<DOC>
[110th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:32919.wais]
THE CONGRESSIONAL BUDGET OFFICE'S
BUDGET AND ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, JANUARY 30, 2007
__________
Serial No. 110-3
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
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COMMITTEE ON THE BUDGET
JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut, PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas Ranking Minority Member
LOIS CAPPS, California J. GRESHAM BARRETT, South Carolina
JIM COOPER, Tennessee JO BONNER, Alabama
THOMAS H. ALLEN, Maine SCOTT GARRETT, New Jersey
ALLYSON Y. SCHWARTZ, Pennsylvania THADDEUS G. McCOTTER, Michigan
MARCY KAPTUR, Ohio MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California JEB HENSARLING, Texas
LLOYD DOGGETT, Texas DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts K. MICHAEL CONAWAY, Texas
BETTY SUTTON, Ohio JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York
Professional Staff
Thomas S. Kahn, Staff Director and Chief Counsel
James T. Bates, Minority Chief of Staff
C O N T E N T S
Page
Hearing held in Washington, DC, January 30, 2007................. 1
Statement of:
Hon. John M. Spratt, Jr., Chairman, House Committee on the
Budget..................................................... 1
Hon. Paul Ryan, a Representative in Congress from the State
of Wisconsin............................................... 2
Peter R. Orszag, Director, Congressional Budget Office....... 4
Prepared statement of:
Mr. Ryan..................................................... 3
Mr. Orszag................................................... 10
THE CONGRESSIONAL BUDGET OFFICE'S BUDGET AND ECONOMIC OUTLOOK
----------
TUESDAY, JANUARY 30, 2007
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:03 a.m., in room
210, Cannon House Office Building, Hon. John M. Spratt, Jr.
(Chairman of the committee) presiding.
Present: Representatives Spratt, DeLauro, Edwards, Cooper,
Allen, Becerra, Doggett, Blumenauer, Berry, McGovern, Sutton,
Scott, Etheridge, Hooley, Baird, Moore, Bishop, Barrett,
Bonner, Garrett, Diaz-Balart, Hensarling, Lungren, Simpson,
McHenry, Conaway, Campbell, Porter and Smith.
Chairman Spratt. I call the meeting to order and open the
hearing with a congratulations again to Dr. Peter Orszag, our
witness this morning, on his appointment as the Director of the
Congressional Budget Office. He is a superbly qualified
economist. He has an outstanding reputation not just among
economists, but among the public and Members of Congress alike.
We are pleased to have you, Peter, as the Director of the
CBO and as a central part of the budget process as we face the
challenges, and there are plenty, that lie ahead of us.
The purpose of today's hearing is to discuss CBO's newly
released budget and economic outlook, and to give Members an
opportunity to ask Dr. Orszag about CBO's estimates. CBO does
excellent work in producing its budget estimates and forecasts.
It is also important for Members to understand and for the
general public to understand that the restrictions or
conventions that are imposed upon CBO by law and by practice
make their estimates and the subsequent limitations of the
baseline subject to explanation because they are not to be
taken as predictions so much as they are benchmarks where we
are with respect to current policy.
Any improvement in the deficit is a welcome development.
Last week's baseline budget estimate from CBO is still not any
cause for declaring victory. When the surplus from Social
Security is excluded, as I think it should be, the deficit for
this year's budget is $362 billion, and it hovers in this range
until 2011. At that point budget forecasting rules call for CBO
to assume that the tax cuts passed in 2001 and 2003 will expire
as the terms provide. The Bush administration assumes
otherwise, and the consequences for the bottom line are going
to be enormous.
CBO is also required to assume that the alternative minimum
tax will remain enforced and not be adjusted so that the AMT
becomes a tax schedule for tens of millions of American
taxpayers, most of for whom it was not intended. If instead the
AMT is fixed so that it applies only to up-bracket taxpayers,
those for whom it was originally intended, the loss revenues
between 2008 and 2017 is in the range of a trillion dollars.
On the spending side, budget forecasting rules call for CBO
to assume that the supplemental appropriation passed in the
previous year carried forward to future years. Since the fiscal
year 2007 Defense Appropriations Act includes $70 billion for
bridge funding for operations in Iraq and Afghanistan, this
level of expenditure is included or assumed in the 2008, 2009
and through 2017. With the supplementals for Iraq and
Afghanistan totaling $120 billion in 2006, probably as much as
$170 billion in 2007, the $70 billion carried forward is a
likely understatement, at least for the short run.
When these adjustments are made, the estimates from CBO
become a sobering reminder of how much current policy will have
to be changed to return the budget to a fiscally responsible
course. If not corrected, large deficits--these large deficits
will result in a rising mound of debt, which CBO already
estimates to total $8.9 trillion by the end of this year. This
means there has been a 55 percent increase in the statutory
debt since the Bush administration took office, and its
corresponding increase in debt service means that--and a
corresponding increase in debt service.
So the challenges we face are considerable. When you open
this book, Dr. Orszag, and read the first paragraph in the
first chapter, this sounds like good news. Congressional Budget
Office projects that if current laws and current policies
remain the same, the Federal budget will assure a deficit of
$172 billion for the year 2007. That is good news, no question
about it. But if you turn the page and read the first paragraph
on page 2, CBO tells us, however, if all tax provisions set to
expire over the next 10 years were extended, and the AMT is
indexed for inflation, the budget outlook for 2017, 10 years
from now, would change from a surplus of $249 billion, a
surplus, to a deficit of $476 billion. Debt held by the public
at the end of 2017 would climb to nearly 40 percent of GDP, and
the 10-year cumulative deficit total would be $3.2 trillion. In
other words, we have our work cut out for us.
Dr. Orszag, I welcome you here, but before turning to you
to hear your statement, let me offer the Ranking Member Mr.
Ryan the opportunity to make an statement as well. Mr. Ryan.
Mr. Ryan. Thank you, Mr. Chairman. Excuse me while I cough
while I do my opening remarks. When you have a 2-, 3-, and 4-
year-old, you get a cold about every 2, 3 or 4 weeks.
The budget outlook we are considering today--first of all,
I want to welcome Dr. Orszag. It is good to have him, off to a
good start, and this is a very, very good read as far as CBO
outlooks go.
The outlook we are considering today does contain some
truly good news. Even as we have kept tax burdens low, revenues
have continued pouring into the Treasury at higher-than-
expected revenues, and this is the single biggest factor in
this current year's deficit reduction. But the good news
basically does stop right there.
As Chairman Spratt just noted, and as Dr. Orszag will
confirm, I have no doubt, much of the budget outlook rests on
unrealistic assumptions both on the spending side and on the
tax side. Among them clearly are the funding levels for the war
in Iraq and significant tax increases. But even taking these
facts in account tends to obscure the most important driver of
Federal spending, and the biggest threat to our fiscal and
economic health; that is, entitlement spending.
Just a week ago we heard from David Walker, the Comptroller
General, and others that warned us that unless Congress takes
prompt, substantive action to address the unsustainable growth
in entitlement programs, particularly our large health care
programs, both the budget and the economy will face serious
consequences.
CBO's report echoes these concerns. It projects entitlement
spending to grow about 5.9 percent a year. This trend will be
led by Medicare and Medicaid, which will grow at about 7 to 8
percent a year. Even if we allow all the tax cuts to expire, it
is swamped by this growth in entitlement spending. So even if
we manage to balance the budget by 2012, which I think we can
and should do, entitlements will quickly drive us right back
into deficit, and the situation will keep getting worse after
that.
So we see good news now. It is kind of a calm before the
storm. And let's just put it into perspective and realize that
we have a big storm coming on the horizon. So the point is that
it is not enough for us in Congress to only look at war costs
or discretionary spending or whether taxes are permanent or
not; we need to face up to the entitlement problem, and we need
to do it soon.
Again, there was some truly good news in the report and I
don't want to lose sight of that. The economy is growing well.
Inflation is in check. A lot of good things are happening. We
have had 7.2 million jobs created since the last recession, but
we can't use this report to bury our heads in the sand, and we
cannot pretend that simply cutting defense spending or raising
taxes is going to solve the real problem we face. We can get to
balance in 5 years, and I believe we should, and I think we
will. But we cannot do it with massive tax hikes. I believe Dr.
Orszag will agree that we are going to have to make difficult
decisions and enact substantive changes to address the growth
in entitlement spending, and we are going to have to do it soon
if we are going to do it right. Thank you.
Chairman Spratt. Thank you, Mr. Ryan.
[The prepared statement of Mr. Ryan follows:]
Prepared Statement of Hon. Paul Ryan, a Representative in Congress From
the State of Wisconsin
The budget outlook we are considering today does contain some truly
good news. Even as we've kept tax burdens low, revenue has continued
pouring into the Treasury at higher-than-expected levels. And this is
the single biggest factor in the current year's deficit reduction.
But the good news stops there. As Chairman Spratt has noted--and as
Director Orszag will confirm--much of the budget outlook rests on
unrealistic assumptions--both on the spending and tax side. Among them,
clearly, are funding levels for the war in Iraq, and significant tax
increases.
But even taking these facts into account tends to obscure the most
important driver of federal spending, and the biggest threat to our
fiscal and economic health: entitlement spending.
Just a week ago today, this Committee heard compelling testimony
from the Comptroller General, David Walker, and others warning us that
unless Congress takes prompt, substantive action to address the
unsustainable growth in entitlement spending--particularly of our
largest healthcare programs--both the budget and the economy will face
serious consequences.
CBO's report echoes these concerns. It notes that entitlement
spending--which already consumes more than half of the budget--is
projected to grow at about 5.9 per year.
This trend will be led by Medicare and Medicaid, which will grow at
7 to 8 per year--faster than projected growth of the entire economy,
and faster than projected growth in tax revenue--even if the 2001 and
2003 tax relief was allowed to expire.
So even if we could manage a balanced budget by 2012, entitlements
would quickly drive us right back into deficit, and the situation would
just keep getting worse after that.
The point is that it's not enough for us in Congress to look only
at war costs, or discretionary spending, or taxes. We need to face up
to the entitlement problem--and we need to do it soon.
Again, there was some truly good news in this report, and I don't
want to lose sight of that.
But we can't use this report to bury our heads in the sand, and we
can't pretend that simply cutting defense spending or raising taxes is
going to solve the real problem we face.
We can get to balance in five years--and we can do it without
massive tax hikes.
But--as I believe Dr. Orszag will agree--we're going to have to
make difficult decisions, and enact substantive changes to address the
growth of entitlement spending, and we're going to have to do it soon.
Chairman Spratt. Dr. Orszag, you can submit your statement
for the record, which will be acceptable from you, and I think
you are our only witness today. Summarize as you please, but
the floor is yours. Go ahead. We are glad to have you.
STATEMENT OF PETER R. ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Orszag. Thank you very much, Mr. Chairman and Mr. Ryan
and other members of the committee. I am looking forward to
working with all of you over the next 4 years as we struggle
with the Nation's fiscal challenges. I will try to be quite
brief in my opening remarks to leave plenty of time for
questions, especially since Chairman Spratt and Mr. Ryan
covered many of the points I was intending to cover, thus
making it easier for me.
I have five points to make about the economic and budget
outlook, and I think interpreting the document that we released
requires taking all five points into account.
