confusion about these trust funds. As with
my colleagues, I had town meetings and other meetings with
constituents over the break, and I am afraid that the way that
some of the stories were written it caused undue distress with
some folks who are concerned that their Social Security or
Medicare benefits may be affected by those differing
projections that go up and down.
Making the point that those benefits are not affected in
any way, adding to that the point you have made today that the
size of the trust fund is not affected in any way by these
differing projects, I take it a step further I guess in a way
and that is the consistency of the trust funds are not affected
in any way. They still consist of the same things they would
have if we had a hundred billion dollars more in surplus, or a
hundred billion dollars less in surplus. The trust funds are
not only the same size, they are the same consistency.
So thinking ahead or thinking about you, our challenges for
the future, that has not been altered. I want to get, I guess
really I want to get to the point that I don't think that we
have talked quite enough about; that is, the opportunity that
these type budgets give us to reexamine programs and agencies
and spending. Mr. Culberson and I come from a State where
periodically every program and every agency is reexamined
because it expires and you have got to take a new look at it to
see whether you want to continue that program. They are
sunsetted.
I am most struck by your chart 3 on page 6, which gives us
the average annual percentage growth by agency over the last 4
years, and it shows, for example, HHS up an average of 11
percent, education up an average of 10 percent. Those are
pretty amazing numbers. Having been here during that time, I
don't think we have adequately examined what is working, what
is not, what is being wasted, really taking a look at those
programs. We have talked about reforms of Social Security and
Medicare. We have got to do that. But would like to know what
the administration has planned for a wider examination.
I am interested in defense reform, among others. But if you
look at this chart and the increases without that kind of
examination, it seems to me that has got to be a focus as we
move ahead. Can you tell me what the administration has planned
in that regard?
Mr. Daniels. Yes, sir. First, let me notice--or take note
that on the chart you reference that incorporates the 2002
request that the President has made or the--and so even with a
year of more moderate growth averaged in, you still have these
numbers which, as you point out, I think are pretty impressive
in showing how rapid the growth has been or I'm sure some would
say how rapid the catch-up has been for some of those
departments.
Looking forward, it would certainly be our intention to
bring to the Congress in the budget proposals for 2003 and all
subsequent years as rigorous a review of the existing $1.9
trillion of spending as we can. We were pretty, I think, candid
in admitting this year that given the abbreviated time for
transition and so forth, we were pretty cautious about
suggesting reductions and eliminations of programs and that
sort of thing, trying not to be reckless, not to post things
that hadn't been looked at carefully.
But we have been working very hard this year. We have
reviewed very, very carefully trying to for the first time
assign performance ratings to many programs, and we do take it
as an important responsibility to come to the Congress with
well thought out suggestions for how--for where money could be
redeployed from older uses to newer ones.
I hope this is something that people, whatever their
general outlook about policy, could agree on. The better we are
at ferreting out the less productive uses of the taxpayers'
dollars, the more dollars will be available. Then we can move
on to the discussion about what are the most important new
needs and how much, what is the right total and so forth.
I really do hope that as we become a little better about
this, we can have agreement that it is absolutely the starting
point for good public policy.
Mr. Thornberry. Thank you.
Chairman Nussle. Thank you. Mr. Moran.
Mr. Moran. Thank you, Chairman Nussle. You began this with
the fancy technology we have here by showing the dramatic
change in deficit spending that really began in 1981, went for
almost 15 years and then there was a dramatic turnaround from
deficit spending to a balanced budget and ultimately to surplus
spending.
Now, many of us feel that we are going right back again
into making the same mistake that we did in 1981, rushing
prematurely into a deeper tax cut than the economy can
necessarily afford, and thus jeopardizing our determination to
balance our budgets and give confidence to the financial
markets.
Those surpluses that were achieved over the last 8 years
were despite the fact that the Republican led Congress
consistently appropriated less--excuse me, consistently
appropriated more than President Clinton requested in his
budget estimates.
And my friend Mr. Thornberry has, I guess he just left, but
he was citing the mid-session review, page 5, where it talks
about the fact that spending in the Federal domestic agencies
exploded during the last 3 years, including growth of 45
percent in Health and Human Services and 27 percent at the
Department of Transportation. Then it says these departments
can benefit from a period of digestion without great growth
beyond those expanded levels.
These were policy decisions that were made by the
Republican leadership, not to make this too partisan, but I
think it needs to be said that transportation is up because the
Congress decided to make trust funds flow through all gas
taxes. That is why it is up. It is a policy decision.
Health and Human Services is up primarily because of the
increases in the National Institutes of Health, which granted
was very much a bipartisan agreement, but we ought not to
phrase these statements in an accusatory manner. I think it is
fair to say that they have been at least bipartisan, if not at
the initiative of the Republican led Congress.
Now, Mr. Daniels, you have called the surplus in the
Medicare Hospital Insurance Trust Fund, and I quote, ``an
artificial overage completely irrelevant to the future of
Medicare benefits.''
The budget resolution under which Congress operates treats
the Medicare Trust Fund as real and significant. In fact, if
the budget resolution reported by this committee and passed by
the House and Senate is upheld and followed, the additional
$18.4 billion sought by President Bush for defense this year
can only be added to the 302(a) and 302(b) allocation for
defense if the additional spending does not encroach on the
surplus in Medicare.
So regardless of how the Bush Administration and OMB regard
the Medicare Trust Fund surplus, Congress and the budget
resolution passed by the Congress pay it great deference.
Let me quote for you what our chairman, Mr. Nussle, told
Secretary Woodridge at one of the most recent hearings when he
was here just a few weeks ago. Chairman Nussle said, ``This
Congress will protect 100 percent of the Social Security and
Hospital Insurance Trust Funds, period, no speculation, no
supposition, no projection.''
Yet, the Bush Administration is telling Congress that
despite our lockbox legislation and other promises, the $18.4
billion addition for defense will be spent from Medicare Trust
Fund surplus this year if we intend to balance our spending
with our revenue.
That is why we keep going back to these numbers, because
there is an inconsistency here, and in referring to the OMB
forecast on Table 3, page 8 of the mid-session review, OMB
shows that to balance our budget you will have to use Medicare
Trust Fund receipts every year through 2006.
Obviously that includes the $18.4 billion in defense with
inflation in the outyears, but it doesn't include any follow-on
increment, nothing for transformation.
In fact, the transformation of the military, which of
course is being discussed in the Armed Services authorization
right now, probably as we speak, by the committee, it has been
the subject of the Defense Department's ongoing strategic
review, as you know. It is going to be very costly if it is to
be effective in aligning our national defense strategy with the
threats and security needs of the 21st century.
The administration does plan to address future year funding
priorities. We know that because we read that in the present
statements in the mid-session review. Secretary Rumsfeld has
indicated that 18.4 is only the first installment of necessary
and substantial future increases in defense spending.
So how, with this revised budgetary scenario, are longer
term defense spending plans going to be affected? That would be
the first question, and I think one of overriding importance
right now.
Mr. Daniels. Well, I was asked this question a little
earlier, and my answer would be the same, that first of all
this is a significant first step, not to be underestimated. It
does add to 200 billion, 198 billion or 209 in authority over
the time period. So I don't know how much more might prove
required, but we should note the dimension of this. Yet there
remains, before we touch the first dollar, as I hope we
certainly will of the embedded spending base, the Federal
Government, including the Pentagon, by the way, there remains
uncommitted $600 billion above and beyond Social Security
surpluses for purposes like this.
You didn't ask about Medicare, but do I want to point out
that in the mid-session review the money set aside or proposed
for Medicare reform, including prescription drugs, was
increased from our earlier estimate. The $300 billion that is
in the budget resolution I think is somebody's sort of good
faith place holder, but it is not based on a real plan and in
our judgment is more expensive than is necessary, particularly
if real reform is part, as it must be, of the package.
We increased ours from 153 to 190 billion, and that is over
8 years. So instead of an average 15 a year, it is an average
of 24, about halfway to the average of 30 that is in the place
holder figure. I am just trying to suggest that we not overlook
the sort of forest here, which is that by either set of
projections, ours or Dr. Crippen's, there is vastly more money
scheduled to arrive in the Federal till after the tax relief
that has been passed than we need for today's purposes. We can
work on an accommodation of tomorrow's purposes some mix of
those within the available funds, I am quite confident.
Mr. Moran. Well, I heard your first response, and I know
this is consistent with it. But we keep coming back, showing
that in order to balance the budget, the receipts are not there
this year unless you are including receipts from Medicare--and,
in fact, even Social Security--to the tune of $9 billion in
Social Security, and that is our concern. We are also looking
at the fact that discretionary spending has gone up, and we
have got all of those other commitments that we are talking
about, what, $190 something billion, but that is over a 10-year
period, for defense. That appears to be inconsistent with what
the Defense Department is anticipating. We have also got
spending levels in our appropriation bills, even ones that have
already passed the House, that are consistently above the
estimates that you are attempting. Would you anticipate at this
point recommending that the President veto any of these
appropriation bills?
Mr. Daniels. Again, I don't--I try never to anticipate or
speculate on what the President might do--very hopeful that
there will not be vetoes necessary this season. I really don't
see any reason for it, because I believe we see leadership of
both parties, Senator Daschle yesterday in his comments, for
instance, moving toward something I believe this committee
ought to feel really good about, which is appropriations bills
that fit within the framework of the budget resolution, and
here I am footnoting that to include the President's
supplemental, or I am sorry, amendment request for defense,
that fit within that and honor all of our commitments,
including preservation of the Social Security surplus.
So I don't see why we should have to get to that point,
although the President retains the tool and the resolve if need
be.
Mr. Moran. We will see. Thank you.
Mr. Daniels. Thank you.
Chairman Nussle. Mr. Hastings.
Mr. Hastings. Thank you, Mr. Chairman. Mr. Daniels, thank
you for being here.
When your report came out and when the CBO report came out,
we were all home and we heard the initial reaction come out,
albeit somewhat negative. But I have to tell you since I have
been back here and listening to you and the testimony and at
least listening to even the people on--my colleagues on the
other side of the aisle, I have to be very optimistic, because
the point I think needs to be made again, and that is that we
are going to have the second largest surplus that we have ever
had this year.
The economic outlook from your organization and CBO is very
strong, albeit a slow area, and we are on track to pay down the
national debt.
But there is another point that has come across loud and
clear that I am very pleased to have heard. That is that
everybody is concerned that we do not--I will put it this way--
tap into Social Security or Medicare. People on both sides of
the aisle agree; that is, we should not. You have been very
emphatic in stating where the President is. Frankly, I don't
know why that question keeps getting asked over and over and
over, unless there is an underlying reason that it should be
asked that has nothing to do with policy.
There is one ingredient that is left out that has been
touched on that maybe is not emphasized enough. That is what we
can control here in the Congress; that is the issue of
spending. Now, we can't control what the revenue expectations
are. The economy is going to make that judgment. The economic
outlook is--again, our capitalistic system will make that
determination, but what we do have control over is the spending
part. And the chairman emphasized this right from the get go,
which is a matter of priorities.
I just want to once again ask you, and ask you to
reemphasize that in the President's budget, 2002 budget which
we are now debating, if we live within the budget resolution we
can fund all of the priorities that certainly we have put in
our budget resolution, but what the President has also talked
about during the campaign and now that he has been President.
Is that essentially correct?
Mr. Daniels. Yes, that is correct.
Mr. Hastings. One other thing that I want to talk about,
entirely unrelated to this but worth talking about because we
are talking about paying down the debt. We are still on course
of redeeming all of the debt that is redeemable?
First of all, for the record, explain what you mean by
redeemable debt and paying down.
Mr. Daniels. I generally use the term ``maximum retireable
debt'' to refer to the maximum amount that we can pay back
without being boneheaded about it; that is to say, beyond a
certain point--all of the economists we have consulted, the Fed
is in the very same place, and I think so with CBO--beyond a
certain point, scarcity of the remaining debt, as you try to
buy in debt that is not due yet, leads the holders to demand a
premium. Beyond some point that premium it is not smart to pay
and no administration would do it.
So that is the issue there. You know, whatever number one
sees here doesn't really change anything fundamental. We can
achieve that as we can under our projections and CBO's. We can
achieve that kind of debt reduction.
We will have driven debt as a percentage of the budget, a
percentage of the economy, down to levels we haven't seen since
the First World War, essentially will disappear as a factor,
and that is something that we ought to try for there. You still
are going to get that effect under any of the scenarios that we
have been discussing.
Mr. Hastings. That leads to a potential challenge that we
have in 10 years or so, when all of the redeemable debt is paid
down and we are running surpluses. What is the government--how
do we react to that?
Mr. Daniels. A very important issue, as Chairman Greenspan
and many others--it gets here a lot faster than 10 years. As
cash piles up, if and when cash piles up in Federal hands for
which there is no prudent use, one of two things can happen.
Someone will think of an imprudent use, like more spending,
which would be a danger, or as you are beginning to hear the
rumbles now, people who would like to see the Federal
Government keep its hands on all of that extra money so no
problem, we will invest it in the private economy.
There is a real fundamental disagreement and a good debate
we may have 1 day before that long as those surpluses continue
to accumulate, and I think the President's position would be,
is, that is not a good idea at all, the Federal Government to
own a large part of the private economy.
But there are voices who see it otherwise, and as the
surpluses accumulate, I think that debate will start in
earnest.
Mr. Hastings. There is one other option, too. That is
further reduction on the taxes of the American people, because
obviously you are overpaying. So I certainly hope that would be
a part of that discussion.
Thank you very much.
Chairman Nussle. Mrs. McCarthy.
Mrs. McCarthy. Thank you, Mr. Chairman. Thank you, Mr.
Daniels, for your patience with all of us.
You know, I listen to all of my colleagues on both sides of
the aisle. I have a hard time sitting here because I am
probably one of the most--consider myself fairly conservative
on an awful lot of issues.
But anyway with that being said, I sit here and I think the
Federal Government does have an important role for this
country. We talk about tax refunds and things like that, and I
think everybody certainly does like them. But if we didn't have
the moneys we wouldn't be able to take care of our veterans, we
wouldn't be able to take care of transportation, which is so
important for this country. We wouldn't be able to take care of
the health care needs that this whole country needs. That is
what the Federal role is.
Unfortunately, those costs do go up and we do have to
account for that. I sit on the Education Committee, and we
bipartisanly worked hand in hand, Republicans and Democrats and
certainly with the administration, to pass a really good
education bill. Now, the President's budget was $7 billion, and
still continuing to work with the President. Our bill came out
on the floor with a $5 billion increase over what the budget
was for 2002. From my understanding from the colleagues of the
Senate it is even double that, I believe.