The first point is that under the official baseline, which,
as Chairman Spratt noted, reflects current law with regard to
revenue and spending, the budget deficit falls from $248
billion last year to $172 billion this year. That excludes any
outlays associated with a likely supplemental appropriation for
the ongoing war on terrorism. Including that spending would
bring the deficit for 2007 up to a figure of around $200
billion or so.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Over the next 10 years, as the first chart shows, if the
first chart comes up, the budget under the baseline moves into
surplus in 2012 and then remains in surplus through the rest of
the budget window. That very significant increase around 2012,
which is that sharp upward movement in the line there, is
associated with the expiration of various revenue provisions at
the end of 2010, which raises revenue in 2011 and thereafter.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
My second point is, as has already been noted by both
Chairman Spratt and Mr. Ryan, that baseline adopts a specific
set of assumptions for the future. In particular, it strictly
interprets current law. So various revenue provisions that are
scheduled to expire or are soon to expire, discretionary
spending is assumed to keep pace with inflation, but not with
population growth or with overall economic growth. As a result
of those two assumptions, revenue rises from 18.6 percent of
the economy this year to over 20 percent by the end of the
projection window. That is largely because the alternative
minimum tax grows significantly from 4 million taxpayers last
year to 33 million in 2010, and because of the expiration of
various revenue provisions associated with the 2001 and 2003
tax legislation, and discretionary spending falls from 7.8
percent of the economy to 5.8 percent of the economy by the end
of the budget window.
If you made an alternative set of assumptions about the
course of future policy and, for example, assume that
discretionary spending, including the war on terrorism, kept
pace with the overall economic growth, and that the 2001 and
2003 tax provisions were not allowed to expire, and that the
alternative minimum tax was not allowed to overtake the tax
system, instead of a surplus in 2012 of $170 billion dollars,
one would have a deficit of $328 billion, and over the 10-year
window you would have a cumulative deficit of $4.2 trillion.
So again, it has already been noted, making different
assumptions, I think the next slide summarizes those, and those
are inclusive of the debt service implications of changing
policy. Changing policy relative to current law has a
significant effect on budgetary outcomes.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
My third point, if we could go to the next slide, has to do
with uncertainty. I think it is very important to realize this
year we are expected to spend about $2.7 trillion. We are
expected to bring in revenue of about $2.5 trillion for a
deficit of about $200 billion. If we are 5 percent too high on
spending and 5 percent too low on the revenue projection, so
just 5 percent on each, the actual outcome would shift from a
deficit of $200 billion to a surplus of more than $50 billion,
the point being that being slightly off on two big numbers can
have a very big effect on the difference between those two
numbers, which is the deficit. So there can be very substantial
swings in the deficit from relatively minor errors in
forecasting big numbers like revenue and spending.
To try to illustrate that uncertainty, this chart shows you
the projected budget outcomes under the baseline, with the dark
blue area representing the most likely outcomes under that
baseline. For example, in 2010, we project a deficit of about 1
percent of GDP of the economy, but there is a 20 percent
probability based on past forecasting errors of a 3 percent
deficit or larger, and a 5 percent probability of a 3 percent
surplus or more. So I want to make sure that everyone
understands that there is significant uncertainty surrounding
future budgetary outcomes.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
The fourth point has to do with the changes since last
August. If we could go to the next slide, please. Thank you.
Consistent with the emergence of projected surpluses under the
baseline, which did not occur last August, there has been a
significant improvement in the baseline since last August. Last
August, for 2007 through 2016 we were projecting a deficit of
$1.8 trillion. We are now projecting a surplus over that period
of almost $400 billion.
But I want to quickly make two points about that
improvement. First, it has little to do with changes in
economic assumptions. In fact, economic changes by themselves
account for only $173 billion of that shift. Secondly, a very
large chunk of it, roughly half, has to do with the mechanical
implications of our assumptions with regard to discretionary
spending. By scoring convention, what we do is we take enacted
appropriations in the base year and project them out. In
August, that base year included $120 billion in appropriations
for the global war on terrorism, and a little bit less than $60
billion for domestic relief activities associated primarily
with the hurricane. This year so far we only have $70 billion
enacted with regard to the global war on terrorism, and nothing
corresponding to the domestic relief activity. So in both
categories there is basically about $50 billion less in the
base year, and then project that forward in each year
thereafter and you get about $500 billion less in defense
spending and $500 billion less in nondefense spending, which
has little to do with the underlying fiscal environment, and it
is instead mostly mechanical implication of the way that we are
instructed to conduct or to construct the baseline.
The other point, though, is that there is some real
improvement, as Mr. Ryan noted, in the short term. Some of that
has to do with improved outlay projections over the longer
term, over the 10-year period as a whole. Much less of the
improvement has to do with revenue. In fact, the net effect on
revenue changes since August 2006 is only $57 billion over the
10-year window.
The real improvement, abstracting from that mechanical
discretionary assumption, has to do with Medicare spending in
particular. We have $445 billion less in Medicare spending over
the 10-year window than in August 2006, of which $265 billion
comes from Medicare Part D, the prescription drug benefit. That
in turn reflects both lower cost per beneficiary--bids came in
15 percent lower than last year this year--and also a lower
outyear assumption with the regard to the number of
beneficiaries who will take up the benefit, because now we have
more information--we have real information on beneficiaries. It
looks like a larger share of beneficiaries will have other
coverage and, therefore, not take up the Medicare benefit in
the outyears. Both of those combined reduced the Part D
projections by $265 billion.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
My final point--and this returns to a theme that Mr. Ryan
noted also--if we could go to the final chart, please--is that
over the long term, the Nation's fiscal imbalance is quite
serious. It has a lot to do especially with our health care
programs. Medicare and Medicaid combined, the Federal share of
Medicaid plus Medicare, amount to 4\1/2\ percent of GDP this
year. They are projected to rise to 5.9 percent by the end of
the budget window in 2017. If over the next 40 years health
care costs continue to grow as rapidly relative to economic
growth as they did over the past 40 years, one gets that top
line shown in this graph. Medicare and Medicaid would amount to
20 percent of the economy by 2050 under that projection. That
is as large as the entire Federal share today. Even if health
care costs' growth slow to 1 percent faster than economic
growth, which is the dotted line in the middle, those two
programs would have accounted for 10 percent of the economy.
It is not too gross of an exaggeration to say the central
long-term fiscal challenge facing the United States is to bend
that curve so that cost growth occurs at a slower rate, and I
would say there is a significant opportunity for us to slow
health care costs without impairing innovation and without
harming Americans' health if we can find better ways of making
sure that our health care system is cost-effective.
But in light of that curve in particular, it is implausible
that economic growth alone will eliminate our long-term fiscal
imbalance, and some combination of spending reductions and/or
revenue increases will be necessary to avoid a very significant
fiscal problem that will develop over the medium to long term.
Thank you very much.
[The prepared statement of Peter R. Orszag follows:]
Prepared Statement of Peter R. Orszag, Director, Congressional Budget
Office
Chairman Spratt, Congressman Ryan, and Members of the Committee,
thank you for giving me this opportunity to present the Congressional
Budget Office's (CBO's) budget and economic outlook for fiscal years
2008 to 2017.\1\
---------------------------------------------------------------------------
\1\ See Congressional Budget Office, The Budget and Economic
Outlook: Fiscal Years 2008 to 2017 (January 2007).
---------------------------------------------------------------------------
If current laws and policies remained the same, the budget deficit
would equal roughly 1 percent of gross domestic product (GDP) each
fiscal year from 2007 to 2010, the Congressional Budget Office (CBO)
projects. Those deficits would be smaller than last year's budgetary
shortfall, which equaled 1.9 percent of GDP (see Table 1). Under the
assumptions that govern CBO's baseline projections, the budget would
essentially be balanced in 2011 and then would show surpluses of about
1 percent of GDP each year through 2017 (the end of the current 10-year
projection period).
The favorable outlook suggested by those 10-year projections,
however, does not indicate a substantial change in the nation's long-
term budgetary challenges. The aging of the population and continuing
increases in health care costs are expected to put considerable
pressure on the budget in coming decades. Economic growth alone is
unlikely to be sufficient to alleviate that pressure as Medicare,
Medicaid, and (to a lesser extent) Social Security require ever greater
resources under current law. Either a substantial reduction in the
growth of spending, a significant increase in tax revenues relative to
the size of the economy, or some combination of spending and revenue
changes will be necessary to promote the nation's long-term fiscal
stability.\2\
---------------------------------------------------------------------------
\2\ For a detailed discussion of the long-term pressures facing the
federal budget, see Congressional Budget Office, The Long-Term Budget
Outlook (December 2005), Updated Long-Term Projections for Social
Security (June 2006), and The Outlook for Social Security (June 2004).
---------------------------------------------------------------------------
CBO's baseline budget projections for the next 10 years, moreover,
are not a forecast of future outcomes; rather, they are a benchmark
that lawmakers and others can use to assess the potential impact of
future policy decisions. The deficits and surpluses in the current
baseline are predicated on two key projections (which stem from
longstanding procedures that were, until recently, specified in
law).\3\
---------------------------------------------------------------------------
\3\ The Balanced Budget and Emergency Deficit Control Act of 1985,
which established rules that govern the calculation of CBO's baseline,
expired on September 30, 2006. Nevertheless, CBO continues to prepare
baselines according to the methodology prescribed in that law.
---------------------------------------------------------------------------
<bullet> Revenues are projected to rise from 18.6 percent of GDP
this year to almost 20 percent of GDP in 2012 and then remain near that
historically high level through 2017. Much of that increase results
from two aspects of current law that have been subject to recent policy
changes: the growing impact of the alternative minimum tax (AMT) and,
even more significantly, various provisions originally enacted in the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and
the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and
modified by subsequent legislation, which are scheduled to expire by
December 31, 2010.
<bullet> Outlays for discretionary programs (activities whose
spending levels are set anew each year through appropriation acts) are
projected to decline from 7.8 percent of GDP last year to 5.8 percent
of GDP by 2017--a lower percentage than any recorded in the past 45
years. That projection derives mainly from the assumption in the
baseline that discretionary funding will grow at the rate of inflation,
which is lower than the growth rate that CBO projects for nominal GDP.
The projection for discretionary spending implicitly assumes that no
additional funding is provided for the war in Iraq in 2007 and that
future appropriations for activities related to the war on terrorism
remain equivalent, in real (inflation-adjusted) terms, to the $70
billion appropriated so far this year.
SUMMARY TABLE 1.--CBO'S BASELINE BUDGET OUTLOOK
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Actual Total Total
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008-2012 2008-2017
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IN BILLIONS OF DOLLARS
Total Revenues................................................ 2,407 2,542 2,720 2,809 2,901 3,167 3,404 3,550 3,717 3,896 4,084 4,284 15,001 34,531
Total Outlays................................................. 2,654 2,714 2,818 2,926 3,038 3,179 3,234 3,391 3,533 3,687 3,892 4,034 15,194 33,731
---------------------------------------------------------------------------------------------------------------------------------
Total Deficit (-) or Surplus............................ -248 -172 -98 -116 -137 -12 170 159 185 208 192 249 -194 800
On-budget..................................................... -434 -357 -299 -332 -367 -258 -85 -101 -79 -57 -72 -10 -1,342 -1,662
Off-budget\a\................................................. 186 185 201 216 230 246 255 261 264 265 264 259 1,148 2,461
Debt Held by the Public at the End of the Year................ 4,829 4,995 5,104 5,232 5,380 5,403 5,242 5,089 4,912 4,709 4,521 4,274 n.a. n.a.
AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT
Total Revenues................................................ 18.4 18.6 19.0 18.7 18.4 19.2 19.8 19.8 19.8 19.9 20.0 20.1 19.1 19.5
Total Outlays................................................. 20.3 19.9 19.7 19.5 19.3 19.3 18.8 18.9 18.8 18.8 19.1 18.9 19.3 19.1
---------------------------------------------------------------------------------------------------------------------------------
Total Deficit (-) or Surplus............................ -1.9 -1.3 -0.7 -0.8 -0.9 -0.1 1.0 0.9 1.0 1.1 0.9 1.2 -0.2 0.5
Debt Held by the Public at the End of the Year................ 37.0 36.6 35.7 34.8 34.2 32.8 30.5 28.3 26.2 24.0 22.1 20.1 n.a. n.a.
Memorandum:
Gross Domestic Product (Billions of dollars).................. 13,066 13,645 14,300 15,014 15,742 16,465 17,205 17,973 18,764 19,582 20,425 21,295 78,726 176,766
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Source: Congessional Budget Office.
Note: n.a. = not applicable.
\a\ Off-budget surpluses comprise surpluses in the Social Security trust funds as well as the net cash flow of the Postal Service.
Policy choices that differed from the assumptions in the baseline
would produce different budgetary outcomes. For example, if lawmakers
continued to provide relief from the AMT (as they have done on a short-
term basis for the past several years) and if the provisions of EGTRRA
and JGTRRA that are scheduled to expire were instead extended, total
revenues would be almost $3 trillion lower over the next 10 years than
CBO now projects. Similarly, if discretionary spending (other than for
military operations in Iraq and Afghanistan) grew at the rate of
nominal GDP over the next 10 years, total discretionary outlays during
that period would be nearly $1.3 trillion higher than in the baseline.
Combined, those policy changes--and associated debt-service costs--
would produce a deficit of $328 billion (1.9 percent of GDP) in 2012
and a cumulative deficit over the 2008-2017 period of $4.2 trillion
(2.4 percent of GDP).
Underlying CBO's baseline projections is a forecast that U.S.
economic growth will slow in calendar year 2007 but pick up in 2008.
Specifically, CBO anticipates that GDP will grow by 2.3 percent in real
terms in 2007, a full percentage point less than the growth recorded
last year. For 2008, CBO forecasts that GDP growth will rebound to 3.0
percent. Under the assumptions of the baseline, real GDP growth would
continue at a similar rate in 2009 and 2010 and then slow to 2.7
percent in 2011 and 2012. For the rest of the projection period,
average growth of real GDP is projected to decrease to 2.5 percent per
year as increases in the size of the workforce continue to slow.
THE BUDGET OUTLOOK
CBO estimates that if today's laws and policies did not change,
federal spending would total $2.7 trillion in 2007 and revenues would
total $2.5 trillion, resulting in a budget deficit of $172 billion. The
additional funding that is likely to be needed to finance military
operations in Iraq and Afghanistan would put that deficit in the
vicinity of $200 billion. Even so, this year's shortfall would be
smaller than the 2006 deficit of $248 billion.
BASELINE PROJECTIONS FOR THE 2008-2017 PERIOD
Under current laws and policies, the deficit would drop further in
2008, to $98 billion. That decrease results primarily from two factors.
On the revenue side of the budget, receipts from the AMT are estimated
to increase by about $60 billion next year because of the scheduled
expiration of the relief provided through tax year 2006. (In addition,
telephone-tax refunds, which totaled $13 billion in 2007, are projected
to drop by $10 billion in 2008.) On the spending side of the budget,
outlays for operations in Iraq and Afghanistan and for relief and
recovery from hurricane damage are about $14 billion lower in 2008 than
in 2007 under the assumptions of the baseline.
The baseline deficit is projected to rise modestly over the
following two years, 2009 and 2010, as outlays grow by about 3.8
percent annually and revenues increase by about 3.3 percent a year.
That projected growth rate for revenues is lower than in recent years,
mainly because corporate profits and capital gains realizations are
expected to revert to levels that are more consistent with their
historical relationship to GDP.
After 2010, spending related to the aging of the baby-boom
generation will begin to raise the growth rate of total outlays. The
baby boomers will start becoming eligible for Social Security
retirement benefits in 2008, when the first members of that generation
turn 62. As a result, the annual growth rate of Social Security
spending is expected to increase from about 4.5 percent in 2008 to 6.5
percent by 2017.
In addition, because the cost of health care is likely to continue
rising rapidly, spending for Medicare and Medicaid is projected to grow
even faster--in the range of 7 percent to 8 percent annually. Total
outlays for those two health care programs are projected to more than
double by 2017, increasing by 124 percent, while nominal GDP is
projected to grow only half as much, by 63 percent (see Figure 1).
Consequently, under the assumptions of CBO's baseline, spending for
Medicare, Medicaid, and Social Security will together equal nearly 11
percent of GDP in 2017, compared with a little less than 9 percent this
year.
Revenues are projected to increase sharply after 2010 given the
assumption that various tax provisions expire as scheduled. In the
baseline, total revenues grow by 9.2 percent in 2011 and by 7.5 percent
in 2012, thereby bringing the budget into surplus. Beyond 2012,
revenues are projected to grow at about the same pace as outlays (by
roughly 4.5 percent a year), keeping the budget in the black through
2017 under baseline assumptions.
Relative to the size of the economy, outlays are projected to range
between 18.8 percent and 19.7 percent of GDP during the 2008-2017
period under the assumptions of CBO's baseline--lower than the 20.6
percent average of the past 40 years (see Figure 2). Mandatory spending
(funding determined by laws other than annual appropriation acts) is
projected to grow by 5.9 percent a year over that period, which is
faster than the economy as a whole. By contrast, discretionary
appropriations are assumed simply to keep pace with inflation and, to a
lesser extent, with the growth of wages. Thus, discretionary outlays
are projected to increase by about 2.0 percent a year, on average, or
less than half as fast as nominal GDP.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
CBO projects that revenues will average 18.7 percent of GDP from
2008 to 2010 (close to the 18.6 percent level expected for this year)
before jumping sharply in 2011 and 2012 with the expiration of tax
provisions originally enacted in EGTRRA and JGTRRA. After that,
revenues are projected to continue growing faster than the overall
economy for three reasons: the progressive structure of the tax code
combined with increases in total real income, withdrawals of retirement
savings as the population ages, and the fact that the AMT is not
indexed for inflation. Under the assumptions of the baseline, CBO
projects that revenues will equal 20.1 percent of GDP by 2017--a level
reached only once since World War II.
Federal government debt that is held by the public (mainly in the
form of Treasury securities sold directly in the capital markets) is
expected to equal almost 37 percent of GDP at the end of this year.
Thereafter, the baseline's projections of smaller annual deficits and
emerging surpluses diminish the government's need for additional
borrowing, causing debt held by the public to shrink to 20 percent of
GDP by 2017.
changes in the baseline budget outlook since august
Although the long-term budgetary picture continues to be worrisome,
the baseline outlook for the next 10 years has brightened in the five
months since CBO issued its previous projections.\4\
---------------------------------------------------------------------------
\4\ Those projections were published in Congressional Budget
Office, The Budget and Economic Outlook: An Update (August 2006).
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Budgetary outcomes have improved for each year from 2007 to 2016
(the period covered by the previous projections), from a reduction of
$114 billion in the deficit for 2007 to a swing of $285 billion in the
bottom line for 2016 (from a deficit of $93 billion to a surplus of
$192 billion). In all, those reductions represent a difference of about
1.2 percent of GDP over 10 years.
Those changes overstate the fundamental improvement in the
underlying budget outlook, however. Roughly half of the total change
stems from the baseline's treatment of previous supplemental
appropriations for disaster relief and the irregular pattern of funding
for military operations in Iraq and Afghanistan. Consequently, more
than half of the improved bottom line is unrelated to changes in the
underlying budgetary and economic environment.
Much of the remaining change to the current baseline comes from
lower projected spending for Medicare. Total outlays for that program
over the 2007-2016 period are nearly 8 percent lower in this baseline
than in CBO's August projections. That reduction is largely
attributable to new estimates of per capita costs for all Medicare
benefits, but it also reflects lower projections of the number of
enrollees in the prescription drug benefit program. Those recent
changes, however, do not significantly alter the upward trajectory of
Medicare spending in the long term.
THE ECONOMIC OUTLOOK
The Federal Reserve's shift in monetary policy over the past two
and a half years and the recent decline in housing construction are
expected to restrain economic growth this year, but the economy is
likely to post solid gains next year. CBO forecasts that GDP will grow
by 2.3 percent in real terms in calendar year 2007 but by 3.0 percent
in 2008 (see Table 2).
Gains in employment, which remained solid in 2006 despite a
slowdown in economic growth during the second half of the year, are
expected to lessen in 2007. That change may cause unemployment to edge
up from the 4.6 percent rate recorded for 2006. As housing construction
stabilizes, however, economic growth and employment should start to
recover by the middle of 2007.
SUMMARY TABLE 2.--CBO'S ECONOMIC PROJECTIONS FOR CALENDAR YEARS 2007 TO 2017
[Percentage change]
----------------------------------------------------------------------------------------------------------------
Forecast Projected Annual Average
Estimated -------------------------------------------------------
2006 2007 2008 2009-2012 2013-2017
----------------------------------------------------------------------------------------------------------------
Nominal GDP:
Billions of dollars................... 13,235 13,805 14,472 (\1\) 17,395 (\2\) 21,519
Percentage change..................... 6.3 4.3 4.8 4.7 4.3
Real GDP.................................. 3.3 2.3 3.0 2.9 2.5
GDP Price Index........................... 2.9 1.9 1.8 1.8 1.8
PCE Price Index \3\....................... 2.8 1.7 1.9 2.0 2.0
Core PCE Price Index \4\.................. 2.3 2.1 1.9 2.0 2.0
Consumer Price Index \5\.................. 3.4 1.9 2.3 2.2 2.2
Core Consumer Price Index \6\............. 2.6 2.6 2.3 2.2 2.2
Unemployment Rate (Percent)............... 4.6 4.7 4.9 5.0 5.0
Interest Rates (Percent):
Three-month Treasury bills............ 4.7 4.8 4.5 4.4 4.4
Ten-year Treasury notes............... 4.8 4.8 5.0 5.2 5.2
----------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor,
Bureau of Labor Statistics; Federal Reserve Board.
Notes: GDP = gross domestic product. Percentage changes are year to year.Year-by-year economic projections for
2007 to 2017 appear in Appendix E.
\1\ Level in 2012.
\2\ Level in 2017.
\3\ The personal consumption expenditure chained price index.
\4\ The personal consumption expenditure chained price index excluding prices for food and energy.
\5\ The consumer price index for all urban consumers.
\6\ The consumer price index for all urban consumers excluding prices for food and energy.
Last year, robust investment by businesses and solid growth in
exports helped the U.S. economy absorb the decline in housing
construction. Investment and exports are expected to continue to
support the economy in 2007. For many years, businesses' capital stock
(the plant, equipment, and software they use for production) grew more
slowly than overall demand for U.S. goods and services; as a result,
despite the recent growth of investment, the nation's capital stock is
still low relative to the level of demand. Investment should therefore
continue to increase, even if the growth of demand slows. Similarly,
export growth is likely to remain strong because increases in demand
for U.S. products overseas are durable enough to withstand a slight
slowdown in U.S. demand for other countries' exports.
In the absence of any adverse price shocks to the economy, the core
rate of inflation--which excludes prices for food and energy--is
expected to ease slightly this year. Overall inflation (as measured by
the year-to-year change in the price index for personal consumption
expenditures) will fall from last year's rate of 2.8 percent to 1.7
percent in 2007 because of a large drop in prices for motor fuels near
the end of last year. The core rate of inflation, however, is expected
to decline less rapidly during 2007.
CBO anticipates that the interest rate on three-month Treasury
bills will drop slightly this year from the 4.9 percent rate seen at
the end of 2006. Further declines are expected during 2008, when that
rate will average 4.5 percent. CBO's forecast assumes that long-term
interest rates will edge up as short-term interest rates decline. The
rate on 10-year Treasury notes, for example, is forecast to rise from
4.8 percent this year to 5.0 percent in 2008.
Beyond the two-year horizon, CBO projects that economic growth (as
measured by increases in real GDP) will average 2.7 percent a year from
2009 to 2017. As members of the baby-boom generation begin to retire,
the growth of the labor force is expected to slow, pushing down the
rate of real GDP growth during the second half of that period.
Projected rates of inflation, unemployment, and growth of labor
productivity average 2.0 percent, 5.0 percent, and 2.2 percent,
respectively, after 2008. Interest rates are projected to average 4.4
percent for three-month Treasury bills and 5.2 percent for 10-year
Treasury notes.