Because I believe in education so much and I do believe
that the Federal Government does have a strong role, because
there are States that just don't have the money to put into
education, if we are going to make education, as I agree with
the President that we should be doing and I was thrilled to see
him talking about it during the whole August recess, that I am
concerned when we start talking about not having the kind of
moneys that we are going to need.
What does it look like in the future, and that is not even
talking about IDEA, which a majority of us here in the House
certainly want to fully support, because that was a mandate
that we have never fully succeeded our obligation as far as I
am concerned. I think the American people would agree with all
of us that we have to make sure the funds are there. I am
asking, what does the administration see in the future as far
as appropriations for education?
Mr. Daniels. I think the President would look forward to
steadily increasing investment in education, and obviously
proposes that for this year. I would expect that the budget
resolution will probably--I am sorry, that the appropriations
coming out of the resolution or under the resolution will come
back with perhaps more than he proposed, that we can probably
work that out. There is room to do it.
Likewise, I would hope for the future--as I say, we see
escalating revenues, escalating surpluses, and we ought to
consider ourselves fortunate to serve in a time like this. I
mean, there always will be problems and we always will find
something to wrestle and argue about. But a very few years ago
the idea of a balanced budget was thought to be a hopeless
mirage and now we have shot past balanced, and 160, $170
billion of surplus.
We do have the wherewithal to deal with our problems as we
agree which are the most important, and there is certainly that
agreement about education. So I would look to an increasing
Federal level of support.
Mrs. McCarthy. Just to follow up a little bit, because
certainly with the balanced budget, you know we pay as we go
and somewhere you are going to have cuts. My concern is where
are those cuts going to come from? I mean----
Mr. Daniels. I don't give up that easy. Because we have
increasing revenues, tens of billions of dollars of new
revenues coming in each and every year. That should accommodate
that, plus, you know, some--if by cuts you mean trying to
identify old spending that is not as valuable as the new
spending, we ought to be able to find some of that. And, think
of the numbers we worry over and haggle over, a billion, a few
billion dollars, 10 billion. Ten billion dollars is one-half of
1 percent. What business couldn't find one-half of 1 percent
somewhere if it had an urgent, important need, for instance
education, to devote it to.
So I think that we can do those things and we ought to
resolve together to do them.
Mrs. McCarthy. I thank you.
Chairman Nussle. Mr. Culberson.
Mr. Culberson. Thank you, Mr. Chairman.
Mr. Daniels, in the brief time I have got with you, I first
of all want to thank you and the President for your focus on
the fact that the taxpayers of this country are paying on
overcharge, and your focus on ensuring that we maintain a
balanced budgeted is tremendously important for the continued
economic growth of the country and vitally, vitally important I
think for the long term in this Nation.
I wanted to ask you, of course the terminology we use in
any debate is vitally important, not only to make sure that we
are accurately framing the debate for our own purposes as
policy makers, but also for the listeners, for the American
taxpayers.
I wanted to follow up on some of your comments earlier
about the tax overcharge because that is indeed what it is. Of
every $100 that the Federal Government spends, how many of
those dollars come in as a result of tax collections? Ninety-
nine out of a hundred dollars or--tax dollars collected from
the American people?
Mr. Daniels. Well, if I understand your question,
Congressman, at present you would say a dollar fourteen came in
for every dollar spent, more or less.
Mr. Culberson. Right. But essentially virtually all of the
money the Federal Government spends is as a result of tax
collections is my point.
Mr. Daniels. Yes, sir.
Mr. Culberson. Therefore I wanted to ask, because I notice
in your presentation today, in all of the documents that you
have given to us you refer to a budget surplus. I think that is
confusing to a lot of people because in fact it is a tax
surplus.
As Chairman Nussle has correctly pointed out in all of his
presentations, you will note all of the documentation produced
by the Budget Committee refers to the surplus as a tax surplus.
I think that is an accurate statement, wouldn't you agree, that
it is a tax surplus rather than a budget surplus?
Mr. Daniels. That may be a better term, yes, sir.
Mr. Culberson. I would encourage you, if you could, ask if
you and the President, the Office of Management and Budget
could adopt that terminology, because I think it is very
important for all of us in Congress as we debate this surplus,
that we understand that it is a tax surplus, and very important
in communicating to the public that it is not a budget surplus,
it is a tax surplus. It is not money that needs to be spent, it
does indeed represent tax revenue collected from the American
people, and in that sense it is a tax surplus, and I would ask
if you could adopt that terminology. Is that something that you
could do?
Mr. Daniels. Well, thank you for your suggestion.
Mr. Culberson. And also I wanted to ask, if I could, Mr.
Daniels, that from--based on your knowledge of the history of
the Congress and the budgets that have been proposed over the--
certainly over my lifetime since 1955--of course the best way
to measure future performance is past history. Haven't the--
when were the first balanced budgets over that--since 1955 when
were the first balanced budgets passed by Congress?
Mr. Daniels. Well, you will test my history, Congressman,
but 1969 I believe. Perhaps in the late 1950's, but 1969. Then
we lost all contact with that goal for a long, long time and
then Congress achieved it just in 1997, I guess.
Mr. Culberson. But it has clearly been a result of the
Republican Congress, that once the Republican Congress came in
January 1995 it seems to me is when we turned that corner and
began to pass balanced budgets?
Mr. Daniels. I am going to leave causality to this
committee to debate among itself. I have usually described it
as a bipartisan achievement, and I think that is probably a
good way for history to record it.
Mr. Culberson. Well, I do thank you for your work and I am
very pleased to support the President's budget and help in any
way that I can. Thank you.
Chairman Nussle. Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Director, I want to--so many concerns and so little
time. So I want to run through a couple of them quickly if I
can.
First of all, to focus on the marginal issues, the 1
percent of this, the 2 percent of that is a little
disingenuous, because everything we ever discuss around here is
1 percent of this or 2 percent of that. So therefore--I mean, I
know your intent is to minimize some of the issues. I
understand that, and I respect that. But nonetheless, in my
opinion, it is a little disingenuous, particularly when as we
just discussed earlier, people at home are getting $300 checks
or $600 checks or $1.75 checks.
For most people, most taxpayers, that is less than 1
percent of their gross income, yet I haven't heard anybody talk
in terms of the tax rebate in dismissive terms, such as 1
percent of this and 2 percent of that.
Therefore I would just as soon get off of the marginal
issues because they are not relevant to the average person at
home. We all know that to find one-half of a percent of
anything in any budget in the government issue, no matter what
level the government is, is a difficult thing, because so many
of us have so many different priorities. That is the struggle.
Can it be done? Sure. Any one of us can do it, but that is not
the way this government is set up. It is a very difficult thing
to do.
As far as the argument that because the trust funds have
all been treated as such and such, they have always meant
nothing, we have always done the same thing, and therefore we
should continue to do the same thing, to me is an incredible
statement.
I have only been here in the last couple of years, but I am
actually very happy to be here in times of surpluses and not
deficits, because we do have an opportunity to change what I
consider to be bad past practices, many of them--one of the
largest of which, in my opinion, is raiding the Social Security
Trust Fund and is raiding the Medicare Trust Fund. My opinion,
I understand you disagree. So be it.
But I think it is an important thing to do, and I think it
is an important thing to do not because of today's recipients.
I have never been part of the group that wants to scare anybody
about today. But I am also concerned about tomorrow. I am
concerned about myself and my children and my grandchildren yet
unborn that they have the same opportunities my parents and I
both have.
I agree with you, there is no concern about today, but I am
concerned about tomorrow, and what we do today certainly
impacts what happens tomorrow.
So as far as I am concerned, simply because the trust funds
have all been treated in a bad way is no argument to continue
doing so, especially when we sit here with surpluses that we
can do something about.
As far as the trust funds themselves and how they do it, I
know that I have no intention of--or no hope of changing your
opinions. I know that. But on an equal level you have no hope
of changing mine either. A trust fund at home in my old life,
when I practiced law, people always saw it as money put aside
in a sacrosanct box. I know that Social Security is not the
same thing. But if you did something with trust fund moneys
that were not intended by the trust fund and you got caught,
you went to jail. You still do, not used to, still do. And yet
this government for years has been doing it, and not only does
no one go to jail, they seem to be proud of it. We have an
opportunity to change that. We should. We need to.
And therefore I--it is fine by me if you want to use a
different term, because it is not a trust fund per se. I know
that. I respect that. I didn't make up the term. I didn't call
it that. Call it anything you want to. Call it a specific tax
source account. Call it a dedicated account, because that is
all it is, an accounting mechanism. I respect that. I accept
it. But when you have that account and you use money that comes
from a specific tax source that is supposed to go to that
specific account and you use it for something else, anything
else, you haven't been honest with the American taxpayers.
I know that we haven't done it. I understand. The President
himself, and I agree with him. In times of recession or war,
sure, you have to do some things that are a little difficult.
We don't have a recession at the moment, thank God, and we are
not at war, thank God. So that being the case, we shouldn't be
using that money for anything else. This Congress has been
clear on that. The President has been repeatedly clear on that.
I understand that right now we might be in a debate as to
whether we are or are not, and I am not ready to make that
debate today, because I know that numbers are numbers and they
are estimates at the moment. We will know whether we are or are
not before the end of the year. But right now we are not sure.
If it is so easy, if it is easy just to wipe away all of
our concerns about the trust fund by putting more IOUs into the
trust fund account, I have two questions.
Number one is, under the President's proposal, how are
people supposed to invest that money if we take 2 percent of
their money and put it into stock funds or whatever we want to
put it into with IOUs? Am I supposed to go buy and invest my
money with IOUs? I don't think I can call Fidelity up right now
and say, I really will pay you a few thousand dollars 20 years
from now if you let me invest right now in the Magellan Fund.
If that is so easy, why don't we just do it? Or if it is so
easy to put IOUs in and not worry about it, why don't we put a
lot more IOUs in right now and print them up? We can go down to
Treasury right now and print them all up, and put them into the
trust fund and we don't have to worry about the Social Security
Trust Fund or the Medicare Trust Fund ever going bankrupt,
because it is the easiest thing in the world.
Everything that I have heard today tells me what is the big
deal? Just put some more IOUs in that trust fund and we never
have to worry about it. Now, I know that your answers are not
going to be what I am looking for. I know that. I will tell you
that everybody I know at home, up until the last couple of
months everybody I heard or read, now all of a sudden some of
these so-called pundits, and amazing to me, they are all
relying on newspaper reporters to tell us what to do. That is
what we seem to be doing now.
Up until now everybody was on the same page. The Social
Security Trust Fund should be sacrosanct, again absent war and
recession and other extraordinary circumstances. We are not in
that now. What has changed? What has changed? Why shouldn't
that fund be sacrosanct? Why shouldn't every dollar of FICA
taxes, because that is what they are, being paid by Americans
not be put aside for them, their children, their grandchildren
forever and ever, amen.
Mr. Daniels. Well, Congressman, I think we agree on a lot
more than you might assume. Let me just touch three things.
Number one, if there ever were a raid on the trust funds, I,
this administration would be entirely with you in seeking to
find out who did it and why? If somebody came to me tomorrow
and said, we just checked, the Medicare Trust Fund doesn't have
$234 billion, it has $224 billion, what would we do? We would
start a criminal proceeding to find out who did it. That is not
going to happen. Never will. And I tried to explain earlier why
it is not related to how much surplus we finally run.
You say we should not use the money for any other purpose.
Well, we do use the money. We use the money to pay down debt,
which is something we all agree on. We are only talking about
how much of that is the right amount to pay.
Lastly, I would simply associate really with your last
comments, and I think the President would, too, that the
details will be very difficult to work out. It is really--it is
exactly the direction that the President has suggested, that at
least some of the FICA taxes people pay ought to be theirs.
They ought to own them in a way that they do not own them
today. Those FICA taxes your constituents pay go right----
Mr. Capuano. Excuse me. Explain to me, if there is no money
in the trust fund, how can they own an IOU? Is that what you
want them to own?
Mr. Daniels. After reform?
Mr. Capuano. If you get everything you want.
Mr. Daniels. The President has not chosen a plan. There is
a commission looking at a variety of ways to do it. But the
principle that you raise is one that the President has
endorsed, and that is that a piece of any--of a worker's
contribution would go not to the Federal Government to be used
for debt reduction or any other purpose, but that a piece of it
would go to an account owned by that person, just as, you know,
millions and millions of 401(k) plans and so forth exist in the
private sector, to be invested at the discretion of that
person.
Mr. Capuano. I don't mean to be argumentative, Mr.
Director, but a 401(k) is real cash, real money in a real
account. It is not IOUs that I pick up the phone and I call my
broker on, it is real cash. You have been spending all morning
telling me that the trust funds don't have real cash in them,
all they have is IOUs, which I understand.
Mr. Daniels. Well, you are making the arguments for the
President's reform of Social Security, and I thank you for it.
You are making exactly the right argument.
Mr. Capuano. If the President wants to get cash in those
accounts in the Social Security Trust Fund, we are on the same
page. What we do with that cash once it gets there is a
different issue, number one. Number two is why can't we start
now? So we only get to get cash in the account if and when the
President gets everything that we wants? Other than that there
will be no cash in the account at any point in the near future?
Mr. Daniels. No. My only question here is, you know, who is
we? It ought not be--the we who is deciding what to do here
ought to become the American people individually, one family by
one family. They ought to be--the President would say, at least
for a part of the Social Security system, they ought to be
empowered to own that and to decide, they decide, not all
powerful trustees somewhere in Washington decide, how that
money should be invested. It would grow more quickly than the
promises those bonds represent.
So I would associate very much with the spirit of what you
are saying. And obviously the details are very tricky and--but,
you know, thank you. I think that you have illuminated a very
really important difference between the system that served us
well for a long time and the system we need for the future.
Mr. Capuano. You may have missed the point, that I also
illuminated the problem that we have right now. We don't have
to wait for any changes in the Social Security system, we could
do it right now.
Chairman Nussle. Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman.
Mr. Daniels, let me see if I can kind of follow up on what
the Congressman is talking about. The way I understand it the
Social Security Trust Fund is the proceeds of all of the amount
of money that has been collected for some period of time. What
the new plan is to take the proceeds from the Social Security
Trust Fund and pay down the debt, the public debt I guess or
private debt, and then there is an IOU then from the Federal
Government to the Social Security Trust Fund. Is that fact
correct?