Chairman Spratt. Of course, like I was referring earlier to
some of the positive changes in your forecast, if you read all
the way to appendix B, you find CBO has made some major
changes, which you have testified, in the so-called baseline
since just last August, in a matter of months. The cumulative
changes come to how much?
Mr. Orszag. The cumulative changes come to 2 point--over $2
trillion.
Chairman Spratt. Over $2 trillion between 2008 and 2017.
Mr. Orszag. No. It is $2.1 trillion, Chairman Spratt,
between 2007 and 2016. We do it over that window because that
was the window used in August.
Chairman Spratt. And the remaining bottom line is a
surplus?
Mr. Orszag. That is correct. Roughly $400 billion now.
Chairman Spratt. If you keep reading, you find that more
than half of these changes related to the way you adjust for
supplementals.
Mr. Orszag. Correct.
Chairman Spratt. Would you expound upon that? We have got
the war costs, we have got the Katrina costs, we have got
various costs. Under current law you are obligated to carry
forward prior-year supplemental appropriations. But in the case
of defense, only $70 billion has been appropriated, so that is
your carry forward; is that correct?
Mr. Orszag. That is correct.
Chairman Spratt. The difference between that and what was
appropriated in 2006----
Mr. Orszag. Is about $50 billion.
Chairman Spratt. And the carry forward on that accounts to
how much over a 10-year period of time?
Mr. Orszag. About $500 billion.
Chairman Spratt. So just in adjusting for the baseline,
which is a technical adjustment really, you have got a
substantial adjustment to the bottom line.
Mr. Orszag. And again, Mr. Chairman, that is only with
regard to defense discretionary spending. There is also another
roughly $500 billion of basically the same thing on the
nondefense side. So a trillion dollars total.
Chairman Spratt. Well, in particular, Medicare, while you
just gave us the dire possibilities given the rate of growth in
the Medicare program, what you have found in looking forward 10
years, 2007 to 2016, is a substantial reduction, I think it is
$588 billion cumulative cost reduction in Medicare since your
last forecast?
Mr. Orszag. I believe it is $445 billion.
Chairman Spratt. Four hundred forty-five.
Mr. Orszag. But in any case, it is a significant
adjustment.
Chairman Spratt. Medicaid is $70 billion?
Mr. Orszag. A little bit above $70 billion reduction, yes.
Chairman Spratt. Any other adjustments like that of that
magnitude?
Mr. Orszag. Those are the most substantial ones, but I want
to return for a second to nondefense discretionary spending,
because in addition to the Medicare and Medicaid reductions
that you noted, there is also less nondefense discretionary
spending because we have not had a repeat of the hurricane
spending in 2007. So that also accounts for roughly $500
billion lower discretionary spending in this baseline.
Chairman Spratt. All right. Let me put up our first chart,
which you have seen many times and everyone else has, but it
goes directly to the point you are just making. There are two
diverging curves here. The lower curve--the upper curve plots
your baseline. I am not sure whether it includes the
adjustments you have made in this report or not, but I believe
it does. The lower curve----
Mr. Orszag. I think it does.
Chairman Spratt. Yeah.
Mr. Orszag. It goes above zero.
Chairman Spratt. But beginning in 2006, 2007, there is a
steadily widening divergence between where we would go if we
assume politically what will happen with the Bush budget and
where CBO will take us with your particular baseline. When you
get to the end of the period of time, I can barely see, but I
think that deficit is $500 and some odd billion. Your
corresponding deficit on page 2 is $476 billion for that point
in time, that particular period. It is my understanding that we
are using slightly different assumptions about war costs.
Now, would you walk us through the changes that account for
that divergence? First of all, a reestimation of war costs;
secondly, the extension of the 2001 and 2003 tax cuts; and
thirdly, leaving the AMT unadjusted or adjusted, or leaving the
AMT as is.
Mr. Orszag. Okay. And again, the $502 billion figure you
are showing there is your calculations. What I can do is walk
you through some of the changes in policy that we show in table
1-5 that would have a material effect on the 2017 outcome.
So as we show in table 1-5, if one extended the 2001 and
2003 tax provisions rather than allowing them to expire in
2010, the revenue reduction in 2017 would be $333--sorry--$330
billion and there would be additional debt service of $94
billion. So that gets you to a total of roughly $424 billion
from that provision.
Chairman Spratt. That is a cumulative revenue effect of
renewing the expiring tax cuts?
Mr. Orszag. No. I am sorry. That is in 2017 alone. Over the
10-year window as a whole, that policy change by itself would
have a budgetary effect inclusive of debt service of $2.2
trillion.
Chairman Spratt. $2.2 trillion.
Mr. Orszag. Correct.
Chairman Spratt. Due to the renewal of these expiring tax
cut programs alone.
Mr. Orszag. That is correct.
If you then also extend other expiring tax provisions like
the research and experimentation tax credit and other things
that are scheduled to expire over the 10-year window, that is
an additional almost $500 billion, and then the alternative
minimum tax combined with making the 2001 and 2003 tax
legislation permanent or extending it past its currently
scheduled sunset would raise--I mean, would incur an additional
budgetary effect of over a trillion dollars also.
Chairman Spratt. Say it again, please, sir.
Mr. Orszag. The alternative minimum tax effect in the face
of extending the 2001 and 2003 tax legislation, because there
is an interactive effect, would involve a budgetary cost of
over a trillion dollars over the next 10 years.
Chairman Spratt. That alone, on top of the $2.2 trillion.
Mr. Orszag. Correct.
Chairman Spratt. In other words, if we fix the AMT so that
it does not reach any more taxpayers than it reached last year,
the cost in revenues over a 10-year period of time, 2007
through 2016, would be a trillion dollars.
Mr. Orszag. Slightly more than that, yes.
Chairman Spratt. And that would add to the $2.2 trillion
due to the extension of the expiring tax cuts due to expire in
2010.
Mr. Orszag. That is correct.
Chairman Spratt. War costs. How do you treat war costs? Let
me just stop to you say--I am not trying to answer your
question or lead the witness. You are a hell of a lot smarter
than I am.
Mr. Orszag. I am very cautious whenever you say something
like that, but go ahead.
Chairman Spratt. You give two different estimates, ways of
looking at the ongoing cost of the war.
Mr. Orszag. That is correct.
Chairman Spratt. Would you take a minute just to describe
how you did that and why you did that?
Mr. Orszag. Sure. We provided two different paths for
potential defense spending associated with Iraq, Afghanistan,
and the global war on terrorism in particular, in part because
I think there is widespread acknowledgement that there will be
some divergence between merely taking the $70 billion that has
been enacted thus far and kind of inflating that out into the
future. So we provide you with two alternative paths.
One would involve--they both involve some increase in troop
levels in the near term, and then they phase out at different
rates into different levels. So in particular under one
alternative, you wind up with 30,000 troops involved in those
activities by 2010, so a more aggressive phasing out; and then
the other alternative you wind up with 75,000 troops by 2013.
Under both alternatives there is more spending than under the
baseline in the short term, and there is less spending by 2017
than in the baseline.
Chairman Spratt. That is, the baseline otherwise carries
forward the $70 billion thus far appropriated in 2007?
Mr. Orszag. Correct. Under the first alternative that I
mentioned in which you wind up with 30,000 troops there is a
net--over the 10-year window, you have those higher costs at
the beginning and lower costs at the end, a net budgetary
savings of a little bit over $300 billion. Under the second
alternative where you have a slower phase-down, and you wind up
with a higher troop level relative to the first alternative,
there is a net budgetary cost, including debt service, of a
little bit over $200 billion, and that is because your savings
don't quite offset the nearer-term costs.
Chairman Spratt. On page 2 when you say that the--if you
make these assumptions that the deficit would be $476 billion
instead of a surplus of $249 billion in 2017, what assumption
are you making about the ongoing war costs?
Mr. Orszag. That just takes the baseline assumptions with
regard to discretionary spending.
Chairman Spratt. Seventy billion dollars and carries it
forward.
Mr. Orszag. Correct.
Chairman Spratt. So it tends to understate the near term
and probably, we hope, overstate the outyears. But in any
event, once you make these adjustments, the path we are looking
at is radically changed; is it not?
Mr. Orszag. For example, under the change in policy that I
showed you with discretionary spending excluding the war on
terrorism, keeping pace with overall economic growth and with
the tax provisions extended and the alternative minimum tax
stabilized instead of having a falling deficit and moving it to
surplus, you have a rising deficit as a share of the economy
from a little under 1\1/2\ percent of the economy this year to
more than 3 percent of the economy by the end of the budget
window.
Chairman Spratt. So the choices we make this year and next
year are going to have a profound effect on the outyears and
determine whether or not we continue on the deficit-ridden path
we have been taking, or whether or not we begin to put this
budget back into balance in 2012.
Mr. Orszag. There clearly is, even over the 10-year window,
an impact from changes in policy or from policy choices on
budgetary outcomes. And I would again note, though, what we do
over the next 10 years has importance, but the central long-
term challenge facing the Federal Government in terms of
budgetary outcomes has to do with that longer-term problem
involving health care costs. So we need to be able to keep both
problems in mind.
Chairman Spratt. One final question. One of the big issues,
and maybe one of the big differences between CBO and OMB, will
be revenue growth. Would you take just a minute to explain what
you have assumed, CBO has assumed, with respect to revenue
growth since substantial revenue growth over the last couple of
years has had a remarkable, dramatic effect upon the bottom
line? I think we have had 11.7 percent growth between 2006
and--between 2005 and 2006, and the question is, can we expect
the growth rate to continue at those high levels, or do you see
it reverting to normal?
Mr. Orszag. Well, under the baseline we have an irregular
pattern of revenue growth because we incorporate current law
with regard to revenue. So the expiration of various tax
provisions can cause very significant growth rates around those
sunset years, but if you abstracted from that and so, for
example, looked at a path that did not allow the sunset to
occur, what would happen is that we would have somewhat slower
revenue growth towards the end of the projection period than
towards the beginning for a couple of reasons. One is that
overall economic growth is projected to slow, and I think this
is a very important point. As the workforce enters retirement
age, the growth rate of the workforce will slow relative to
historical rates, and that will slow overall economic growth,
and that slower overall economic growth will have a dampening
effect on revenue growth also.
In addition to that phenomenon, the part of the revenue
uptick that we cannot explain based on known factors is assumed
after 2008 to revert to more normal historical patterns because
that is the traditional way that--or that is what has tended to
happen in the past, that these sort of forecast errors or
unexplained components tend to revert to more normal patterns
relative to the economy as a whole. So that is what we assume
after 2008.
Those two factors may well mean that our revenue growth in
the outyears and, you know, in 2016 and 2017 is slower than the
administration's projections, but we will need to wait and see
what the projections are when they release their budget next
month.
Chairman Spratt. Thank you very much, Mr. Orszag.
Mr. Orszag. Mr. Spratt, if I could quickly make one--the
$588 billion figure you mentioned is the change for all
mandatory spending, which includes the $445 billion for
Medicare and then additional spending on Medicaid and some
others.
Chairman Spratt. But the point I was trying to make was
even with these substantial favorable developments, when you go
back and factor in the tax cuts extension in 2010, and you
factor in the cost or the likely cost of the war, and you leave
the--you assume that the AMT will be sort of neutralized in
place, you have got a profound change in the course of the
budget, and we are back deep in deficits again, notwithstanding
these very favorable changes you have made otherwise to your
forecast; is that a correct simulation?
Mr. Orszag. Again, changes in policy relative to current
law with regard to both revenue and spending could have a
significant effect on budgetary outcomes over the next 10
years.
Chairman Spratt. Thank you, sir.
Mr. Ryan.
Mr. Ryan. First, let us go back to the Medicare savings you
talked about. Your new baseline says that Medicare spending is
projected to be $445 billion less than the August baseline; is
that correct?
Mr. Orszag. That is correct.
Mr. Ryan. Break that down again; $265 billion for Part D.
Mr. Orszag. For Part D. The rest appears to be concentrated
mostly in Part A, but we are still looking at exactly what is
going on between Part A and Part D.
Mr. Ryan. And the $265 billion savings off the August
baseline comes from what exactly?
Mr. Orszag. The majority comes from the lower cost per
beneficiary; in other words, the PDPs, the prescription drug
plans, and the Medicare advantage plans are coming in lower
than we projected.
Mr. Ryan. So that is lower cost because lower prescription
drug prices are being reimbursed?
Mr. Orszag. Correct.
Mr. Ryan. And so you are seeing downward bend in the growth
curve in Medicare in the new program, Part D and Medicare
advantage, than previously. And enrollment, you said your
enrollment numbers are getting lower because people are getting
coverage elsewhere; is that right?
Mr. Orszag. Before I get to that, it is not really that the
cost growth in--out in 2016 or 2017 has changed, but rather
that there is just a lower level.
Mr. Ryan. Right. You are knocking the base down and then
move forward.
Mr. Orszag. Correct. In addition to that factor, while
enrollment in the very near term has actually been higher than
we projected, slightly higher, we now have more information
about other coverage that Part D beneficiary--or Medicare
beneficiaries have, so instead of assuming that 87 percent of
beneficiaries would take up Part D, we are now in the outyears
assuming that 78 percent would, and that leads to lower costs.
Mr. Ryan. Eighty-seven to seventy-eight, you said?
Mr. Orszag. Correct.
Mr. Ryan. Well, you mention budget policy alternatives to
get to balance, which basically we talk about war costs,
discretionary spending and tax policy. There aren't really any
alternatives offered in the entitlement side of the budget in
this new outlook.
It seems that something good has happened in Medicare. It
seems that something favorable has happened in Part D where you
have--just in one part of this large entitlement program you
have got a savings of $265 billion, which without coincidence
is the new part that involves more competition within the
program which is bringing more savings not only to the
beneficiary, but to the taxpayers. Is that not an area that we
can discover more as far as future health care spending
direction to go toward a competitive model like the Part D
program? Does that not lay sort of a groundwork that perhaps
where we are seeing substantial savings in the new competitive
model within this entitlement program, that that might be a
place for more savings to be got in other parts of these
entitlements?
Mr. Orszag. Well, again, I don't want to jump to
conclusions because of the cause of the reduction, but I would
fully agree with you that it is encouraging, and, in fact, you
know, to the extent that it is continued, could have a material
effect on Medicare projections in particular.
Mr. Ryan. It just seems to me that this is something we
need to look at quite a bit more because this is--of all the
good news in this, it is all overshadowed by the entitlement
explosion. But within the entitlements we are seeing less
spending because of this new program, which is providing a
competitive product where providers compete against each other
for beneficiaries' business, and that active competition has
actually lowered the cost of the program.
Let me go over the revenue estimates. Obviously if you take
a look at the baseline--I won't ask for the chart back up. If
you just let the tax cuts go away to go to balance, and that is
all the tax cuts you are talking about, all the 2001 and 2003
and the expiring provisions, those are what you assume go away
because that is what current law is, and that is what brings us
into surplus in 2012, correct?
Mr. Orszag. Correct.
Mr. Ryan. So that means if we get rid of the per child tax
credit, if we get rid of the marriage penalty, if we raise
income tax rates across the board on every taxpayer, if we
bring the death tax pack to pre-2000 levels, and if we get rid
of the lower rates on capital gains and dividends, those are
all of the tax cuts you are talking about go away, then we will
go back in the balance and therefore surplus, right?
Mr. Orszag. That is the alternative, the change in policy
that is shown in table 1-5.
Mr. Ryan. It is the revenue estimates themselves that give
me a little bit of a cause for concern. If you take a look at
CBO's forecasting record on overall revenue, let us just take a
look at one of these components, capital gains taxes, which I
would argue probably has the best macroeconomic feedback effect
of any of these tax changes. I am not saying all tax cuts pay
for themselves, but if you take a look at the initial CBO
forecast, say, for the lower rate on capital gains taxes, CBO
projected revenue to be $42 billion in 2003, $46- in 2004, $52
billion in 2005 and $57 billion in 2006. And what actually had
occurred was 51- in 2003, 72- in 2004, 97- in 2005, and $110
billion in 2006. Overall CBO's forecast on capital gain
revenues were off by 68 percent, so when you take a look at the
fact that, you know, CBO and using joint tax numbers were so
far off on estimating the revenue loss associated with just
this particular tax change, it makes one think about whether or
not your estimates for all the new revenues that would come in
with these tax increases are quite there or not, because it
seems like these don't accurately take into consideration a
realistic assumption on the macroeconomic feedback effect on
some of these.
Not all tax cuts are the same, it is clear, but my fear is
that if we just take this money to the bank and say, let us
just raise all these tax rates across the board, this money
will show up, well, that is not what happened when we cut the
tax rates. We didn't lose as much as we thought we would, so I
wonder if we are going to gain as much as we think we are going
to gain if we let all these tax cuts go away.
The point I am trying to make is, even if we do this, even
if we let all these tax cuts expire, and we achieved that line
on the chart, put all the other factors aside, is it not true
that just as we did after 2017, we pretty much go back into
deficit soon thereafter because the entitlement growth just
swamps this?
Mr. Orszag. Yes. We would eventually go back into deficit.
Mr. Ryan. So even if we let the tax cuts expire, we are
going back into deficits.
Mr. Orszag. The ongoing increases in health care costs in
particular will eventually overwhelm the budget.
Mr. Ryan. Okay. I just have a quick baseline question on
the war. Is the way you assumed war costs going out is you just
take the last supplemental and you run that through the
baseline? So the last supplemental was $70 billion, and so is
that basically the plug you put in for for the next 5 years? Is
that essentially how you are doing this in your baseline?
Mr. Orszag. Essentially, although I would note that the
outlays associated with previous budget authority that had been
provided spends out over the budget window. But, yes, you are
basically correct.
Mr. Ryan. So if we get a $100 billion supplemental in a
month or two, and you are redoing the baseline next time
around, you will take the 70- out and put the 100- in and carry
that out, is that basically how the baseline would be affected?
Mr. Orszag. It would be added because they would both be
for the same fiscal year.
Mr. Ryan. That is right. That is right. Because it would be
the same. So it would be 170- you are carrying out.
One more quick question. The workforce participation rates.
These assumptions are really interesting to me. You are using
these workforce participation rates, because of the aging of
our society and because of boomers coming into retirement, the
demographics are such that workforce participation rates would
decline; therefore, that would negatively affect the economy.
Are you using the same assumptions on retirement rates that
the models have been using for years? Meaning, are you taking
into consideration that people are actually working longer
these days; that people are working well into their seventies,
whereas 20 years ago, you pretty much retired at 65, where
today you retire more at 75?
My question is does that model take into consideration
longer work periods for and longer workforce participation by
this new generation of people? You know, the generation before,
the boomers pretty much retired at 65. These boomers seem to be
working a lot longer. I am just curious whether you have taken
that into consideration in your model or not.
Mr. Orszag. Yes. And obviously one could debate how much,
but basically what has happened over the past 10--well, going
back over a longer period of time is workforce participation
rates for, say, those in their early sixties were declining
substantially. They then kind of stabilized and have increased
a bit over the last 10 years, rising from sort of the
midforties to kind of the midfifties. For those in their late
sixties, workforce labor participation rates are a lot lower
than they are, in sort of the 20 percent range or so.
We assume some additional increase in the projection
window, but I think the important point is to offset the effect
of moving more of the population into those age groups would
require--and to have it have no effect on the overall
participation rate, you would have to get those rates up to the
rates for like people in their late fifties. Those are up near
like 70 percent, and that is basically implausible.
Mr. Ryan. Right. Okay. Thank you.
Chairman Spratt. Mr. Edwards.
Mr. Edwards. Dr. Orszag, could you tell me, based on
whatever assumptions you have made, what percent of the 2006
and 2007 deficits are due to tax cuts passed since 2001?
Mr. Orszag. That is a difficult calculation. One could take
the original revenue projections, I suppose, and compare that
to the existing deficit, but that is not a calculation that we
have done.
Mr. Edwards. Okay. Could you make whatever assumptions you
would need to make and present that back to the committee?
Mr. Orszag. I guess we are being asked to do so, so we
will.
Mr. Edwards. Good.
[The information follows:]
CBO Response to Mr. Edwards
According to the original scoring of various enacted laws by the
Joint Committee on Taxation, legislation since 2001 reduced revenues by
$190 billion for 2006 and by $221 billion for 2007.
Mr. Edwards. Secondly, do you have with you now, or could
you put together, for the past 10 years both short-term and
long-term projections made by OMB and CBO, and then juxtapose
with that what the actual deficits were compared to the
projected deficits, to show the difference between the CBO
projections and the actual reality?
Mr. Orszag. Yep.
Mr. Edwards. Partly--not to criticize CBO, but certainly
clarifies that CBO has to live under certain assumptions that
simply are not realistic. Is it fair to say the actual deficits
have been on the whole larger than the short-term and long-term
projections by CBO over the past 5 years?
Mr. Orszag. Over the past 5 years as a whole, if you
started with, say, the January 2001 projections, the budget
outcomes have certainly been worse in the sense of much larger
deficits rather than the surpluses that were projected at that
time.
Mr. Edwards. Okay. Am I correct also that CBO did a study a
year or two ago requested by the Republican Majority on the
dynamic impact of tax cuts and actually came to the conclusion
that one very probable outcome of tax cuts paid for by
borrowing money from foreign governments, including the Chinese
and others, those tax cuts paid for by borrowing money from
foreigners and other groups actually could slow down economic
growth; is that correct?
Mr. Orszag. It is possible. The effects of tax reduction on
the economy will reflect where you are starting, you know, the
existing tax rates, the type of tax change you make, and then
how you finance it, and financing it for some period of time
through additional deficits imposes sort of a countervailing
force. So a reduction in marginal tax rates, for example, might
encourage more work and more investment and more risk taking,
and that could boost the economy, but financing it through a
deficit reduces national saving. That puts a drain on the
economy, and the net effect of those two forces could be
slightly positive or slightly negative, although it is
typically quite small.
Mr. Edwards. Do you believe that generally a dollar in tax
cuts create a dollar in additional revenue to make up for the
dollar lost in revenue and tax cut?
Mr. Orszag. There is no credible evidence suggesting that
that is the case.
Mr. Edwards. Thank you.
Chairman Spratt. Mr. Porter of Nevada. The reason I am
doing this is that he was here at the time the gavel went down
and before that; he was the first to appear. This is a reward
for early behavior. In the future we will record the people who
are sitting in their seats at the time the gavel goes down.
Mr. Porter?
Mr. Porter. Thank you, Mr. Chairman. I appreciate that vote
of confidence. I will be on time in the future, too. Thank you
very much.
Doctor, again we appreciate your being here, and I guess
you may have addressed in your backup material, but I haven't
been able to find it. Regarding deficits and 9/11, is there a
way to equate the impact on our national deficit based on the
attacks on New York and Washington in 2001?
Mr. Orszag. Well, I can answer that in a couple of
different ways. There was, as you know, an economic slowdown
that occurred around that time. That economic slowdown did have
an adverse effect on budgetary outcomes, and that is one
effect, although I would note that most studies that try to
directly link the attacks themselves to that economic slowdown
suggest that there is not all that much of a connection, in
part because of the timing of the two events.
Secondarily, there is also new spending that is associated
with new efforts to better protect the United States, including
both the global war on terrorism and homeland security efforts.
And we do provide figures for both homeland security spending
and for the global war on terrorism spending in this document,
and, you know, combined for 2007, just looking at enacted
appropriations, that would be more than $100 billion.
Mr. Porter. And certainly it is not a perfect science, but
if we could go back to 2001 into our U.S. economy, I heard
estimates of a trillion dollars or less, the impact on our
national economy. Do you know of any numbers, separate from our
deficits as a government, but to the U.S. economy--is there
estimates that were placed based on the loss to our economy?