Mr. Daniels. That is correct, Congressman, that the funds
until very, very recently were used to pay the ongoing costs of
government, to pay for defense or the FBI or, you know, to run
the national parks. When Congress achieved a true--a balanced
budget and began to--and finally built it to the size that it
is today, there has been an agreement to use those extra moneys
to pay down the national debt. That is what--we have talked
about that quite a lot today.
Mr. Brown. What kind of return does the Social Security
Trust Fund receive from that IOU?
Mr. Daniels. It receives a standard Treasury rate, in the
neighborhood of 5 percent I guess right now.
Mr. Brown. Then how----
Mr. Daniels. Maybe a little less than 5. I am sorry.
Mr. Brown. Because I have always heard that we are getting
something like a 2 percent return.
Mr. Daniels. This may be referring to what a worker can
expect in terms of the return on the money. Workers send money
in for their careers. That goes out the door, at least all that
is needed goes out the door to pay the retirees of that day.
When you compare what the worker after retirement receives from
today's Social Security system, the way it is set up, compare
that to what they paid in all of those years, you get a very,
very poor return. Probably less than 2 percent for most people.
However, on in the future, if we don't change the system, it
will be less than zero.
Mr. Brown. OK. I guess that is one of the things that I
kind of committed to come up here to try to be sure that those
recipients were going to be getting a better return on their
investment, be it investing stocks or some other instrument.
And that would certainly try to expand on that and trying to
fulfill that commitment.
You don't see any further enhancement of that return, be it
the Treasury bill rate or some other rate? I mean, I don't have
any problem with the philosophy of doing that because my Keogh
plan and my IRA, I have got it with a savings and loan, but I'm
not sure that dollar is not sitting in that savings and loan;
they have taken that money and invested it out, and it is maybe
a loan or some other instrument out there.
So I don't think that money is sitting there, neither would
I ever believe that the Social Security trust fund had money in
it. If it didn't have that money working, it wouldn't get any
return. Is that correct?
Mr. Daniels. Yes, sir. Almost half of the surplus, the
increase in the Social Security trust fund this year will come
from the interests it accrued as opposed to FICA taxes in,
minus benefits out. Almost half of it will come from the
interest. So it gets credit for interest on the bonds that sit
there.
Mr. Brown. That would be my goal, to enhance that return to
much greater than the 2 percent.
Mr. Daniels. By moving it into different----
Mr. Brown. I am proud. As I went around my district, the
tax surplus check that came back to me, I carried it around in
my pocket because I like to keep it close to my heart, because
I think unprecedented in the history of this nation that we
sent a refund check back. I don't know if we ever did it
before.
I am grateful for it. The people I talk to in my district
are happy that they are getting those checks. And I tell you, I
guess it is good that they are getting them in sort of
incremental stages too, rather than getting it in one big
flash, because now they all got something to expect.
Mr. Daniels. I am glad you reminded me, because I am pretty
sure Mrs. Daniels is carrying it close to her heart, because I
haven't seen ours yet. I think it was due last week.
Mr. Brown. Thank you very much.
Chairman Nussle. ``Stimulate'' is the key word here. There
is more economic growth if you go out and spend that thing,
Henry.
Mr. Matheson is next. Well, if you will yield, Mr. Holt.
Mr. Holt. Mr. Brown, I would be happy to help you get that
money into the economy if you need some help with that. Mr.
Daniels, thank you for coming and bearing with us.
I would like to follow on some of the questioning from Ms.
McCarthy.
First of all, I think you have looked at the CBO report. I
want to make sure I understand the--in the way CBO and OMB has
dealt with the President's education--or with the education
budget numbers.
What do they include? And in general terms, what do you
include that they don't include?
Mr. Daniels. Yes. There is an important difference. They,
CBO, will not assume policy that Congress has not enacted, as
they should not do. So they will have taken--Dan can correct me
if I misspeak in any way. I believe they will have taken the
final level for 2001, whether it is education or anything else,
and inflated that to a so-called current services level.
We arrive at ours through a different way, which is to take
the President's proposal, which was for an increase, and apply
it to our number as though Congress had passed it. So, in an
area where the President proposed a significant real increase,
like education, we would have a higher number than they would.
There could be areas where the President proposed no increase,
and their number would look higher than ours.
Mr. Holt. Now, you probably know that the House 302b
allocations for education are roughly $4 billion above the
President's request. Now, the President's request also removed
some funding, the Department of Labor and the Department of
Health and Human Services. And right now in the Appropriations
Committee, they are putting some of that back in, I am told.
Now, that seems that it will leave us with maybe a billion
dollars or so to devote to education, which is several--3 or $4
billion short of what has been authorized this year under the
Elementary and Secondary Education Act, ESEA. I think I heard
you say to Mrs. McCarthy that you are sure we can find some
money to do better than the President's budget, maybe not
everything that is in the House authorization, but somewhat
better. Did I hear you correctly on that?
Mr. Daniels. Yes, you did.
I mean, I think the starting point here is, one thing we
are very assured of is there will be substantially more
education spending this year than in any year past. The
President's proposal alone would get you there. Secondly, the
budget resolution does have room for $5.6 billion more than the
President requested. The reason for that is that we had
requested or suggested an emergency reserve. We thought it
would be a--a prudent way to budget in advance for what we
thought was the sort of an average projection of what we might
have next year in unforeseen spending, true emergencies.
Congress did not agree. That amount of money was left in
the budget resolution totals. And I am sure a good piece of it
will find its way into education, that being high priority for
so many Members.
Mr. Holt. This will be possible, as I understand it,
because some of the Medicare surplus, the HI surplus, will be
available for general purposes. I mean, that is what the
numbers show, you know, and just 6 months ago, or less than
that, we met in this room and we heard that we could have it
all.
You said that we could fund national priorities like
education, and you could preserve Social Security and Medicare
surpluses, and give the American people a very large tax cut
and pay down the debt. At that same time, many of us, most of
us here in the House were talking about lockboxing, so to
speak, the Medicare and Social Security funds.
The President had previously said that he approves
lockboxing, the lockboxing of Medicare and Social Security. And
although I--I couldn't find the phrase from your testimony--
subsequently the Secretary of the Treasury has said, we have
dedicated every dollar of Social Security and Medicare money to
come in to pay down the public debt so that we are honoring the
idea that Social Security and Medicare money should be used
only for those purposes.
So you are now saying, though, that some of that Medicare
money can be used for education expenses, not just to pay down
the debt? In other words, you pay down the debt a little more
slowly?
Mr. Daniels. Well, of course, as we see it, all Medicare
money and 50 billion more is needed just to pay for Medicare,
not for any other purpose. So this is sort of a conceptual
difference that we have talked about many times. Those are the
facts about Medicare's revenues and its costs.
One fine point, the President never has spoken to a
Medicare lockbox ever. Not this year, not in his campaign. He
has always taken the viewpoint that I just expressed, that we
should recognize the reality, which is that Medicare does not
run a surplus or anything close to it.
Now, on the--a point about what was--what seemed to be the
state of play a few months ago, I think you are quite right. I
guess my observation would be that as Congressman Spratt led us
through the change in the picture over those last few months,
46 billion, more or less, is the number attributable to the
change in economic circumstances, to the drop-off due to the
economy, and that right there more than explains the fact that
the surplus now is only as big as Social Security's surplus,
not bigger than Social Security's surplus, the Part A as it
seemed a few months ago.
Mr. Holt. Although, as Mr. Spratt made clear earlier today,
that is not just technical adjustments or economic downturn, it
is mostly decisions that have been made here in Congress with
the blessing of the President.
Mr. Daniels. Right. Without quarreling with that, I am just
saying that the 46 billion that is economic downturn, exceeds
by $12 billion the Medicare Part A surplus for this year. So
just trying to answer your question about the--why the change.
Mr. Holt. OK. Well, so that the--the lockboxes that we were
talking about earlier, you called them a fiction then, and you
still think that is a fiction. I guess you did say that it was
a fiction that might stop people from spending money, and now
it seems to me that you are violating even that fiction and
making this Medicare money available to be spent on other
purposes.
Mr. Daniels. Well, to repeat myself, I think all of the
Medicare money is spent for Medicare. Every penny. And we are
still very committed, the President is very committed to
spending restraint. So nothing--simply calling it as we see it
about the--how this really works, what really does and doesn't
affect the trust funds and so forth, has nothing to do with the
President's commitment to restraining spending and preserving
enormous surpluses like the one we see for this year.
Mr. Holt. Thank you, Mr. Daniels.
Chairman Nussle. Mr. Matheson.
Mr. Matheson. Thank you, Mr. Chairman.
Mr. Daniels, you have been in that seat for a long time,
and answered lots of question. We both made it. No, maybe one
more. Sorry about that. I just had three items I wanted to run
past you quickly.
First, I just want to associate myself with the comments of
Mr. Clement earlier about, I am also on the Transportation
Committee, and while I think there are a number of factors in
terms of our economy and economic growth that are clearly
beyond what the Federal Government does, there is one activity
that I did--do think is critical, that is, commitment to
maintaining our transportation infrastructure, in terms of
highways, aviation and our ports.
Being a member of that committee, I think there is real
bipartisan support in being committed to maintaining that
infrastructure. So I just wanted to associate myself with Mr.
Clement's comments earlier.
Secondly, the issue of trying to be responsible about
spending. It is an issue that we have a number of us talk about
today. I really think that it is--the challenges are a
bipartisan challenge. I don't think one party or the other has
any big hold on being good or bad about spending.
As we move forward in trying to be intelligent and
responsible with our spending, you mentioned, in terms of
making recommendations about spending to Congress, that the
President will be a participant if necessary. You mentioned
that in your opening comments.
I am curious if there is a sense of what is necessary? When
is that point going to be made where the administration is
going to come up with additional specific spending
recommendations to work with Congress in that effort?
Mr. Daniels. Well, I think you can look for new spending
recommendations in January of 2002.
There won't be any additional spending recommendations, I
don't imagine, for this year. We will have, I think, a fresh
and probably fairly lengthy set on both the growth and the
redeployment side for the budget that is a few months ahead of
us.
Mr. Matheson. To the extent we have passed legislation, for
example, in the House, we passed an energy bill just before we
went on recess. It contained a number of additional revenue
adjustments that affect our budget situation. It did not
include any offsets at the time from the House version, and I
know we got to go through the Senate process, so I don't want
to get ahead of things too much.
When legislation such as that moves through Congress, would
the administration like to see offsetting spending or
adjustments to offset the costs of those new pieces of
legislation?
Mr. Daniels. Well, often, yes, that would be most welcome.
The bill that the House passed is substantially above
anything the President had requested. So if the Senate had a
similar view, we would have to work together to look for
offsets.
But, you know, like you, I don't know where we are going
there.
Mr. Matheson. One last item that I just wanted to mention.
We all know the uncertainty of projections. You certainly know
that in the job you are in now, and know that from the business
world as well. It seems to me that in terms of when we make
plans for the future, 1 year, let alone a 10-year budget, that
with the uncertainty associated with the projections, maybe
there ought to be a little margin for error.
What are your thoughts about how we ought to be looking at
that, and should we be incorporating some margin for error in
our budget projections?
Mr. Daniels. I not only think so, but I believe that we
have. The budget, as we presented it, had a trillion dollars,
so-called contingency reserve for the--and then I think that we
were pretty direct in saying that we assumed that a substantial
portion of that would go to--at this point, unknown new needs,
Medicare reform and defense and so forth.
One reason to project things that way was to the guard
against misses on the down side. And that we still have a
multi-hundred billion dollar uncommitted number there, and I
think that is prudent, probably should be a part of each long-
term budget.
Mr. Matheson. That is what I wanted to follow up on. I
remember the contingency when we looked at the budget
resolution. Does the mid session review analyze where that is
today, based on the changes in our projections?
Mr. Daniels. Yes, sir. It is about $575 billion. This is
after a couple of important decisions. The biggest one is the
defense increase. Starting with the proposal this year and then
assuming that flows all of the way through, that is $200
billion there. Also the next biggest one, I think, would be the
Medicare increase that I referred to earlier.
So those are two refinements beyond what we had proposed in
April that used the first piece of that uncommitted number.
Mr. Matheson. Just to recall, that contingency did include
Medicare trust fund as part of that contingency, is that a
correct statement?
Mr. Daniels. Well, it exceeded the amount of the Medicare
Part A trust fund that we expected to have at the end of the
period.
Mr. Matheson. Thanks, Mr. Chairman.
Chairman Nussle. Ms. Clayton.
Mrs. Clayton. Thank you, Mr. Chairman.
Thank you for your patience and your explanations. I want
to follow up on that budget resolution as well. You are right,
you had recommended in the President's budget, a $1 trillion
reserve. The budget resolution that we passed out of Congress
had a reserve for a number of important issues that both the
President and the Congress had included education, Medicare,
the defense and agriculture.
Now, that $1 trillion has now been reduced, I think you
said, to $575 billion; is that correct?
Mr. Daniels. Yes, ma'am.
Mrs. Clayton. Just before we adjourned for our recess, the
Agriculture Committee, passed a bipartisan bill, based upon
your projection and based on the budget resolution. In the
reserve account for agriculture, which included both year 2001,
2002, the amount came to about $78 billion. Taking the
supplement out for year 2001, left $73 billion. Now, in your
report and your testimony, both in the mid-session review as
well as your individual testimony, you cite that now we are not
a part of that reserve. You say that agriculture must find an
offset for that which we included in the reserve.
Which is it? Were we a part of that reserve? And, if we are
not now, how do you plan to recommend the offset for the
agriculture bill that has been passed out of the committee?
Mr. Daniels. That is an important question, but the
uncommitted funds that Congressman Matheson was just drawing
our attention to are seven to eight times the amount of sort of
the target reserve that was marked off for agriculture.
We are not going to know for quite some time what a new
farm bill will look like, let alone what it will cost. One has
started in the House. They haven't started in the Senate. The
farm bill doesn't expire until the end of next year, over a
year from now. So I don't have any doubt that, just as happened
this year, that the needs of America's farmers will be met, and
again, certainly over the longer term, there is more than ample
room to do it.
Mrs. Clayton. I appreciate that answer, but it doesn't
really answer the question. The question is given in your
statement in the mid-session review. You are now saying that we
need to have offsets in order to meet the needs of the American
farmers. My question is where are those offsets going to be
proposed if they are not part of the reserve?
Mr. Daniels. We don't know that we have incremental costs
yet----
Mrs. Clayton. I beg your pardon. We don't know if we have
incremental----
Mr. Daniels. You haven't passed a farm bill. The Senate
hasn't passed a farm bill. We don't know whether the $27
billion that is in the baseline for next year will be the right
amount or not. So we look forward to working with the Congress
on this issue. The bill--and the only clue we have as to what
might be in prospect, the bill that has moved a little bit in
the House committee would add $2 billion in outlays to 2002, a
very manageable amount if that happened to be the case. The
Senate may have something entirely different in mind.
Mrs. Clayton. Perhaps I didn't make my statement clear
enough. I wasn't talking about the agriculture appropriation
for year 2002. I was talking about the farm bill that presumed
to use $73 billion over 10 years of the 78 that was a part of
the reserve.
Mr. Daniels. Right.
Mrs. Clayton. Five of those seventy-eight has already been
allocated and approved, and the President has signed for a
supplemental. That leaves us 76. I was not talking about the
current agriculture appropriation. I was talking about a 10-
year farm bill.
Mr. Daniels. Yes, ma'am. If it turned out--we won't know
for a long time. If it turned out that the additional cost of
that bill were something like $73 billion, that would be in
contrast, by our numbers, $575 billion that is uncommitted and
available.
Mrs. Clayton. So we would need an offset. We are to go to
the floor next week. So the question the Rules Committee will
have for the Agriculture Committee, would be should it be taken
out of the $575 billion, or is this offset somewhere else?
Mr. Daniels. I think, and I haven't looked at the term you
are talking about, but the only place in which an offset would
come into play is if it had a 2002 effect beyond what could be
accommodated in this year's resolution.
Mrs. Clayton. I see. So that only applied to this year's
appropriation and not to the reserve of the $73 billion?
Mr. Daniels. That is right. We would have to look at this
year by year.
Mr. Spratt. Would the gentlelady yield?
Mrs. Clayton. Yes, I will.
Mr. Spratt. Could I redirect the gentleman's attention to
table 1, page 4. There you derive the $575 billion number that
you keep referring to. Of that amount, $537 billion is a
Medicare surplus. That leaves a $38 billion residual, which is
not much of an offset for anything; so what you are telling the
gentlelady is if she is willing to spend the Medicare surplus,
you might be able to use that; however, the word ``offset''
connotes something different. It connotes that we come up with
a new source over and above what is in the budget, a new
revenue source or a new spending cut that will mean no effect
on the bottom line.
So I think we need a clarification. When you say that the
farm bill will have to be offset, do you mean that some of this
$38 billion residual can be used for that purpose, or if you
want to dip into Social Security and Medicare at least, you can
use it, or that you must find a new offset, a new spending cut,
so that there is no impact on the bottom line?
Mr. Daniels. I think offsets would refer to the year 2002,
and that if it would take us above the budget resolution and
therefore----
Mr. Spratt. The budget resolution as a reserve has
anticipated that up to $70 billion will be spent on this bill.
That money was reserved. The Chairman was given authority to
make the allocation.
Mr. Daniels. Let me say it has nothing to do with Medicare
Part A as far as we are concerned. That may be a self-
limitation that Congress wants to continue----
Mr. Spratt. You mentioned $575 billion. Of that 575, $537
billion is Medicare. So there is only $38 billion left over.
Mr. Daniels. I said that is a limitation that some Members
of Congress may want to impose. We don't see it that way for
the reasons we have discussed----
Mr. Spratt. It is a limitation of the budget resolution.
That is the way the resolution is drawn. The Chairman can
increase the allocation for the farm bill, but he cannot
encroach upon Medicare. So all he has got is $38 billion.
Mr. Daniels. I recognize that is where his authority is
limited. Congress would have to act, as it always can, to make
the spending possible, and in this case we would agree.
Mrs. Clayton. Mr. Daniels, would you say that the
administration will honor the budget resolution which we passed
out of the House?
Mr. Daniels. Yes, ma'am. We would like to work with the
Congress and the appropriations process to do just that. It
would be a great thing, by the way, for this committee and its
Senate counterpart if we did see it through in that way so that
the resolution did form the framework under which spending
finally did occur and was contained.
Mrs. Clayton. Well, the Agriculture Committee is working
with that assumption. They are working under the guidance of
the budget resolution, and they took it in good faith that they
had $78 billion, 5 of which they spent, and the other 73 they
have allocated over the next 10 years. If we are now being told
that we don't have that amount, that means that we are not
working on the framework of the budget resolution.
Mr. Daniels. If the Congress sometime between now and the
end of 2002 passes a new 5-year farm bill that adds that kind
of spending, the moneys there, we will have to work together to
accommodate it, but the revenues certainly look to be there far
more than enough to afford it.
Mrs. Clayton. And it is there excluding Medicare
expenditures?
Mr. Daniels. Well, the way we look at it, yes, because
Medicare money is come and gone before these surpluses are ever
accumulated.
Mrs. Clayton. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Spratt?
Mr. Spratt. I just wanted to refer you to table 3 instead
of table 1 because it shows that most of the $575 billion,
including Medicare, occurs in the outyears, particularly the
last 2 or 3 years. In the near term the non-Social Security
surplus is a billion dollars next year, $2 billion the
following year, and $6 billion in 2004. There is very little
there to play with.
Mr. Daniels. Well, there is if we are completely inert
about the 1.9 we start with and just, in fact, leave it there
and inflate it, but that would not be our intention.
Chairman Nussle. Mr. McDermott for one question.
Mr. McDermott. Just one question. I picked up this
morning's newspaper, and I read that the leadership in the
House was pushing capital gains cuts. What is going to be the
White House's position on that?
Mr. Daniels. The President has said he is open-minded about
it. It was obviously not part of his plan, his tax relief plan
of this year, and so for the moment he is taking an open
stance.
Mr. McDermott. It is being pushed as a stimulus to the
economy for this year. You are saying it wouldn't work this
year? Is that what----
Mr. Daniels. No, I am not saying that. The President said
he is open-minded, and he would listen to the Congress to see
what the sentiment was. It certainly reflects, as members of
this committee on both sides did, a concern to make government
do all it can do within its limits to get the economy going and
sustain it, and I think that is what animates that suggestion.
The President hasn't ruled it out, hasn't ruled it in.
Mr. McDermott. What would be your recommendation if he came
to you and said, Mitch, what should I tell them?
Mr. Daniels. As of this morning, I would say the rebates
are only halfway out the door. The latest rate cuts have only
recently occurred. My personal view is that we should take a
little time and see how the economy is responding. Meanwhile we
should look at all options, and this is clearly one that might
give us a better chance of a real strong and ongoing recovery.
Mr. McDermott. So we might see capital gains before the end
of the year?
Mr. Daniels. I can't project. I can only report to you what
the President said.
Mr. McDermott. The door is not closed--is what you are
saying?
Mr. Daniels. He did not close the door, no, sir.
Mr. McDermott. So it could happen?
Mr. Daniels. That has a lot to do with both sides of the
Members of Congress, what both sides are prepared to do, but
yes.
Mr. McDermott. OK. Thank you.
Chairman Nussle. I was counting, by the way. That was
seven, just so we are----
Mr. McDermott. I had to----
Chairman Nussle. Reel him in. I understand.
Mr. Daniels. Those are called follow-ups, Mr. Chairman.
Chairman Nussle. Mr. Daniels, you have been extremely
generous with your time, and we appreciate the chance to
question you and the administration on these figures, and we
appreciate the time you have spent with the committee today.
Mr. Daniels. Always a pleasure.
Chairman Nussle. Thank you.
The committee will continue now with its second panel, and
we are honored again to have the cause of the government
shutdowns--I am joking, of course--the very distinguished
Director of the Congressional Budget Office, Dan Crippen, who
has been before our committee before.
While the Director is taking his chair, one of the
interesting observations that I have heard made about the
situation we find ourselves in goes in part to what we were
just discussing, and it will be my first line of inquiry with
the Director, and that is that in years past, the way the
budget process worked, once the budget was passed, that was the
budget, no ifs, ands, or buts. There wasn't any mid-session
corrections, no adjustments, no changes, no consideration of
changes.
For instance, the just completed line of inquiry with
regard to the farm bill is a good illustration of that. The
budget is still controlling, and there is nothing in the mid-
session review that changes that or changes the authority that
the Chairman has. The numbers were locked in by that budget
resolution when we passed it on the floor of the House, and, in
fact, all committees and departments of government, the
Congress, are able to, as a result of that, make decisions
based on that resolution into the future. It is only this year,
as I understand it, is the first time where any consideration
of a mid-session review has begun to point us possibly in a new
direction for fiscal restraint. I am not suggesting that is
bad. I actually think that is good, but it does show as an
example some of the confusion that is out there.
There is nothing in this mid-session review that changes
one iota of the budget technically. We may as Congress make a
different determination of what we should do based on these
predictions and projections, but there is nothing in the budget
that has changed as a result of these projections.
We welcome you, Dr. Crippen, to the panel again, and we
welcome your testimony. Your entire testimony will be part of
the record, and you may summarize. Welcome.
STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE (CBO)
Mr. Crippen. Thank you, Mr. Chairman. Maybe given the
numbers we have and the hour of the day, we should recess to
the cafeteria. I think I have a high enough credit limit on my
credit card, that I could buy lunch.
Chairman Nussle. As long as it is not a Pentagon credit
card, it will be just fine.
Mr. Crippen. I know better than that with this committee,
yes.
Mr. Chairman, I will take the opportunity to not give you
my prepared statement, but just make a couple points very
quickly so we can move on.
I think one of the two biggest unknowns in our forecast and
one of the reasons they change so much is growth in
discretionary spending. It is simply a fact that we assume and
are told to assume, frankly, that discretionary spending will
be at this year's level plus inflation for the course of our
baseline. Because appropriations are made on a yearly basis,
the baseline may not be terrific, but it is probably the best
that we can do. If spending were to grow differently from
inflation, it would certainly leave you with a different long-
term surplus number. If it grew at 8 percent a year, for
example, it would add another $2.5 trillion to spending over 10
years or subtract that amount from surpluses if it grew less
than inflation, obviously it would show larger surpluses.
Secondly, and the object of much discussion today, of
course, are the unknowns about economic performance. In the
economics profession, we are notoriously bad about calling
turning points in the economy. We missed this one as much as
anyone else, but it has always been that way. That doesn't give
you much comfort, I am sure, but I think because there was some
discussion about 1981 that it may be interesting to spend 30
seconds looking at that.
CBO presented an analysis of the President's budget in
1981. We suggested there would be in 1983, for example, a
deficit of about $59 billion; a small number by today's
standard, but pretty large by the standards of today. What
turned out to be true was a deficit of about $200 billion, over
$200 billion actually, so four times our estimate. The reason
for the difference was largely economic. CBO, along with most
of the rest of the world, did not foresee the coming severe
recession in 1981 and 1982 nor the rapid decline in inflation
that caused revenue collections to drop precipitously.
We can advance to close to current day. Last year at this
time the cover of our midyear report showed what we thought
were the primary contributors to the change in the fiscal
outlook from deficits to surpluses. The primary contributor, in
our view, was a change in the economy. Productivity and
economic growth were higher than we had foreseen as late as
1997. Similarly, today, we have a change in the short-term
outlook, certainly, that has caused a diminution in the
surpluses for the near term, 2002 in particular. If you change
the adjustment for corporate revenues, put them back in the
year in which they normally would have been collected, about
half of the change in 2002 is economic, and the other half is
legislative. Obviously those ratios change dramatically by the
end of the period; over the 10 years about 20 percent of the
diminution is due to economics and 80 percent is due to the
legislative changes that have been made.
So it all goes to say that our forecasts do change more
than we would certainly like them to. The two biggest unknowns
are discretionary spending and performance of the economy.
Lastly, Mr. Chairman, I will do what I have done here
before. I have a chart that I drag around that begs the
question about what happens sometime after this 10-year period.
We are only looking at the next decade in the forecasts we have
been discussing. Frankly, when our generation retires we will
witness the largest shift the Federal budget has ever
experienced. We will double the number of recipients for
retirement programs at the federal level and more than double
the spending for those retirees.
Something dramatic must happen here. We are currently
collecting 20 percent of gross domestic product (GDP) in
revenues and spending about 18 percent. The national average,
the historical average in tax collections since World War II,
has been about 18 percent. To maintain government as we know it
today and make room for this more than doubling of expenditures
for retirees, we will have to make some very big changes in the
not-too-distant future. Those changes may include increasing
taxes by 10 percent of GDP or thereabouts, cutting other
spending, which would virtually eliminate the rest of the
government, or borrowing a great deal of money again. That
ability to borrow 10 percent of GDP a year is probably
questionable over a very long period, but those are the kinds
of choices before us, and we need to keep them in mind.
Despite much of the discussion about trust funds, as all
the committee has heard me say before, I am a bit agnostic
about trust funds. They clearly have some import in the outlook
here, but the important questions are how much in resources are
we transferring from the productive to the retired economy, and
how big is the economy? To the extent the trust funds can
affect those two factors, they play a role, but to the extent
they don't, they are an accounting mechanism. Let me give you
one quick example before I quit.
In 2015 or thereabout, about the time I am eligible to
retire, my kids won't be paying quite enough in payroll taxes
to cover my benefits. Now, the trust fund will be in fine shape
and have interest payments coming into it and eventually plenty
of bonds to be turned in through my entire life presumably. But
what happens in 2015 with the current trust fund is that the
Social Security Administration, figuratively speaking, will go
to the Treasury with a coupon and say, pay us the interest. In
order for the Federal Government to generate that cash, it has
essentially three options: Cut spending and other programs,
raise taxes, or borrow the money. So under the current
situation the Treasury will have to come up with cash to
actually pay me my benefit.
Now, think of an alternative scenario in which there was no
trust fund, there were no interest payments for that trust
fund, simply payroll taxes and spending were out of line. If
when I went to cash my check the Social Security system didn't
have enough money, the Treasury would be faced with those same
three options. They would have to raise taxes, cut spending, or
borrow from the public. So with or without a trust fund, come
2015, the fiscal consequences may be quite similar, and the
economic consequences as well. The actuarial accounting of the
trust fund is an important element, but it is not one that will
necessarily help or hurt this picture. What is important,
again, is the size of the economy and how much we are
transferring to the retirees.
With that, Mr. Chairman, I will quit.
Chairman Nussle. Thank you, Director.