Mr. Orszag. There were some. One of the things about both
natural catastrophes and other catastrophes like terrorist
attacks is that the human cost is very, very substantial. Most
of the analysis that has been done of the overall macroeconomic
impact has suggested a more modest effect from both natural
disasters and human-induced disasters like a terrorist attack.
So there were some attempts to provide an aggregate impact
number.
I don't believe that CBO has examined that question, and
most attempts--most things--most analyses that have tried to do
so have suggested relatively modest effects in the context of
an economy that is now $13 trillion a year.
Mr. Porter. I can give a Nevada experience as a tourist
destination for the world. And we are a bellwether on the
positive side of the economy. When things are good, we are very
busy in Nevada because people are comfortable, and they can
travel. But we were literally out of business for a number of
months in Nevada. People were afraid to get on a plane. They
were afraid to leave their homes in many respects.
So there was a serious hit on our economy, and I would like
to get for the record some of our statistics. I don't have them
with me today, but there is no question that 9/11 changed our
country and put a major impact on our budgets as businesses and
as families, but also as a Federal Government. I just want to
make sure as we are talking about some of the reasons that we
are where we are today certainly had a lot to do with what
happened in 2001.
Mr. Orszag. And again I would say that, you know, there
was--you can see it in the numbers--a material effect on the
budget, and I would also note on particular areas within the
United States, your State, obviously activities in New York
City itself and elsewhere, and just to be clear, my comments
were only with regard to the overall macroeconomic effect which
might be more modest than the effect in particular areas.
Mr. Porter. Thank you.
Thank you, Mr. Chairman.
Chairman Spratt. Mr. Doggett.
Mr. Doggett. Thank you, Mr. Chairman.
Dr. Orszag, I would like to just continue some of the
questions Mr. Edwards was asking you and talk about this cure-
all that is offered to the American people and all kinds of
economic weather and big gulps of tax elixir, tax cut elixir.
We heard testimony recently from the Comptroller General
David Walker. We have heard comments from even one of the
former chairmen of President Bush's Council of Economic
Advisers that the Bush tax cuts have not paid for themselves,
and they will not pay for themselves. Do you agree with that?
Mr. Orszag. All of the studies that I have seen from
credible analysts, including the Department of Treasury,
suggest that the tax cuts may have helped to spur the economy
somewhat in the short term, and that that offsets some of their
costs, but the offset especially over the long term comes
nowhere near the cost itself. In other words, the tax cuts do
not pay for themselves, and only a very small share of their
revenue cost is offset from the economic growth effect of the
cuts themselves.
Mr. Doggett. Well, I appreciate your qualifying your answer
by saying credible evidence, and I believe that was the term
that you used with Mr. Edwards, because we have heard plenty of
incredible comments within the halls of Congress and, of
course, by some of those who observe Congress and feel that the
tax cut elixir will solve all of our problems.
Indeed, to be more specific as it relates to the deficit
for the year 2007, I believe the Joint Committee on Taxation
has already estimated that the total cost of the Bush
administration tax cuts in 2007 will be higher than the budget
deficit for this year. Is that an estimate that seems
reasonable to you?
Mr. Orszag. It is possible. The original estimates of the
revenue effects associated with the 2001 and 2003 tax
provisions, including the alternative minimum tax, were about 2
percent of the economy, and our projected deficit is a little
under 1\1/2\ percent of the economy.
Mr. Doggett. It is either the tax cuts then amount to
either the total amount of the deficit or almost the total
amount of the deficit, the numbers.
Mr. Orszag. Again, those were based on the original
projections from the Joint Committee on Taxation, and just
comparing them to this year's deficit without taking into
account a potential effect on economic activity and others, but
if you just did that simple comparison, that would be the
conclusion you would reach.
Mr. Doggett. And again, I believe you will provide some
additional specific analysis to Mr. Edwards on that.
Mr. Orszag. I gather so, too.
Mr. Doggett. You have pointed out that whether it is your
analysis or that of OMB, that just the slightest variations in
the assumptions can produce very different answers. I suppose,
for example, you can assume away this year's deficit if you
have enough phony assumptions to put in place. And I want to
ask about some of the assumptions that were made by the Bush
administration back in 2002 when they forecast what this year
would look like as a result of all of our great policies, and I
believe that the original estimate was that we were going to be
in much better shape this year than we turned out to be. Do you
have information on those contrasting estimates?
Mr. Orszag. Sure. I should have the original 2000--well,
what I have is the official baseline from 2001, and what that
suggested was that in January of 2001, the projected baseline
outcome at that point for fiscal year 2007 was a surplus of
$573 billion.
Mr. Doggett. So their view was of a $573 billion surplus
for this year?
Mr. Orszag. Again, that was the official baseline, CBO's
numbers for the official baseline in January 2001, $573 billion
for this year.
Mr. Doggett. So even if you subtract out the cost of the
war on terrorism, that is a pretty wide variation, isn't it,
from what we really ended up with?
Mr. Orszag. That is obviously a significant difference
from----
Mr. Doggett. And I think as we look at framing this budget,
it will be important to not only consider the Federal deficit,
but the deficits the policies of the Bush administration have
created in education, in health care and in other areas for so
many American families, and to look at what caused this deficit
and not to fault those who didn't cause the deficit for this
problem. Thank you, Mr. Chairman.
Mr. Orszag. Mr. Chairman, if I could actually for just a
second----
Chairman Spratt. Certainly.
Mr. Orszag. I realize I am looking at the table. I might be
able to answer Edwards's question directly.
The revenue legislation that was enacted since 2001 based
on the original scoring of that legislation amounts to over
$200 billion for 2007, $273 billion including economic and
technical changes, $221 billion just for the legislative
changes itself. So that may be the number that you were looking
for.
Chairman Spratt. Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman. Did I arrive early
as well?
Dr. Orszag, with this continuing discussion of tax relief,
I believe last week we heard from Comptroller Walker that
although not all tax relief may pay for itself, that some tax
relief, especially dramatic reductions in marginal rates, do. I
don't have that testimony in front of me, but I feel that is
accurate. Do you agree with Comptroller Walker?
Mr. Orszag. Again, I did not see his particular statement,
but the analyses that the Congressional Budget Office, the
Department of Treasury and other entities have done suggest
that reductions in marginal tax rates in general--and it
depends on where you start from if you are starting from 70
percent or 80 percent rates is different than if you are
starting from 35 or 40 percent rates--do not pay for themselves
in the sense of having an economic growth effect that offsets
their full cost. The precise results will depend on how you
finance the tax change, though.
Mr. Hensarling. I believe I have it now that the
Comptroller General said marginal rates do pay for themselves,
and that indeed our capital gains tax cuts have paid for
themselves several times over. Isn't it indeed true that since
we have had the tax relief of 2001 and 2003 that we have
dramatically larger tax revenues?
Mr. Orszag. Revenues in nominal terms are now higher than
they were in 2001.
Mr. Hensarling. Isn't it also true that we have the largest
amount of tax revenue in nominal terms than we have ever had in
our tax history?
Mr. Orszag. Yep.
Mr. Hensarling. I think that one area of agreement that you
have with the Comptroller, and I don't want to put words in
your mouth, but I think you said something earlier in your
testimony that the central fiscal challenge we face as a Nation
was our rising health care cost curve. Is that a fair
assessment of what you said?
Mr. Orszag. Yes.
Mr. Hensarling. Did I also understand you to say that it is
possible to bend that growth curve without necessarily
degrading our health care quality and accessibility? Did you
say something along those lines?
Mr. Orszag. I think that there is an opportunity to do so,
and the central challenge is figuring out exactly how that can
be done. We are not yet in a position to make the changes that
would produce that outcome, but I think it is--there is hope
that it is possible.
Mr. Hensarling. So logic would tend to dictate, then, that
every reduction in a growth curve does not necessarily lead to
a lesser commitment or a lesser quality of health care. For
example, it wasn't all that many years ago--we trip across
these things from time to time--I recall Medicare was paying as
much as five times as much for a wheelchair than what the
market forces would have cost, and they did that because they
didn't have competitive bidding. I think we went back and
corrected that one. But would that be an example of somebody is
getting the same wheelchair, the same model from the same
manufacturer at a cost that is less to the taxpayer? So it is
one small little anecdote, but wouldn't it seem to suggest that
it is possible to find reforms that might save money and not
degrade health care?
Mr. Orszag. It certainly does, and perhaps even on a
broader scale there is evidence that Medicare costs per
beneficiary vary a lot across different regions of the country
in ways that don't correspond to health outcomes, raising the
possibility that there could be very significant cost growth
taken out of the system again without impairing innovation or
harming health.
Mr. Hensarling. Dr. Orszag, returning to the deficit
question, let us assume for the moment that all your
assumptions are right. Let us assume we allow the tax relief to
expire.
If we don't reform and bend this health care cost curve,
what does the tax burden look like on the next generation, say
30 years from now, people's children and grandchildren in this
room.
Mr. Orszag. Do you mean if we allowed----
Mr. Hensarling. If we wanted to balance our budget 30 years
ago from today, we would go ahead and get rid of all of this
tax relief. We would let it expire. If we wanted to balance the
budget 30 years from now, if you have got a figure, 40, 20,
what is the tax burden it is going to take? What is the
magnitude of tax increase to be placed on the American people
if we do not reform this entitlement spending?
Mr. Orszag. If cost grows, continues to grow about the same
rate as in the health sector as it did over the 40 years and
you finance that entire revenue side on the budget by the mid-
2030s, it would be an increase of about 10 percent of the
economy relative to a current base of about 18\1/2\ percent
now. So a very, you know, more than a 50 percent increase in
revenue as a share of the economy.
Mr. Hensarling. 50 percent increase.
Mr. Orszag. From roughly 18\1/2\ to closely 30.
Chairman Spratt. Thank you.
Mr. Etheridge from North Carolina.
Mr. Etheridge. Thank you, Mr. Chairman.
I would like to thank you and thank you for being here. A
couple of questions if I can go back. I may have written the
numbers down incorrectly. You are talking about the assumptions
on the part D for the number that dropped, and I believe you
said that the assumption originally used was about 87 percent
assumption rate down to 78.
Mr. Orszag. Correct.
Mr. Etheridge. Let me ask you a question on that. Because
assuming that you--and you use that to extrapolate your number
out. The question I have is that part of that has to do with
people looking at the plan that was provided under part D and
recognizing they had a better plan that was being offered. That
much I do know. I mean, you don't have to answer that. I know
that is a fact. The question I have is this, though. Because a
lot of State plans that offered prescription medicine for
retirees and they decided to stay with the plan rather than to
move because they have a better plan. The question I have is as
you look out, extend the years out for employers, does it
encourage employers to decide we aren't going to continue to
offer this, we are going to slowly move out of it? What does
that do for the cost in outyears if that should happen?
Mr. Orszag. There are provisions in the Medicare
legislation to incorporate employer-based coverage for
retirees. But if there were a significant movement away from
that system and into----
Mr. Etheridge. From offering a plan.
Mr. Orszag. And into Medicare part D, the net effect would
depend on the additional cost for the enrollees versus what is
effectively paid to the employer for that coverage. I don't
have an exact figure for you.
Mr. Etheridge. The reason I raise that number is because
more and more people now are falling into what is called the
donut hole. And each year it will get quicker for them to get
into it, which is--it is going to create a bigger and bigger
problem to fix it or people just not, you know, looking for
alternatives.
And Social Security, since my time is running out, leaves
me with one other area. In your economic model as you
extrapolate out in the outyears, does the model take into
effect economic downturns in the turns in the economy?
Mr. Orszag. There is a slower economic growth assumption
for this year because of softness in the housing sector and
some other sectors and then economic growth picks up again in
2008 and thereafter. We don't try to predict when recessions
and boons will occur and instead try to look at the underlying
trend rate of growth.