[The prepared statement of Mr. Crippen follows:]
Prepared Statement of Dan L. Crippen, Director, Congressional Budget
Office
Mr. Chairman, Representative Spratt, and members of the committee,
I am pleased to be here today to discuss the current outlook for the
budget and the economy. Last week, the Congressional Budget Office
(CBO) released The Budget and Economic Outlook: An Update, which I will
summarize today.
Recently enacted legislation and the continued sluggish behavior of
the U.S. economy have reduced the projected Federal budget surpluses
for fiscal year 2001 and future years. CBO projects that the total
budget surplus in 2001 will be $153 billion $122 billion lower than CBO
estimated in May. About two-thirds of the decrease results from new
legislation; one-third comes from a weaker economy and other factors.
Despite that drop, if the $153 billion surplus materializes in 2001, it
will equal 1.5 percent of gross domestic product (GDP), the second
largest surplus as a share of the economy since 1951.
Because of the smaller total surplus, CBO now projects a small on-
budget deficit for this year. (The on-budget accounts exclude the
spending and revenues of Social Security and the Postal Service). If
current tax and spending policies are maintained and the economy
performs as estimated, CBO projects small deficits or surpluses in on-
budget accounts for the next 4 years; however, steadily increasing on-
budget surpluses reemerge by the middle of the decade. The projected
surpluses would allow all public debt that is available for redemption
to be retired by 2010.
the budget outlook
For the 5 years from 2002 through 2006, CBO projects surpluses
totaling $1.1 trillion, which come almost entirely from off-budget
accounts (see Table 1). For the 10-year period through 2011, CBO
estimates that under current policies, surpluses will total $3.4
trillion. Social Security makes up about three-quarters of that total.
In 2010, the on-budget surplus reaches 1 percent of GDP, and the total
surplus grows to 3 percent of GDP. Those estimates should be viewed
cautiously, however, because future economic developments, technical
estimating errors, and future legislative actions could produce
substantial deviations a point that CBO discussed in detail in its
January report on the budget and economic outlook.
Total surpluses for the 2002-2011 period are $2.2 trillion less
than CBO projected in May, when it last published its budget baseline
(see Table 2). New legislation accounts for $1.8 trillion of that
decrease, and changes in the economic forecast account for another $0.3
trillion; the remainder stems from other changes (technical ones not
directly driven by new legislation or by changes in the components of
CBO's economic forecast).
The Economic Growth and Tax Relief Reconciliation Act of 2001
(Public Law 107-16) is estimated to reduce revenues by $70 billion in
2001 and nearly $1.2 trillion over the 2002-2011 period. That law
changed numerous tax provisions, including lowering income tax rates,
establishing a 10 percent tax bracket, increasing tax credits for
children, repealing the estate tax, lessening the so-called marriage
penalty, raising the limits on contributions to retirement accounts,
and enhancing education incentives. In addition, the law increases
outlays for refundable tax credits by $4 billion in 2001 and $88
billion between 2002 and 2011.
Many of the provisions of P.L. 107-16, especially the ones with the
greatest impact on the budget, phase in over time. Moreover, most of
the provisions expire at the end of calendar year 2010. Extending all
provisions through 2011 would reduce revenues by an additional $255
billion over the 2002-2011 period.
Other legislation will also increase projected outlays through
2011. Providing additional assistance to farmers will increase spending
by $5.5 billion in 2001, and the 2001 Supplemental Appropriations Act
is projected to boost spending by $83 billion from 2002 through 2011.
Because legislative changes will leave less money available to reduce
outstanding Federal debt, interest payments will increase by $413
billion over the next 10 years, CBO estimates.
Lower projections of economic growth over the next few years, along
with other revisions to the economic forecast, will diminish surpluses
by $283 billion between 2002 and 2011, according to CBO's projections.
(Those revisions reflect changes in the economic outlook since January,
when CBO last updated its economic assumptions). In addition, technical
changes will reduce surpluses by $177 billion.
In the Administration's Mid-Session Review, the Office of
Management and Budget's (OMB's) baseline budget projections are
similar, though not identical, to those presented by CBO. For 2001, OMB
estimates a small on-budget surplus, whereas CBO estimates a small on-
budget deficit. In each year of the projection period, CBO's estimates
are lower than OMB's overall, CBO's figure for total surpluses from
2002 through 2011 is $445 billion less. Although that discrepancy may
seem large, it results from differences of just 1.0 percent in total
projected revenues for the period and 0.7 percent in total projected
outlays.
the economic outlook
CBO has revised its economic forecast to reflect the weakness in
the U.S. economy during the first half of 2001. Although economic
activity has slowed to a crawl, CBO believes that the economy will
narrowly avoid recession and recover gradually next year. CBO now
expects that the levels of both nominal and real (inflation-adjusted)
GDP will be lower in 2001 and 2002 than it anticipated in January. CBO
also has raised its estimates of the unemployment rate and long-term
interest rates for the next few years and lowered its estimate of
short-term interest rates.
CBO's current forecast assumes that growth of real GDP will average
1.7 percent this calendar year and 2.6 percent next year for both
years, those rates are about three-quarters of a percentage point lower
than CBO estimated in January (see Table 3). CBO's projections do not
incorporate the annual revisions to the national income and product
accounts published by the Commerce Department's Bureau of Economic
Analysis at the end of July, which were released after CBO's forecast
was completed. Incorporating those revisions could move budget
projections in either direction but probably not by very much.
Inflation, as measured by growth in the consumer price index for
all urban consumers, is 0.4 percentage points higher for 2001 and 0.2
percentage points lower for 2002 than the estimates in the January
forecast.
Short-term interest rates are projected to be lower in the next few
years than CBO previously anticipated, but long-term rates are expected
to be slightly higher. Interest rates on 3-month Treasury bills are
forecast to be about a full percentage point lower for both 2001 and
2002 than the levels estimated in January. However, the interest rates
paid on 10-year Treasury notes are projected to be between 0.3 and 0.4
percentage points higher than previously anticipated.
CBO does not forecast fluctuations of the economy beyond 2 years.
Instead, it extends historical patterns in the factors increases in the
labor force, rising productivity, and the rate of national saving that
underlie the growth of potential GDP. After incorporating those
patterns, CBO makes economic projections that extend three to 10 years
out.
For 2003 through 2011, CBO projects that growth of nominal GDP will
average more than 5.2 percent a year and that growth of real GDP will
average 3.2 percent levels slightly above those estimated in January.
According to CBO's projections, inflation in the 2003-2011 period will
average 2.5 percent, which is similar to the rate that was anticipated
last winter. Interest rates over the period will average 4.9 percent
for 3-month Treasury bills and 5.8 percent for 10-year Treasury notes,
CBO projects figures that are also similar to January's projections.
CBO's economic projections incorporate the effects of the recently
enacted tax legislation. In the short run, the rebate of taxes payable
on income earned in 2001 may help counter the economic slowdown by
encouraging consumer spending. In the long run, the impact of the new
tax law on GDP is uncertain, but any effect is likely to be small.
Analysis of the law's economic effects is complicated by the sunset
mechanism built into it, which establishes expiration dates for all of
its provisions. People's expectations about the law's expiration in
2011 could affect their decisions about consumption, work, and saving
over the next 10 years. For the purposes of its economic projections
but not for its budget calculations CBO has ignored the expiration.
Like all forecasts, CBO's forecast is very uncertain, and economic
activity could be significantly slower or faster than CBO currently
expects. Indeed, economic indicators released since CBO's forecast was
completed in July suggest a weaker economy than assumed in the
projections, though the nature of economic activity (weak business
investment offset by moderate consumer spending and spending on
residential structures) is close to CBO's expectation. In light of
additional weakness in construction spending and in the manufacturing
sector, the latest estimate for the second quarter of this year
indicates that output growth was only 0.2 percent, rather than the 0.7
percent first estimated. And indicators for July, the first month of
the current quarter, suggest that growth may be less than CBO assumed
because of much weaker business investment. Short-term interest rates
in the current quarter are also likely to be lower than assumed in July
because the Federal Reserve cut its intended Federal funds interest
rate another 25 basis points in August.
Much of the uncertainty about medium-term growth involves the pace
of investment in information technologies. The increase in the growth
rate of overall productivity in the late 1990's resulted both from
greater amounts of capital per worker, mainly in the information
technology sector, and from more rapid growth in total factor
productivity (reflecting both labor productivity and capital), probably
in large part the result of innovative uses of information technologies
throughout the economy. The question now is what the pace of investment
in information technologies will be over the medium term and the extent
to which those investments will lead to significant cost savings in
other sectors of the economy.
The economic perspectives of OMB and CBO are generally quite
similar, but the differences in those outlooks still account for a
large part of the difference between the two agencies' budget
projections. The Administration's current economic projections
anticipate stronger near-term growth than CBO's projections do, with a
sharp improvement in economic conditions by the end of this year. As a
result, corporate profits in the Administration's forecast return to
recent levels almost immediately, and the unemployment rate remains
below 5 percent (see Table 4). By contrast, in CBO's forecast, profits
remain weak in the near term, and the unemployment rate rises to 5.2
percent by the end of 2002. After 2002, the Administration's
projections of nominal GDP and of tax bases (such as corporate profits
and wages and salaries) remain slightly stronger than CBO's. Throughout
most of the period, the Administration anticipates significantly lower
interest rates on Treasury securities than CBO does, although the
implications of that difference for the budget are limited at a time
when publicly held debt is being paid down.
TABLE 1.--CBO'S BASELINE BUDGET PROJECTIONS
[By fiscal year]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Actual Total,
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
IN BILLIONS OF DOLLARS
Revenues:
Individual income taxes......... 1,004 1,015 1,039 1,079 1,123 1,175 1,223 1,286 1,360 1,440 1,528 1,717 12,970
Corporate income taxes.......... 207 149 210 195 215 247 253 265 278 292 307 321 2,584
Social insurance taxes.......... 653 694 727 761 794 838 880 923 967 1,016 1,066 1,119 9,092
Other........................... 161 152 158 160 175 178 187 189 196 204 203 185 1,833
-------------------------------------------------------------------------------------------------------------------
Total......................... 2,025 2,011 2,134 2,196 2,307 2,438 2,543 2,663 2,801 2,952 3,103 3,341 26,479
On-budget................... 1,545 1,503 1,602 1,638 1,723 1,822 1,897 1,985 2,089 2,204 2,319 2,518 19,795
Off-budget.................. 481 507 532 558 584 616 647 679 712 748 785 823 6,684
Outlays:
Discretionary spending.......... 615 647 689 717 737 759 774 789 812 833 853 878 7,842
Mandatory spending.............. 1,032 1,092 1,181 1,243 1,313 1,387 1,454 1,531 1,625 1,724 1,831 1,961 15,249
Offsetting receipts............. -81 -89 -92 -109 -112 -107 -112 -119 -125 -132 -139 -148 -1,196
Net interest.................... 223 207 179 174 168 155 139 121 101 78 58 50 1,223
Proceeds earned on the balance 0 0 0 0 0 0 0 0 0 0 -7 -29 -36
of uncommitted funds\1\........
-------------------------------------------------------------------------------------------------------------------
Total......................... 1,789 1,858 1,958 2,024 2,106 2,194 2,254 2,323 2,413 2,502 2,596 2,713 23,083
On-budget................... 1,458 1,512 1,600 1,656 1,726 1,802 1,850 1,906 1,983 2,057 2,134 2,235 18,948
Off-budget.................. 331 346 358 369 380 392 405 417 430 445 462 478 4,135
Surplus or Deficit (-).............. 236 153 176 172 201 244 289 340 389 450 507 628 3,397
On-budget....................... 87 -9 2 -18 -3 21 47 78 106 147 184 283 847
Off-budget...................... 150 162 174 190 204 224 242 262 283 303 323 345 2,549
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
\1\ ``Uncommitted funds'' is CBO's term for the surpluses that remain each year after paying down publicly held debt available for redemption. CBO
assumes that those funds, which accumulate from 1 year to the next, earn proceeds at a rate equal to the average interest rate projected for Treasury
bills and notes.
TABLE 2.--CHANGES IN CBO'S PROJECTIONS OF THE SURPLUS SINCE MAY 2001
[By fiscal year, in billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total, Total,
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-2006 2002-2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Surplus as Projected in 275 304 353 400 437 508 578 641 718 806 883 2,002 5,629
May 2001......................
Changes:
Legislative:
Tax act\1\............. -74 -38 -91 -108 -107 -135 -152 -160 -168 -187 -130 -479 -1,275
Other\2\............... -7 -10 -8 -7 -8 -8 -8 -8 -8 -9 -9 -41 -83
Debt service\3\........ * -4 -9 -16 -23 -31 -41 -53 -65 -79 -92 -84 -413
------------------------------------------------------------------------------------------------------------------------
Subtotal............. -81 -52 -107 -131 -138 -174 -201 -221 -241 -274 -230 -603 -1,771
Economic................... -25 -48 -54 -50 -40 -31 -23 -16 -9 -6 -5 -224 -283
Technical\4\............... -16 -27 -20 -18 -15 -13 -13 -16 -17 -18 -19 -93 -177
------------------------------------------------------------------------------------------------------------------------
Total................ -122 -128 -182 -198 -192 -219 -238 -253 -268 -299 -254 -920 -2,232
Total Surplus as Projected in 153 176 172 201 244 289 340 389 450 507 628 1,082 3,397
August 2001...................
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTE: * = less than $500 million.
\1\ The Economic Growth and Tax Relief Reconciliation Act of 2001 will reduce revenues by $1,186 billion and increase outlays by $88 billion between
2002 and 2011.
\2\ Mostly the 2001 Supplemental Appropriations Act, along with recent legislation that provides additional funds in 2001 for agricultural producers.
\3\ Reflects only the change in debt-service costs resulting from legislative actions. Other effects on debt-service costs are included under economic
and technical changes.
\4\ Changes not directly driven by new legislation or by changes in the components of CBO's economic forecast.