Mr. Etheridge. So that assumption is the same that
legislation is enacted at the level it is at?
Mr. Orszag. It is very difficult to predict when a swing in
the economy will occur, in 2010 or 2011.
Mr. Etheridge. Help me understand the model as it relates
to spending. Because I assume you fill that in. For the dollars
invested in the GDP and the U.S. economy versus the dollars
that we spend, let us say, in the war on terror or the Iraqi
war, Afghanistan, those dollars are spent outside the United
States. How does the model take into account the differing view
because the factors have to be different for dollars spent
inside and outside and internally to generate the GDP?
Mr. Orszag. There is a difference in the short term and
long term. In the short term, one has to worry about what kind
of impact on demand. Domestic demand comes from different
spending patterns. Long-term growth assumptions typically focus
on--more on the growth rate of the work force and how much we
are saving and the capital stock and basically focus on that
side of the economy as driving long-term growth rather than the
demand side which has more to do with multipliers.
Mr. Etheridge. But I guess my point is if you are looking
at something that is extended or protracted over a number of
years, would that have a negative effect or the model just
doesn't deal with it?
Mr. Orszag. I will get back to you but my understanding of
long-term modeling assumptions is that different types of
spending do not have a material effect on long-term growth
rates, that instead they are driven by those other factors that
I was describing.
Mr. Etheridge. One final question as the time runs out. You
were talking earlier, the issue was raised as it relates to
cuts, but if you make a reduction in a tax revenue at the lower
end of the bracket where you give a tax credit, doesn't that
have a stronger impact on bumping the economy than if you take
one or two points off the top?
Mr. Orszag. Again, in a situation in the short term where
the key--where the economy is weak and the key thing is getting
more demand for goods and services that people can produce, CBO
has focused on what observations that moderate income household
incomes may be likely to spend any dollar that is delivered to
them than higher income household in the short term.
Chairman Spratt. Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman. Dr. Orszag, my line
of questioning will be to the revenue side. I understand that
in order to project revenues right, you have to project
interest rates right, you have to project GNP growth right,
personal income growth, personal behavior right and if you
could do all of that that Warren Buffett would be calling you
for advice.
But if my numbers are correct, your projection is a 5.6
percent revenue growth, 2007 and 2006, but my understanding is
thus far the revenue growth has been in excess of 8 percent in
this fiscal year.
Mr. Orszag. I think it is difficult to look at subpatterns
within a year because of seasonal factors, and you get a lot of
action--for example, there was a lot of action before when
people actually filed their tax returns in April and we have
more information about specific income trends at that point.
Mr. Campbell. So you are sticking with this in spite of the
current--the numbers thus far this year?
Mr. Orszag. Yes.
Mr. Campbell. Then the subsequent year you have a 7 percent
increase. Why the increase in growth next year over this year?
Mr. Orszag. That is because the relief from the alternative
minimum tax expires under current law, and you have a fairly
significant 50 or $60 billion increase in AMT revenue mostly.
There are a few other smaller factors.
Mr. Campbell. It is a tax change. And then after that,
taking aside the tax cuts expiring, 3.2 percent kind of is a
steady state, is that--where is that in relation to a 20-year
average, 30-year average, whatever?
Mr. Orszag. That growth rate is going to be lower than
during some historical periods because overall economic growth
is likely to be lower than in some historical periods because
the work force growth, returning to the discussion I had with
Mr. Ryan before, is projected to slow as more people enter
their 60s basically.
Mr. Campbell. So how much lower is that? I realize you
could pick 20 or 30. If you took a 30-year period, how much
lower is that? 3.2?
Mr. Orszag. What we give you in chapter 2 of the document
is our long-term assumptions relative to historical periods,
and I am just quickly looking for it because I know we want to
get--on page 41 of the document, and what you can see there is
that real potential output grows by 2.6 percent over the next
10 years relative to say 3.2 percent over the past 40 years and
that is mostly because the potential labor force growth rate
slows from 1.7 to .7 percent over the next 10, and that is the
major driver of that change.
Mr. Campbell. Looking at the effective tax cuts and so
forth since 2003, the total revenue increase since the 2003 tax
I think it was 8 percent the first year, just short of 15
percent the next, just short of 12 the year after that. Is that
more or less than what CBO projected for revenue growth?
Mr. Orszag. That is more.
Mr. Campbell. Do you think, and I know there has been
discussion clearly that you don't believe at this level that a
dollar in tax cuts yields a dollar in additional revenue to
match it, do you believe that there are some economic behavior
factors that were generated by those tax cuts that are not
taken into account in CBO's projections, or were not?
Mr. Orszag. I think there are economic responses into the
tax reductions, including by themselves, without looking at the
financing side, potentially changing behavior on both for
corporations and for individuals. That would have some revenue
effect.
Mr. Campbell. I am not saying that this is not at all
pejorative, but in your charge, if you were to do these
projections, you are not allowed really to take those things
into account; is that correct?
Mr. Orszag. They are incorporated now into our baseline,
and I also should have noted this earlier. The primary
responsibility for scoring revenue legislation rests with the
Joint Committee on Taxation. That is the first point. The
second point is once changes are enacted, they are incorporated
into--their effects are incorporated into our baseline, and
then the final point, I know there has been a significant
uptick in capital gains revenue, but I think it is very
important to realize lots of factors cause that, and you can
look at short-term gains which were not affected by the 2003
changes. You can look at corporate capital gains that were not
affected by the 2003 changes, both of which have boomed, too,
and you can look at capital gains abroad, which I don't think
were affected by our tax changes. In the U.K. There has been a
surge there, too.
Mr. Campbell. We underprojected the growth with the tax
cuts and some other time we will talk about whether we are
overprojecting the revenue increase from the tax cuts expiring
on the CPI and the CPA. I have done tax returns. When taxes go
up the first thing you do, you sit down with your client and
say how can we avoid paying taxes, and when they go down the
first thing you do is you sit down and say what opportunities
are there to recognize revenues or gains now because the taxes
are lower.
Chairman Spratt. Ms. Hooley.
Ms. Hooley. Thank you, Mr. Chair. Thank you for being here
today.
Growth from revenue from corporate tax revenues has been
strong?
Mr. Orszag. Um-hmm.
Ms. Hooley. And growth from individuals who pay individual
tax, that has been strong?
Mr. Orszag. Um-hmm.
Ms. Hooley. But slower growth has occurred in payroll
taxes?
Mr. Orszag. Relative.
Ms. Hooley. Relative to those two?
Mr. Orszag. That is correct.
Ms. Hooley. What does that say about underlying income, for
example, and what happened to households who received the
dividend in capital gains compared to households who relied
primarily on income from their job?
Mr. Orszag. We are still trying to--we don't have a full-
figure picture for what is causing the individual and corporate
revenue increase. And I should say on the corporate side,
obviously the share of the economy that goes to corporate
profits, it is now at an exceptionally high level and has risen
significantly and that is obviously a very important
contributor to the corporate side. On the individual side,
there are many hypotheses being put forward. One possibility
for any given level for overall income, the larger the share of
higher income household, the more revenue that would be
collected because the overall tax system is progressive and
that could be one cause of collecting more revenue than we
projected based on economic growth alone. But we don't know
that yet.
Mr. Hooley. Have the number of high household incomes
risen? I mean, has that gone up significantly?
Mr. Orszag. There has been over the past now almost 20
years particularly rapid growth in incomes at the top end of
the income distribution.
Ms. Hooley. And has real income growth been occurring for
Americans at all income levels, or have we seen inequality
increasing?
Mr. Orszag. Again, looking over a period of time since, for
example, the mid to late 1970s, income gains have been much
more rapid at the top end of the income distribution than the
middle or the bottom. During the 1990s, what happened was that
the middle versus the bottom tends to destabilize but the top
relative to the middle continued to diverge.
Ms. Hooley. Okay. Is there anything that we need to do to
change our income tax structure? I mean, as we get--this gap
grows larger and larger between the high and the low, are we
losing our middle class?
Mr. Orszag. Well, the changes that could or should be made
to the tax system are obviously up to you, and we are just here
to provide you with analysis with what different options could
be, but you are in charge.
Ms. Hooley. Thank you.
Chairman Spratt. Mr. Barrett.
Mr. Barrett. Thank you, Dr. Orszag. Great to see you. You
are becoming a regular fixture on this committee but thanks for
coming today.
I wanted to head down a different direction, talk about
mandatory spending because that is the elephant in the room
that is breaking the bank. And I have got three questions. I
want to throw them open to you and give you all the time to
answer.
Number one, would it be plausible somehow to tie the growth
of mandatory spending into some type of standard index like a
CPI index? Question one.
Question two, we are looking at Medicare and I know this
from personal experience because my mom and dad recently went
on Medicare, and they are not paupers by any stretch of the
imagination. They could pay some bills. Isn't it arguable that
there are people out there that can afford private insurance
that can't afford to pay for medical bills?
And number three, and I want to kind of tagteam on my
ranking member's question. I did not--for the record, I did not
vote for Schedule D. I thought it was too much for too many
people, too expensive. But having said that, the one thing that
is working in this process is the private sector that is
driving some prices down. Is there some type of relationship
between government intervention or government involvement in
the health care market and the skyrocketing prices of health
care, and that is my third one. I will turn them over to you.
Mr. Orszag. First, with regard to a standard index on the
mandatory programs. By design, entitlement programs specify a
set of criteria to meet and then the spending follows meeting
anyone who qualifies and so it is difficult to reconcile that
perspective with tying to a specific index. You might be able
to come up with mechanisms that the criteria would evolve in
response to changes--I will give you an example. In Medicare,
there is something called the sustainable growth rate for
physicians which something like that was attempted in which
sort of aggregate spending was tried to be pinned down to
index; that is, tied to MEI, basically an index kind of
inflation.
And what we have seen there is that in fact this is an
important point to know about the baseline, too. We assume that
system will be fully implemented in the future and that will
reduce payments to physicians relative to keeping up to overall
health care activities by about $250 billion over the next 10
years. Every time this has been, or over the past few years
when there has been a schedule reduction in physician payments
because of that formula, the Congress has decided to undo the
reduction, including last fall. So attempts to try to pile an
index on to an entitlement program has not necessarily proven
to be that successful, but there obviously are other
possibilities that can be explored.
With regard to Medicare, as you know, part D, even though I
gather you didn't vote for it, does involve some modest means
testing within the Medicare program, which is new, and I know
that there are various options that could be explored. I am not
sure when you were talking about that in particular.
Mr. Barrett. Just the Medicare system in general.
Mr. Orszag. That would be one way in reflecting the fact
that some people can better afford health insurance coverage
than others, at least the concept behind it. And I would be
happy to talk about other options with you if I got a better
sense of exactly what you were interested in.
And finally and returning to the question that Mr. Ryan
asked, again we are still parsing out exactly what the causes
of the lower bids and the lower cost for beneficiaries in
Medicare part D are. There are two things. We have lower cost
in part A and Medicaid which have different structures
associated with them. So the good news on health care is not
limited to part D.
And then secondly, that over a long period of time the cost
growth in public programs, Medicare and Medicaid, has tended to
track cost growth in the private sector and private health
plans, and I think that is actually a very important point. We
are very unlikely to be able to slow cost growth in Medicare
and Medicaid without a commensurate slowing in overall health
care costs in the private sector as a whole. I think at this
point to answer your questions the systems are so interlocked
that you can't separate one from the other, basically.
Mr. Barrett. Thank you, Doctor.
Thank you, Mr. Chair.
Chairman Spratt. Let's see. We have got Mr. Allen of Maine.
Mr. Allen. It is a pleasure to have you here and to hear
you weave through this material as effectively as you have. I
want to stay with this issue of Medicare for a moment, and in
particular, I think we all run the risk sometimes of
categorizing taking data and sort of plugging it into the views
we already have. Some of us might say, well, the costs are
still too high, whatever they are, because we believe that the
negotiated prices would be lower. Some believe evidence of a
reduced estimate is an indication that competition is working.