TABLE 3.--CBO'S CURRENT AND PREVIOUS ECONOMIC PROJECTIONS FOR CALENDAR YEARS 2001 THROUGH 2011
----------------------------------------------------------------------------------------------------------------
Forecast Projected Annual Average
---------------------------------------------
2001 2002 2003-2006 2007-2011
----------------------------------------------------------------------------------------------------------------
Nominal GDP (Billions of dollars):
August 2001................................................... 110,366 10,876 \1\ 13,355 \2\ 17,145
January 2001.................................................. 10,446 11,029 \1\ 13,439 \2\ 17,132
Nominal GDP (Percentage change):
August 2001................................................... 4.0 4.9 5.3 5.1
January 2001.................................................. 4.7 5.6 5.1 5.0
Real GDP (Percentage change):
August 2001................................................... 1.7 2.6 3.2 3.2
January 2001.................................................. 2.4 3.4 3.1 3.1
GDP Price Index (Percentage change):
August 2001................................................... 2.3 2.3 2.0 1.9
January 2001.................................................. 2.3 2.1 1.9 1.9
Consumer Price Index\3\ (Percentage change):
August 2001................................................... 3.2 2.6 2.5 2.5
January 2001.................................................. 2.8 2.8 2.6 2.5
Unemployment Rate (Percent):
August 2001................................................... 4.6 5.2 5.2 5.2
January 2001.................................................. 4.4 4.5 4.7 5.2
Three-Month Treasury Bill Rate (Percent):
August 2001................................................... 3.9 3.8 4.9 4.9
January 2001.................................................. 4.8 4.9 4.9 4.9
Ten-Year Treasury Note Rate (Percent):
August 2001................................................... 5.3 5.6 5.8 5.8
January 2001.................................................. 4.9 5.3 5.6 5.8
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTES: The August 2001 values for GDP and its components are based on data from the Bureau of Economic Analysis'
national income and product accounts before the annual revision in July. Incorporating those revisions, which
occurred after CBO had completed its forecast, could move budget projections in either direction but probably
not by very much. Percentage changes are year over year.
\1\ Level of GDP in 2006.
\2\ Level of GDP in 2011.
\3\ The consumer price index for all urban consumers.
TABLE 4.--COMPARISON OF CBO'S AND THE ADMINISTRATION'S ECONOMIC
PROJECTIONS FOR CALENDAR YEARS 2001 THROUGH 2011
------------------------------------------------------------------------
Forecast Projected Annual Average
-------------------------------------------
2001 2002 2003-2006 2007-2011
------------------------------------------------------------------------
Nominal GDP (Billions of
dollars)
CBO..................... 10,366 10,876 \1\13,355 \2\17,145
Administration.......... 10,364 10,937 \1\13,553 \2\17,488
Nominal GDP (Percentage
change)
CBO..................... 4.0 4.9 5.3 5.1
Administration.......... 4.0 5.5 5.5 5.2
Real GDP (Percentage change)
CBO..................... 1.7 2.6 3.2 3.2
Administration.......... 1.7 3.2 3.3 3.1
GDP Price Index (Percentage
change)
CBO..................... 2.3 2.3 2.0 1.9
Administration.......... 2.3 2.2 2.1 2.1
Consumer Price Index\3\
(Percentage change)
CBO..................... 3.2 2.6 2.5 2.5
Administration.......... 3.3 2.7 2.5 2.5
Unemployment Rate (Percent)
CBO..................... 4.6 5.2 5.2 5.2
Administration.......... 4.6 4.8 4.6 4.6
Three-Month Treasury Bill
Rate (Percent)
CBO..................... 3.9 3.8 4.9 4.9
Administration.......... 3.8 3.9 4.3 4.3
Ten-Year Treasury Note Rate
(Percent)
CBO..................... 5.3 5.6 5.8 5.8
Administration.......... 5.2 5.2 5.2 5.2
Tax Bases (Percentage of
GDP)
Corporate book profits..
CBO................. 7.9 7.5 8.0 8.1
Administration...... 7.7 8.9 8.9 8.0
Wages and salaries......
CBO................. 48.6 48.9 48.4 48.1
Administration...... 48.1 48.2 48.6 48.1
------------------------------------------------------------------------
SOURCES: Congressional Budget Office; Office of Management and Budget.
NOTES: CBO's values for GDP and its components are based on data from
the national income and product accounts before the July 2001
revision. Percentage changes are year over year.
\1\ Level of GDP in 2006.
\2\ Level of GDP in 2011.
\3\ The consumer price index for all urban consumers.
Chairman Nussle. So let me just make sure I get this
straight because while this is not a long-term liability
discussion today per se as has been pointed out, certainly
decisions we make today have impact. Is there anything that we
can do today in the budget to affect that chart that you are
showing right there involving Medicare, Medicaid, and Social
Security? Is there anything on the spending side, anything on
the debt side; is there anything on any side that we can do
within the budget to change those three green, red, and blue
lines from going where you are projecting them to go?
Mr. Crippen. In the simplistic view of the world, there are
only two moving parts. One is how much you are transferring,
that is, the level of benefits, and clearly you could choose to
cut those at some point in the future; the other one is the
size of the economy. There may be actions you can take to help
economic growth. We talked about one this morning, the current
rebate might help, but there also may be spending programs that
you might think would help economic growth; maybe education,
for example.
I am not here to make policy recommendations. I am simply
saying that what is most important is our use of tax revenues
in this context to help the economy grow, because that is
ultimately what is going to be the source of the financing for
my generation's retirement. We will be taking the production of
our children, what they are making at that time, and whether we
finance it through taxes or borrowing or some other means
doesn't matter much. We are going to be taking their production
and consuming it. So the size of the economy is ultimately the
most important single piece of this puzzle. Anything you can
do, therefore, to help economic growth now and in the future is
helpful to this outlook.
Chairman Nussle. To follow up on something my good friend
Mr. Capuano was inquiring about before, my understanding is
that the current accounting process is one that Congress came
up with; in other words, we have instructed Treasury on what to
do with the money that is coming into Social Security and
Medicare. They don't get to make independent decisions down
there, and while it may be a popular view that a trust fund--
and my constituents have the same popular view, that a trust
fund exists someplace just like their savings account or some
kind of a safety deposit box where they can stick away some
dollars, or a Mason jar or whatever you want to call it. That
doesn't exist. Unless and until Congress changes, reforms,
modernizes, whatever words you want to use, the Social Security
and Medicare Systems, that is the way it is going to be, and it
is up to Congress to make the decision and determination of
those changes. Am I in the ballpark?
Mr. Crippen. Sure. Again, those changes, I would suggest,
whatever they are, need to be measured against the metric here
of whether they help or hurt economic growth. Simply changing
the money around--for example, some of the proposals we have
seen in the past for private accounts--may or may not help
economic growth. If the Federal Government had to borrow to
finance those private accounts, for instance, the net effect on
the national savings rate would probably be zero or something
like that; therefore, they would have very little effect on the
outlook in the future in this way of looking at the problem.
It is not a matter of raising the rate of return to the
trust funds or somehow changing the asset allocation. Rather it
is how we are going to finance these changes--how big will the
economy be at the time that we are going to be demanding these
resources from our kids.
Chairman Nussle. The other two questions I have, first of
all, generally speaking, where do you differ from Director
Daniels? As you heard him testify today, are there areas as you
listened--you were here for the whole testimony, and I
appreciate your doing that and listening to the Director. Would
you give us your advice, based on being our congressional
analyst, and independently so, on where you may differ with OMB
on the testimony that he provided and the analysis he provided
for us this morning?
Mr. Crippen.In the short run, there is a slight difference,
as Director Daniels pointed out, in our estimates of economic
recovery, how quickly it takes place and how robust it will be.
We aren't as optimistic as OMB is, which has a big effect on
the short-term outlook. In the long run we differ slightly in
our forcasts of economic growth and, therefore, of revenue
collection. OMB is a little more optimistic than we are. In
addition, the Director said, we at CBO think that Medicare
spending is going to grow faster than OMB does currently. All
together it is by something like $450 billion or so, a little
more than that, I guess, that OMB would have surpluses larger
than we would over that same period. There are some ups and
downs in revenue, but in the main CBO thinks the economy is
going to grow slower, so the government will collect fewer
dollars, and Medicare is going to grow faster and cost the
government more.
Chairman Nussle. Thank you.
Mr. Spratt.
Mr. Spratt. Dr. Crippen, thank you very much. Let me ask
you, how much confidence do you have in your forecast?
Mr. Crippen. Oh, just a great deal.
Mr. Spratt. Seriously----
Mr. Crippen. That is a little hard to answer. What we
attempted to do was give you our best estimate of what we see
now. Even since January that outlook has changed, in part
because of the economy and obviously because of legislation. So
one has to be cautious about these numbers. Clearly the farther
out we go and the fact that we now have a 10-year outlook where
in the old days we had a 4- or a 5-year outlook makes them even
less certain. We don't pretend to know a great deal beyond the
first few years to the extent we know those years. Things like
large demographic changes, we can predict and use those in our
projections. In terms of the economic performance, we
essentially assume that the last 5 years will look like the
first 5, and we don't pretend to be able to call not only turns
in the economy, but any real change in performance out there--
we will have to catch up to it as it happens.
Mr. Spratt. Specifically when do you foresee the economy
beginning to grow again?
Mr. Crippen. Later this year and next year
Mr. Spratt. Calendar year?
Mr. Crippen. Yes.
Mr. Spratt. Like November-December?
Mr. Crippen. We are seeing some positive things happen in
the economy now. Whether that translates into more than 2
percent real GDP, we won't know for a few months, but we are
certainly suggesting that next fiscal year, which starts in
October, we will have growth of around 2.6 percent in real GDP.
Mr. Spratt. As opposed to 3.2 percent assumed by the Office
of Management and Budget?
Mr. Crippen. Right.
Mr. Spratt. There is something called the blue chip
indicators. It is a composite of 50 different economy
forecasters nationwide. Where does your 2.6 percent put you on
their scale?
Mr. Crippen. We are a little bit below the current average
of the Blue Chip for growth.
Mr. Spratt. They would come out at about 2.8 percent, and
you are at 2.6 percent.
Mr. Crippen. Correct.
Mr. Spratt. OMB at 3.2 percent, where would this be on the
blue chip scale?
Mr. Crippen. They are within the total range of the 50, but
they are in the top 10 percent or so. They are above average in
terms of the Blue Chip.
Mr. Spratt. I haven't seen the blue chip chart, but I have
heard it said they would rank number 8 among the 50
forecasters, definitely at the high end of the assumption.
Mr. Crippen. But within the range of the----
Mr. Spratt. You said yesterday in your testimony before the
Senate that as new evidence comes in every day, if anything,
your current forecast, if it were done again last night, would
have been somewhat more pessimistic.
Mr. Crippen. I think that is right. Certainly in the short
run we were looking at something like 1 percent real growth
last quarter, and then it came out at preliminary 0.7 and then
finally at 0.2. So we certainly would not be quite as
optimistic in the short run. We didn't change from January, and
I do need to emphasize this, and I know you know this, but we
haven't changed our long-run outlook very much. We still
believe that the economy can grow at over 3 percent real GDP a
year after we get out of this downturn, but certainly in the
next month or 2 it looks worse than we anticipated back in
January and even in May.
Mr. Spratt. Director Daniels has taken some of the indices
of your forecast, such as the growth rate, and said really we
aren't that far apart, and in the near term the numbers are
fairly similar. But you just measured one difference between
CBO's forecast and OMB's forecast when you indicated there is
about $450 billion in available surpluses more in their
forecast than in your forecast. Is that the correct number?
Mr. Crippen. That is about right. I would have to tell you
to look at our summary report. The first table will tell you
precisely, but that sounds about right for the difference
between the two. That sounds like and is a fair piece of
change, but, of course, over the 10-year period it is something
like a 1 percentage point difference in revenues and half a
percentage point difference in outlays. So it is not a lot.
Mr. Spratt. Much of that occurs in the outyears, too?
Mr. Crippen. Sure.
Mr. Spratt. Let me ask you and make clear to everybody what
kind of baseline forecast you have done. You call this a
current services baseline, and when you do a current services
baseline forecast, what you do is you take discretionary
spending, the spending that we appropriate every year in 13
different appropriation bills, and you simply increase the
total spending in each of those accounts every year by
inflation, nothing more. So that doesn't provide anything for
initiatives. It doesn't provide anything for programs that are
singled out for sizable increases, like defense or education or
NIH. If you want to increase those, you have to decrease
something else. Basically what you are providing is enough
money in real terms to run in place that have the same spending
power in discretionary spending each year as you had the year
before; is that correct?
Mr. Crippen. That is correct.
Mr. Spratt. For the record, let me make clear to everybody
what that does not include. For example, if we could put our
``eye chart'' up here, even if taking this fairly Spartan
baseline, adding only inflation, nothing else, keeping real
spending for discretionary purposes constant, what you show in
your forecast is that Medicare will be invaded next year to the
tune of $36 billion. In other words, we will have to use the
money coming into the Medicare Trust Fund, almost all of it;
$38 billion surplus, $36 billion will have to be spent, almost
fully consuming it. The next year all of the Medicare surplus
in 2003 will be consumed, and we will have to dip into the
Social Security surplus to the tune of about $18 billion. The
next year, 2004, the Medicare surplus will be fully spent, and
there will be about a $3 billion invasion of the Social
Security surplus. This is with no new initiatives or anything
like that, just inflation only. Now, this does not include any
additional amount for Medicare prescription drugs, does it?
Mr. Crippen. No, it does not.
Mr. Spratt. That would have to be added on, and to the
extent it was added, whether it is $190 billion or $300 billion
or something in between, the bottom line would worsen.
Mr. Crippen. It would. I would say on pharmaceuticals that
in all the estimates we have done heretofore, we assume that
the benefit could not be in place before 2004 or 2005, so most
of that would be in the latter half of the decade.
Mr. Spratt. It would take a while to get a program like
that up and running even if it were passed tomorrow. You just
heard our colloquy about the farm bill. This also doesn't
include anything additional for a new farm program----
Mr. Crippen. Right.
Mr. Spratt [continuing]. Which could be as much as $74
billion if the Agriculture Committees get their way and we
carry out this budget resolution. It doesn't include anything
for the increase we have all included for NIH. That will have
to come out of some other program if we don't provide
additional funds for it.
Mr. Crippen. If you provide more than inflation, yes.
Mr. Spratt. The same thing for education. It is inflation
only, but no major initiatives, and it doesn't include anything
also for offsetting extension of expiring tax provisions.
Mr. Crippen. That is correct.
Mr. Spratt. The administration notes in the report they
sent us that this year we will have about four or five very
popular tax concessions in the Tax Code whose applicability
will expire unless we renew it. You assume nonrenewal, that
they will expire, and the revenues they used to offset will no
longer be offset and will recover those revenues in the future.
We will have higher revenues because those things expire.
Mr. Crippen. If they are not renewed, yes.
Mr. Spratt. If they are not renewed. So your budget,
therefore, won't accommodate most of the things we have been
talking about in terms of increasing defense and increasing
education and providing prescription drugs for Medicare. All of
that would have to come below that bottom line and would worsen
the invasion of Medicare and Social Security.
Mr. Crippen. Certainly without other offsetting changes of
some kind, that is right.
Mr. Spratt. Right.
Let me ask you one thing about your chart there, your layer
chart. Let me make a point, too. One reason we have been able
to accommodate the increase thus far, those three entitlement
programs, is that we have had a significant, some would say a
dramatic, decrease in what we spend as a percentage of GDP on
discretionary funded programs.
Mr. Crippen. Particularly defense, yes.
Mr. Spratt. Particularly defense. But in 1962, we were
spending 12.3 percent of our GDP on discretionary programs.
Defense was a good share of that, but there were other
programs, too. This year we are spending 6.3 percent, about
half of what we were spending 30 years ago, which is pretty
phenomenal and has helped allow these programs to grow without
throwing the budget completely out of kilter.
Another significant factor is that this year the total
Federal budget will be 18 percent of GDP. In 1984, 1985, at the
peak of the Reagan defense build-up, it was 23.5 percent. So we
are about 5.5 percentage points lower as a percent of GDP. GDP
is $10 trillion, $11 trillion. That is $500 billion less
spending than if we were taking the same wedge out of the
national pie as we were in the mid-1980's. That is pretty
significant in the way of decreasing spending.
In addition, if you want to mitigate this problem, which is
certainly a problem for the long run, one thing you can try to
do is grow the denominator, grow the GDP.
Mr. Crippen. Exactly.
Mr. Spratt. If we can diligently use the trust fund
surpluses to buy down existing outstanding national debt, at
least buy it back and convert it into trust fund debt, we can
add $3 trillion plus to net national savings over the next 10
to 12 years, and that will add to capital formation, should
lower the cost of capital, should lower the interest rates, and
should boost the economy; should it not?
Mr. Crippen. It should.
Mr. Spratt. So if we can enlarge the denominator, we can
decrease this fraction----
Mr. Crippen. Absolutely.
Mr. Spratt [continuing]. Of GDP----
Mr. Crippen. What you are suggesting, Congressman, is what
I have been trying to suggest as well. That is the more
poignant debate about Social Security and Medicare in the baby-
boom era is what the policies are that we ought to be pursuing
to boost economic growth. Clearly one of them might be to pay
down debt. There could be others, but I am suggesting it is not
so much which side of a line you are on and what a trust fund
balance looks like, because this picture occurs whether or not
there are trust funds at all in some ways. So what is most
important is to have a debate about economic growth and what
policies are best to pursue for that.
Mr. Spratt. Even though we are teetering on a recession, do
you think it is wise to stay this course at least with respect
to the Social Security Trust Fund, and that is to try to use
the trust fund exclusively for debt buydown?
Mr. Crippen. I don't know, Congressman. Again, the
economics profession has a lot of suggestions, but no
conclusions, about how one would best promote economic growth
at this point. It may not be that paying down debt is the ideal
policy if we maintain growth at this fairly anemic rate. You
may want----
Mr. Spratt. If we have a true recession or a deeper
recession----
Mr. Crippen. Or if we don't recover much. I mean, 2 percent
real growth is as close to recession as you would ever want to
be without getting there. So it may be that the Congress would
want another policy. Rather than paying down debt by $150
billion, you might want a policy that didn't pay it down as
much and perhaps spent more or did other things to help boost
the economy.
Mr. Spratt. Let me go back to the chart here, which
basically lays out the budget as you see it. The point I was
making earlier is we have got two phenomena here side by side.
In the near term we have a cyclical downturn in the budget. It
is not the entire effect, obviously, by OMB's calculations.
Using their numbers, it is just 38 percent of it, but basically
in the year 2002, 2003, we pull out of this slump, return to a
fairly significant rate of growth. You have 2.6 percent. They
have 3.2 percent. The economy starts chugging along then, but
we still see some degradation in the bottom line for a number
of years to come, at least on the on-budget surplus and the on-
budget surplus excluding Medicare Trust Fund. Would you agree
these are two distinct problems?
Mr. Crippen. Yes. Absolutely. Well, they are distinct in
the numerical formulation of them. They are not distinct in
that they are both a function of economic growth, that is, or
lack of it. The more we can grow the economy, the better our
forecast will look next year and in 10 years, and the better
this fraction will look in 30 years. So in that sense they are
related, but as our cover shows on the report, if the
definition of the problem is diminution of surpluses, then
clearly in the short run, over the next few years, the economy
has the biggest effect. In the long run it is legislation that
has passed, the tax bill and others, that has changed the
outlook for the surplus.
Mr. Spratt. Your total estimate of the economic and
technical factors since January comes to about $250 billion
over 10 years?
Mr. Crippen. Over the 10 years it is about 20 percent. In
fact, I think Chairman Conrad said yesterday that 21 percent of
the change in the outlook comes from the change in our
economics. In the short run, next year, as I said, if you
adjust the corporate payment back to where it was supposed to
be or should have been or was, you then get about half of the
change, 40 billion, due to economics and 40 due to the----
Mr. Spratt. And the balance, the rest of the change, comes
from enacting policy changes, namely the tax cut?
Mr. Crippen. The tax cut, the supplemental appropriation
that has been enacted, adds about $80 billion over that time
period. There are a smattering of other spending. There is
outlays in the tax bill as well, refundable tax credits and the
change in debt service, that is 80 percent of the change over
the next 10 years.
Mr. Spratt. Thank you very much.
Mr. Hastings. Thank you, Mr. Chairman. I walked in just
when Chairman Nussle was asking you about the areas that you
differed, and I heard--let me make sure I get this correct--
that you differ in the short-term economic recovery, OMB is
different than you are, and in the long-term economic growth;
is that correct?
Mr. Crippen. That is right.
Mr. Hastings. Both of those affect revenues primarily; is
that correct?
Mr. Crippen. Yes.
Mr. Hastings. How much? Give a percentage of when you talk
about--maybe I should ask it this way: When you build in those
two, economic recovery and the long-term economic growth, how
do you factor spending into that, or can you factor spending
into that?
Mr. Crippen. I am not sure. There are certainly some
spending programs that are affected by the economy,
unemployment compensation, for instance.
Mr. Hastings. Let me put it this way: Another difference
between--you may have said this in your opening remarks, and
Director Daniels alluded to it, but they are basing their--the
revenues that you both have are essentially the same. The
difference is in the spending side. The reason why, and, again,
correct me if I am wrong, is because you take current policy
today and extrapolate that to the future, correct?
Mr. Crippen. That is right.
Mr. Hastings. OMB in their projections look at some policy
changes that they are suggesting, making the supposition, that
the Congress will make some of those changes that they want,
and, therefore, you will have a different spending level. Is
that essentially correct?
Mr. Crippen. The primary difference between us and OMB,
Congressman, in spending over the 10 years is not so much the
discretionary baseline, which I think is what you are alluding
to, but more the Medicare spending. We are assuming that
Medicare is going to grow faster than OMB assumes.
Mr. Hastings. You are also assuming that Medicare will grow
under current policy.
Mr. Crippen. Right.
Mr. Hastings. You are not taking into consideration some
changes that the Congress may or may not change. The President,
of course, has strongly suggested and a lot of Members of
Congress have suggested that we need to make some changes. That
is true with Social Security, too, by the way.
Mr. Crippen. Correct.
Mr. Hastings. So I guess what I am getting at is that the
notion that one Congress cannot bind another Congress, although
we respect policies that prior Congresses have made, and if
people want to change them, we will change them, but I think
there is certainly a growing awareness around the country that
Social Security needs to be changed, and, in fact, it was part
of a Presidential campaign for the first time I have ever
heard, and as a result there is a blue ribbon commission that
is going to have a recommendation. And Medicare, there was a
blue ribbon commission that existed a couple years ago, and
nothing has happened.
The point I am making is awareness is out there that some
of these programs need to be changed, and that can affect in
the long term then the spending that you would project as to
what the demands are in the future; is that correct?
Mr. Crippen. Absolutely. You have given me an opening here
to say one of the things that I would have said if I read my
opening statement. That is our numbers, our baseline, is
predicated on a whole set of rules that we generally follow,
but it is not, to be sure, a prediction of what the next 10
years will be. In some ways it is artificial. Saying this is
the equivalent of an assumption that Congress won't meet for 10
years or that we will have no change in policies for 10 years,
which is obviously not going to happen.
So this is not, strictly speaking, predictions of outcomes.
It is the best estimate we have of what the current law would
produce.
Mr. Hastings. Right. That is the point that I think needs
to be emphasized.
I find it remarkable that your numbers and OMB numbers on
revenue projections in the short term were virtually identical.
They may change for those reasons that you said, but any time
that you try to estimate revenues beyond 1 year, it is a very
inexact science. I think everybody would acknowledge that. It
is especially true when you are trying to estimate what
expenditures would be, because there are going to be some
changes in policies, and we don't know. It has been alluded to
on some other policies that have passed out of committees.
Those haven't passed the full Congress yet. They haven't been
signed into law, and there may be some changes as we go down
the line on that, but I want to make the distinction that from
a revenue projection standpoint, you are pretty much on line.
You obviously differ with OMB simply because you are dealing
with the status quo on spending, and there are certainly some
people that want to change some of the programs that will
affect that spending. Is that a fair analysis of----
Mr. Crippen. Yes. The biggest single thing, as you
suggested, is revenues, and the biggest factor is that we are
slightly slower and less optimistic on growth over the next 10
years.
Mr. Hastings. What it boils down to, I guess that is the
challenge that the Congress as a whole has. There are some that
believe that government ought not to grow as fast as it had in
the past. I am in that category. There are others that feel
that government should grow much faster. I think that the good
news out of all this is that if we live within the budget and
the revenue that we have, then our challenge is to obviously
prioritize that spending, which is obviously a challenge every
time Congress meets. So thank you very much.
Mr. Brown. [Presiding.] Thank you, Doug.
Mr. McDermott.
Mr. McDermott. Thank you, Mr. Chairman.
Dr. Crippen, you don't disagree with any of the figures on
this chart, do you?
Mr. Crippen. I don't think so. I can't see it, I must
confess.
Mr. McDermott. I thought I would test your eyesight first
before we give you the driver's test.
Mr. Crippen. OK.
Mr. McDermott. These were taken right out of your book; so
I think you would stand by them if you could see them. The
question, then, I have is this: The President in his State of
the Union message said unequivocally, ``To make sure the
retirement savings of America's seniors are not diverted to any
other program, my budget protects all 2.6 trillion of the
Social Security surplus for Social Security and for Social
Security alone.'' now, that is one quote, and then yesterday or
today actually in the New York Times, the Congressional Budget
Office says that the government will almost certainly be forced
to dip into Social Security revenues later this year to cover
shortfalls created by the sinking economy and by the $1.3
trillion tax cut that Mr. Bush pushed through the Congress last
year. That reflects, I think, the fact that you show dipping
into the Social Security.
Now, I would like to hear you explain what you will tell
Members of Congress who are forced in this next election to
explain why the President said one thing and did another. How
are they going to put a positive spin on that? Can you give me
a positive spin that would work?
Mr. Crippen. Fortunately that is not my job, but I will
try.
Mr. McDermott. Remember this is a 30-second commercial.
Mr. Crippen. I don't know that you can. The $8 billion for
this fiscal year 2001 we are in that we are saying would be
across this line is an estimate as well as the line is an
estimate. We are going to come very close, I think, one way or
the other, pretty close, to being on the line. That is not the
Medicare line that some of you would like to see as well, but
certainly on Social Security we are going to be very close. It
is, as I have been saying, $8 out of 2,000, and these are all
estimates, and we won't know ultimately for several months
after Treasury finally racks it all up where it all came out.
Mr. McDermott. So you would basically be saying, trust us,
it will all work out?
Mr. Crippen. You are very close.
Mr. McDermott. Do you know how much the people trust the
Congress or the President?
Mr. Crippen. Or our numbers.
Mr. McDermott. Or your numbers.
Mr. Crippen. It is not so much trust us, it will all work
out, but if that is your objective to be zero or hit this line,
you are going to be very close on one side or the other by a
few bucks out of 2,000; so in that sense it is not a big deal.
Mr. McDermott. We had a little session before this meeting,
and we talked about this, and I asked a question there, and I
didn't get an answer; so I am asking you how can anybody with a
straight face talk about this situation without talking about
the tax extenders? I sit on the Ways and Means Committee. The
likelihood of us not passing that tax extender for research and
development, R&D tax credit, is absolutely zero. That is going
to pass. We passed $33 billion for energy of which $9 billion
is covered in this budget. The other 24--where do people think
that is going to come from except from borrowing against these
reserves that are sitting in--or they just won't say it; is
that it?
Mr. Crippen. I don't know that they have an opinion one way
or the other. Maybe it is just not saying it. Fortunately those
of us who have never been elected to office don't have to make
those decisions, but clearly there are things in the offing
that could change this outlook and could make it worse, as
Congressman Spratt has so eloquently pointed out. Nothing up
here is concrete, neither our forecast nor the future. You
don't have to pass the energy bill----
Mr. McDermott. Let me tell you what I think we are going to
pass. That is the farm bill. As I said earlier, I was out in my
family reunion out there and picked up the newspaper in Aurora,
Illinois, and the front page story is that it isn't going to be
a 175 bushels an acre, it is going to be 125, and the farmers
are hurting. So we are going to have to come up with the money
for that farm bill.
I know you guys are more skilled than I am in finding
places to grab a little here and shift a little something here.
What kind of budget gimmicks are--I mean, we grabbed next
year's revenue. So we are not going to do that, that 30 million
or $15 million or how much advanced corporate taxes. Where are
we going to find that money except in these trust funds?
Mr. Crippen. Fortunately I don't have to answer that
question, but let me give you an example, which is not a
recommendation. The other day we were looking at the effect of
the final regulation on the current Medicaid--some call it a
scam--but how the States are being over paid. They are paying
more to nursing homes for benefits, and the nursing homes are
giving them money back, and in turn they are collecting more
from the Federal Government. Despite the regulation and your
legislation to try to mitigate that, it is going to cost the
Federal Government 6 or $7 billion a year for the next 10 years
while that goes on; so that alone would be enough to pay for
the farm bill.
Now, that is not the answer to everything that is up there
in red certainly, and we are not here to make policy
recommendations, but there are some things at least that one
might look at.
Mr. McDermott. So you are saying by--overpayment by
providers in Medicare and Medicaid would be places you could
find some of this money?
Mr. Crippen. This one in particular I am alluding to is
where the States have colluded with local governments who are
running nursing facilities and inflated the payments that the
Federal Government is giving to the States.
Mr. McDermott. ``colluded'' is a pretty strong word.
Mr. Crippen. It is probably justified in this case because
it is pretty deliberate.
Mr. McDermott. Would it be Justice Department action, do
you think?
Mr. Crippen. I don't know about that. It is probably within
the guidelines of current payment policy. It is just a loophole
that they are exploiting. That is not a solution to the overall
problem you cite, but there are potentially things one could
look at, and some of them in your committees.
Mr. McDermott. I bet you are looking forward in the next 3
months to figure out how we do it, right?
Mr. Crippen. Absolutely.
Mr. McDermott. Thank you very much.
Mr. Brown. Thank you.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Dr. Crippen, the one chart I wish we had here and we don't,
but I think it is the best chart you all publish, and that
fishtail or that fan chart you had back in February or January
that showed where the surplus can go to the good or the bad,
because I have to say, even though I haven't always agreed with
all of your analyses, that I think the CBO has gone out of its
way to qualify its statements and to qualify its assumptions.
In fact, I think you all said that when we were looking at the
10-year projections earlier this year, that you said there was
a short-term margin of error of something like 1 percent or .9
percent of GDP plus or minus 50 percent over the 1-year period
and 2 percent of GDP over the 5-year period, and you weren't
willing to make the bet for the 10-year period, and you at
least have been proven out that you all are sufficiently risk-
averse in that regard.
I want to go back to your conversation with Mr. McDermott,
and you made a comment, a very telling comment, and this isn't
directed at you, about saying that we are not elected, you
being the CBO. We are elected. All of us are elected, and the
President is elected as well. And we go out and we run our
campaigns, and we talk to our constituents and the people that
we would like to hire us so that they could be our
constituents, and we make promises to them, and we make
promises about what we are going to do, what taxes we are going
to cut, what spending programs we are going to enact, what
sacred cows we are going to protect.
The President is in this as much as the Congress is in
this. In the last election round, everybody went out and said,
yes, we can cut taxes; and they said, we can have a
prescription drug program; and they said, we can increase
defense spending; and we can take care of the agriculture
sector of this economy and are going to increase the amount of
education because we think that is important; and we are going
to protect the Social Security and the Medicare Trust Funds and
put those off limits. We are going to make it all work out and
still have something left over to show for it.
In fact, now we know that you all are correct in saying, be
very careful on using those long-term assumptions, because they
may not turn out that way. What is most frustrating to me about
this whole situation is the fact that the administration can go
out there and make these promises and then, when they can't pay
for the promises, they come back and they point their finger at
Congress and they say it is Congress that has to keep a lid on
the spending, when most of the spending that is being asked for
is by the administration.
The President was the one who went out there on the
campaign, and the President is the one who came up here to
Capitol Hill and said we can have all of those programs. Now
his numbers don't add up and now we are being told, well, if
you use our numbers maybe it will work. But using your numbers,
which, as you know, we have had many fights over whether to use
CBO or not. If we use CBO as the arbiter, we see--or I can
see--just barely, that if you add the President's own requests
in there, the numbers don't add up.
Now, you got into some macroeconomic issues as it relates
to the trust funds and the question of does it really matter if
we spend the Medicare surplus or the Social Security surplus?
The impression we got from Mr. Daniels today was: It really
doesn't matter. It doesn't matter really at all, and the fact
is we are still running these surpluses.
You made comment that it--whether there was money there or
not, when one comes to the Treasury window with the bond from
the Medicare Trust Fund, the HI Trust Fund, or the Social
Security Trust Fund, Treasury still has to figure out a way to
come up with that money and they have basically three options.
I don't disagree with that one bit.
Isn't it true that it is a question as to how much
outstanding debt there is that a nation has, that that has an
effect on the nation's and its economy's ability to redeem that
bond?
So given the fact that, rather than using the surpluses to
pay down public debt, we in effect are borrowing, because we
know at some point the trust funds will have to be redeemed. If
we have a higher level of public debt than we otherwise would
have had we paid down the debt, we are in effect borrowing.
It would appear to me, based upon your mid-session review,
that is what the administrations's budget does. It is borrowing
against the trust funds to spend today, whether for the tax cut
or not.
I look--as I was reading this last night on the plane
coming back into town, in a section entitled The Long-Term
Macroeconomic Effects of the Economic Growth and Tax Relief
Reconciliation Act of 2001, and I am not saying these are your
words, but your department says--talks about effects on
national savings.
It says, in contrast, if a tax cut was financed by
increasing government borrowing to cover current spending, it
goes on to talk about that, in the future, this would have a
negative effect on the growth and GDP because you would have
higher interest costs, higher debt costs.
Now, in the short run that may not matter, and perhaps that
is what Mr. Daniels is talking about. We have a responsibility,
I believe both us in the Congress as well as the executive
branch, to think not just about the short run but to think
about the medium term and to think about the long run as well.
So I guess my question to you is, is it really an
appropriate long-run policy when we are concerned about whether
or not we are going to be able to sustain that chart, let alone
what reforms may be necessary to do that, that we in effect are
increasing the leverage, not decreasing the leverage by
borrowing to pay for current spending today?
Mr. Crippen. The totality, I think, of the box you referred
to in this chart and your point is--it is not so much I believe
that it is going to be easier to borrow in the future because
we have less public debt, and we are talking about a few
percentage points of GDP one way or the other--there is
certainly, we assume, a limit to how much a government can
borrow, although Japan's activities make one wonder what that
limit might be. Nonetheless, there is a limit. It is more
important in our view that the paying down of debt, as you
cited from this box, could help economic growth, and that will
therefore help this picture and also help make it easier to
borrow if we get to that point in the future.
What I would suggest is that what side of these lines you
are on by a few billion dollars probably doesn't matter much.
Our conclusion on the economic effect of the tax bill is that
some pieces of it that would probably help economic growth,
others might deter it and, in the net, it would have not much
effect at all, in part because it is small, relative to the
economy. That is, we hope and expect the economy will produce
about $150 trillion of goods over the next 10 years. This tax
cut is about 1 percent of that, $1.35 trillion or a bigger
number if you would like; and so it is relatively small against
that picture as well.
So the effects are going to be relatively minor at this
point. Again, the important thing that I would emphasize is
that what we need to be debating more than which side of these
projections we're on or how those projections come out is
rather what policies might best help economic growth. I mean,
that, of course, in the short run we have the current downturn
which we would like to do something about if we could, but, in
the long run, it is the economy that is the trust fund for
these intergenerational programs.
Mr. Bentsen. I would hope--I don't think that either of us
would agree that we would want to mimic the Japanese in their
approach to macroeconomic policies or fiscal policies. At the
same time, I guess I would submit to you that by borrowing
today and extending debt when it is otherwise not necessary, we
are--and I think you all bear this out--we are crimping the
ability for sufficient long-term economic growth to support the
very programs that we both agree can only be supported through
faster economic growth.
Mr. Crippen. Again, I would suggest that no one knows what
is the optimum. One might, though, given the current economic
weakness not want to pay down more debt. It just may be more
contractionary than would be good for the economy now.
Similarly, there may be policies that the Congress and the
government would want to or could pursue that would help
economic growth as much or more than paying down debt. The
object, I would suggest, at least relative to this long-term
problem, is not so much debt per se, but the effects that it
can have, as you suggested, on the economy and what other
policies you might have as alternatives.
Spending on education, for example, might be something that
would be worth doing and, indeed, a way to make good on the
promises in the future of those programs by growing the
economy.
Mr. Bentsen. Thank you.
Mr. Brown. [Presiding.] Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Crippen, I have got to go back to that Trust Fund. You
gave three options which I agree with. It ignores the fourth
option that pretty much--for all intents and purposes I look at
the Social Security Trust Fund or the concept of one as just
another pension system. It is a different kind of pension
system.
Other pension systems are funded at some level of funding,
which it is a legitimate item as to how much it should be
funded. This one is not. It is funded with IOUs.
I would argue that a fourth option should be, when we can
afford it again, all of the caveats that we have said before,
to create an actual cash balance trust fund, knowing that, as
Mr. Brown has said earlier, not saying that the cash would sit
there and we debate later on where it should go, but at the
same time have a cash balance trust fund that would create a
fourth option, that I think for the most part most Americans,
including me, number one, thought we always had and, number
two, would like. That makes us more comfortable with our future
and the future of our children.
So though I respect and agree with you on the three options
that are currently available, I would vehemently argue that you
and us together, that all of us have to start thinking about a
fourth option, as to whether it is worthwhile and how do we get
there and what do we do with it when we are there.
That being the case, I think that turns much of the
discussion we are having right now into a different discussion,
one that I think that the American people in the long run would
be happier about, but that is a political discussion as well.
I also wanted to talk about the comments you made on page
34, which you just talked about, namely the economic stimulus
aspect of the tax cut we just went through.
It was amazing to me during that debate how many people
said it was an economic stimulus and how few people actually
understood what that meant. I actually appreciate the fact that
you have now said that, for all intents and purposes, it is
not. It is not a bad thing. It is not going to hurt the
economy. Any impact that it has is minimal at best.
That being the case, I would also agree with you that any
amounts of money we have, we should--every decision that we
make, other than a few basic government things, should be based
on how do we grow the economy. I would strongly argue that what
we just did with these 1.358, 2.2 trillion--pick the number--
would have been much better used in some other fashion as to
have stimulated or at least attempted to stimulate the economy
through things like R&D, through things like any other numbers
of things that are clear--at least clearer, I should say, to
being economic stimulus.
I would hope that you--that your agency, I assume. Will
continue to look at the impacts of this tax cut and tax policy
in general relative to economic stimulus, because it is
critically important.
Mr. Crippen. Yes.
Mr. Capuano. I want to talk a little bit about a couple of
things that are in your report that I have been very concerned
with. Kind of detailed numbers, I apologize. Number one is the
numbers you have in productivity and the comments you make
relative to investments and the impact that it has on the
productivity.
I was a little confused as to whether you thought the
productivity was going in the right direction or not. My
concern has been over the last year almost is that--the lack of
investment in software and hardware, number one. The drawdown
on inventories with no backup orders to push it is really going
to push down future productivity.
You say it is going down, but are you still--I guess you
said some changes were made in the last couple of weeks. Do you
still feel the same way?
Mr. Crippen. Yeah. We are still fairly optimistic. We
lowered our trend rate of productivity by two-tenths of a
percentage point since May, in large measure because we see
less capital investment, as you suggested, and therefore
productivity won't grow quite as quickly.
Certainly there has been an overhang, but we think that it
is going to be worked off in the next year or so, if not
sooner. Inventories have drawn down and stabilized. In fact,
even in the current data it looks like we are having more
investment in telecommunications, for example, than we have had
in any year prior to 1999.
Investment is only down considerably based on the last
couple of years. It is not all that comforting, but we still
believe that many of the underlying changes that increased
productivity over the last few years of the 1990's are going to
survive and continue.
As I said in yesterday's hearing in the Senate, probably
the single biggest risk to our economic forecast is whether we
can continue to grow in productivity at about two and a half
percent, and we believe that we can.
In the 1960's and 1970's, we saw productivity increases
much greater than this. It is only the more anemic growth of
the 1970's that we are now countering. It is not historically
out of bounds to think that two and a half percent is possible,
and given the technology we believe that it will happen.
Mr. Capuano. So I would--well, I am not going to argue with
you. My concern is actually on the document you produced here.
I think those expressed my concerns, is that the numbers are
not now and have been in the last several years--are a little
historically out of whack.
I am not arguing with you. I am not capable of it.
Nonetheless----
Mr. Crippen. That is certainly the biggest risk in our
economic forecast.
Mr. Capuano. The only other question I had really had to do
with some real detailed stuff. I was going through the monthly
Treasury statements, and the last one I had is July.
Mr. Crippen. That is always dangerous.
Mr. Capuano. It is dangerous, but it also raises some
serious issues to me. The two issues that were most concerning
to me, number one, is the $12.5 billion one-time income on the
sale of electromagnetic spectrum that will not be repeated.
Absent that, there would be no doubt from anybody that we are
in deficit right this minute to a huge tune. Yours would be
more than double, and even the OMB director would be hard
pressed to find other gimmicks to override that. That is a one-
time item that is not going to be repeated. That is of great
concern to me.
Mr. Crippen. In fact, may never be realized, because of
court cases. But----
Mr. Capuano. Which is--I wonder what will happen with the
accounting gimmicks once it is not realized, but that is an
argument for tomorrow.
The other question I have, and I guess today is not the
day, but I do want to ask you or your agency at a later time
about the payments to the Social Security Trust Fund. I mean,
this year they are already down just in July. Just the
transfers are down almost a billion dollars.
It is of concern to me, since the revenues aren't down and
the payments out aren't down, but the transfers into the Trust
Fund are down. I guess I wouldn't normally be concerned, except
for the accounting gimmick that we are going through right now
which--I am not arguing with the gimmick. It is as good as any
other gimmick. But it is a one-time gimmick that will come back
to bite us next year. No one wants to talk about it, but it
will, because all gimmicks do.
I am wondering and I am getting concerned that that is not
a similar gimmick, that they are just not going to pay into the
fund to increase this year's bottom line to make it look better
than what it really is.
I am not asking you to answer that now. I am kind of giving
you warning that I will be asking and hopefully you will be
able to educate me and enlighten me and calm me down a little
bit.
Mr. Crippen. I don't know about the latter, but I will try.
Mr. Brown. Thank you, Mr. Capuano.
Mr. Crippen, thank you very much for coming. I know this
dialogue will continue for a period of time. We certainly all
would like to see the economy improve. In fact, I think the
stock market is even down today. We would like to see all of
that come about.
I feel good about the tax cut. I have got my $600 check in
my pocket. I am going to try to spend it before the week is up.
I really do believe that--I think your analogy is good. It
is only going to be probably less than 1 percent of the total,
you know, gross national product. So I don't see how that can
cause the deficit which everybody has talked about.
So I feel very good about it. I believe the economy will be
regenerated and I think those revenue, you know, expectations
will be met.
I appreciate you coming and sharing your items with us
today.
Mr. Crippen. Thank you.
[Whereupon, at 2:15 p.m., the committee was adjourned.]