Now, I wanted to just run through--I would like to give you
some thoughts on what the kinds of causes that I would hope you
would consider if you would take another and deeper look at
this. But it seems to me, first of all, we can get all caught
up in changes, and part of what is going on it seems to me is
that we have a better evidentiary basis for making estimates in
the future once the plan has been running for a while.
Secondly, you mentioned part of the lower cost was because
prescription drug plans and Medicare Advantage plans were
coming in at a lower than anticipated rate while the Medicare
Advantage plans are certainly under considerable amount of
pressure because MedPAC and others are saying they are
overcharging their beneficiaries and that is creating a bit of
some--well, attracting political interest on this side of the
aisle, for sure.
You mentioned the different rates of take-up. But also it
seems to me that there may be larger trends in drug prices, in
consumer behavior going on. We may be sort of turning back away
from or maybe--I mean, this is worth looking at anyway. There
may be some consumers who are turning away from using as
multiple prescription drugs and maybe the--simply the
expiration of patents and the greater use of generics is having
effects. Are there other factors that come to your mind that
maybe have a bearing that you haven't mentioned in the course
of your testimony so far today?
Mr. Orszag. I think you have touched upon the main ones,
and that is why it is difficult to conclude or parse out just
the fact of competition among the prescription drug plans as
opposed to overall trends in health care, which in 2006 we did
see a slower rate of growth than we had experienced previously.
Mr. Allen. Is this an area where the CBO might be looking
at in further dependents when we go forward?
Mr. Orszag. We are very focused on health, yes.
Mr. Allen. I think what I would like to do there is a chart
I would like to have put up on this one. In the course of your
testimony, in the course of David Walker's testimony, we dealt
with this question of tax cuts and whether they pay for
themselves. And as I recall his testimony, he said only in the
case of a dramatic drop in the marginal rate. You said
something like a 90 percent or 80 percent to 50 percent when
you might you see enough change in behavior. That is my
recollection of his testimony.
Mr. Orszag. Can I comment on that because the first factor
I mentioned is where you start really matters. Moving from 90
to 80 is a lot different than moving from 30 to 20.
Mr. Allen. I believe the U.S. Treasury recently came up
with a study that suggested the long-term recovery of revenues
from the 2001 and 2003 tax cuts was about in the neighborhood
of 10 percent. Going forward----
Mr. Orszag. 10 percent of sort of the base costs.
Mr. Allen. Yeah. The 10 percent of the reduction in
revenues from the tax cuts.
If you look at this chart, it seems pretty clear to me
given the dates we are talking about in 2003 and 2004,
revenues, as a percentage of the economy, fell to about 16\1/2\
percent. I think that is the lowest level in how many years? I
mean, can you help me?
Mr. Orszag. That was the lowest level since some time in
the 1950s.
Mr. Allen. To me that chart speaks very clearly that the
drop, the dramatic drop in receipts as a percentage of the
economy had a good deal to do, though I can't quantify it, with
the 2001 and 2003 tax cuts, and therefore the deficits that
resulted from that is driven in part by those two tax cuts. Do
you have any further elaboration on this chart? Can you help
explain to us that factor, the importance of that factor and
any other factors that may have had a bearing on that dramatic
drop in revenues?
Mr. Orszag. I would note that revenues do tend to decline
in an economic downturn and increase during an economic upturn,
and that is a normal cyclical pattern.
Mr. Allen. Has the CBO made any estimate yet to quantify
how much of that decline in revenues was attributable to the
tax cuts?
Mr. Orszag. Again, excluding the fact that the tax changes
may have had on economic activities, we do sort of have a
narrow accounting sense, have a figure of $221 billion in this
year from the tax legislation that was passed in 2001.
Mr. Allen. By this year you mean?
Mr. Orszag. 2007, and that doesn't include debt service
effects from the previous revenue effects.
Mr. Allen. Thank you very much.
Chairman Spratt. Mr. Garrett.
Mr. Garrett. Thank you, Doctor, for being with us. As I
said, looking forward to the future testimony in further
hearings.
I want to ask you a question first of all about baseline
budgeting and supplementals. This committee has already
discussed this in the past with regard to the global war on
terror, and in the past we have used emergency supplementals
repeatedly to fund that to the war effort. And also in this
committee in the past we have discussed the problems with that,
the lack of oversight and the reason we should rather at least
give a given portion of that to go into regular order so the
oversight committees can have the oversight of that. What can
we do, if anything, if we move in that direction to have more--
less supplementals and more on the global war on terror go
through the regular order process? So too that it would not
become part of the eventual continual baseline budget because,
as you said, and we have heard in the past, some of these
figures are not likely to continue on and on.
Mr. Orszag. Let me try to draw a distinction between the
baseline and then the budget process that this committee plays
a key role in.
With regard to the baseline, regardless of whether an
appropriation is a regular one or supplemental, if it exists
when we construct our baseline, it will be inflated out. So
that distinction doesn't really matter for that purpose.
When you then go and set your appropriations totals as part
of the budget process, you can make--this committee can make an
adjustment in the budget resolution, you know, to take out a
supplemental if you want to or put in additional money, and
that is not a function of just our baseline.
Mr. Garrett. It is going to be included in your baseline
regardless of whether it is a supplemental or regardless
whether it is a supplemental or if it is in regular order?
Mr. Orszag. As long as it is enacted.
Mr. Garrett. Is there a way, realizing that some
supplementals wouldn't be reoccurring, that you would have a
way to take it out of your process so the numbers that you have
would come out, would be a more realistic figure going forward,
is my question.
Mr. Orszag. I understand. There are a set of scoring rules
that basically govern this and that is what----
Mr. Garrett. Who sets them and how do we change that?
Mr. Orszag. That was set by a law that has now expired, but
there is an established norm there. What we try to do in
situations like this is try to provide additional information
where you could take that component back, add something in if
you want it, and that is what we did with global war on
terrorism activities in Table 15. There is an official baseline
projection but then if you wanted to take the----
Mr. Garrett. So the simple answer is we can change the
process by your assumptions.
Mr. Orszag. This committee could change the baseline rules
if you chose to.
Mr. Garrett. The second conversation you had when you spoke
to us previously, I know you made regard to your staff and the
tremendous work that they will do in the future and what are
some of the things that you might want to improve upon if you
could? I think one of the things is response time for members'
requests as far as scoring, what have you. Can you just comment
on that?
Mr. Orszag. My understanding, over the past several years
there has been a lot of attention paid to responding in a
timely fashion to members' requests, and we are going to
continue to do that, and if there are ever problems that arise
I hope that you will get in touch with me directly about it.
And I do want to join you in just noting what a tremendous
staff CBO has. And also I am particularly pleased that Donald
Marron is staying on as the Deputy Director, which will provide
a lot of continuity and professionalism in the organization.
Mr. Garrett. I am glad to hear you make this a priority for
the Members.
And finally, we heard a lot of talk about when you make a
tax cut on the dollar you may not see an increase for the
dollar. Hearing that from the other side, somebody might
believe that somebody is setting us up for down the road to see
a tax increase potentially coming. Maybe not. But can you turn
that question around, maybe, and that is to say for every tax
dollar increase that goes can a particular American family
necessarily see a dollar increase of services that they get
from the government? Or to bring it home to my State in New
Jersey where we get $0.57 back on the dollar, so every dollar
New Jersey families sends to Washington, we get $0.57 back in
overall government services. If we were to increase taxes in my
State of New Jersey or a typical American family in New Jersey
by a dollar, can you tell us whether that family in the State
of New Jersey would see a commensurate $1 increase from the
service of the Federal Government for the tax increase?
Mr. Orszag. What I would say is especially over the long
term as a nation we need to pay for our governmental services,
and it is very difficult to parse on an individual family-by-
family basis.
Mr. Garrett. How about a state-by-state basis like mine
that has only been getting $0.57?
Mr. Orszag. It depends on how you do the calculations. How
do you compute the benefit to New Jersey of having an effective
defense of the entire Nation. You can do a sort of accounting
analysis, which people have done, and I am sure that is where
those numbers come from. But it is very difficult to take into
account things that benefit the Nation as a whole and how you
sort of parse that out on a state-by-state basis. So I would
just say that kind of analysis is very difficult to do. It is
difficult to do.
Mr. Garrett. Okay. Thank you.
Chairman Spratt. Mr. McGovern of Massachusetts. Not here.
Mr. Scott of Virginia.
Mr. Scott. Could we get the chart up?
We keep hearing about this gang busting economy and the
jobs that are being created. We wanted to show this chart so
that people would know what we are talking about. This is the
average number of jobs created over the administration for the
Clinton administration and the Bush administration, and
everybody is bragging about how well this administration is
doing so we just wanted to put that up. I understand the
numbers. Now this is the average over 6 years. The more recent
numbers are up to about 150,000 in some recent months, which
would be a little below average for the previous
administration. We just want that up there so people will know
what--put things in perspective.
This year's deficit, as I understand, it doesn't include
the expected supplemental for the war?
Mr. Orszag. That is correct.
Mr. Scott. Does it include any other supplementals? We
understand the FBI has complained that they are going to have
to fire FBI agents and the Department of Justice might have to
get rid of prison guards if they don't get supps. If that
supplemental occurs, that is not a part of this either. That is
something that would have to be added on, right?
Mr. Orszag. The 2007 number comes very close to the
continuing resolution limit, and to the extent you wind up with
domestic appropriations that affect that, that would also
affect the budget outcome.
Mr. Scott. I agree with the gentleman from North Carolina
that I would expect some people to lose their Medicare
prescription drug coverage in the future. It has been a very
attractive benefit but since people can get it on its own, it
is not as compelling a benefit as it has been in the past. So
we have had--we would have to keep an eye on that number. But
is the lower cost benefits because of the lower number of the
people or because of the lower cost per person?
Mr. Orszag. It is mostly because of the lower cost per
person. So out of the $265 billion reduction, a little bit more
than $200 billion is because of the lower cost per person.
Mr. Scott. The emergency costs like hurricanes, like we
didn't have many hurricanes this year. You are going to project
out a lower cost than the year before when we had Katrina and
Rita and everything else. Does it make sense to do it that way
for emergencies, which you don't know what they are going to
be, wouldn't a 5-year average make a lot more sense than the
ups and downs of each year as to what might be expected?
Mr. Orszag. First with regard to programs that involve
spending in emergency programs like insurance programs, we do
incorporate some estimate of the likelihood in doing the
projections. But with regard to domestic spending, that is one
time. Again, the scoring rules suggest that we just take
whatever has been enacted and inflate that forward and not try
to guess what you all will do in future years in that category.
Mr. Scott. PAYGO. Under the PAYGO rules, we have to pay for
the extension of tax cuts.
Mr. Orszag. Under the pay-as-you-go rules that apply in
both the House and the Senate, a revenue, yeah. Basically
extending the tax provisions past their scheduled sunset have
to--would have to be offset through some other mechanism unless
you waive the requirement.
Mr. Scott. And we have heard about the fact that we have
got record revenues, the nominal amount is higher. How many
years in the last--since the Great Depression has the nominal
amounts of revenues actually gone down?
Mr. Orszag. I don't have that number off the top of my head
but the nominal level going down is relatively rare and would
typically be associated with a recession.
Mr. Scott. Would it surprise you if somebody told you that
only after this administration's tax cuts for a couple of
years, the normal years since the Great Depression, that it
actually went down?
Mr. Orszag. It wouldn't surprise me if someone said that.
Whether if it was true or not, I would want to check that.
Mr. Scott. Could you get us the information? I think there
are a couple of times it may have gone down other than this
administration.
Mr. Orszag. I would think after World War II there would
have been a decline.
Mr. Scott. If you would check and give us that information
so we will have it for the next meeting.
Thank you, Mr. Chairman.
[The information follows:]
CBO Response to Mr. Scott
Since the Great Depression (and through 2006), revenues have
declined from year to year 14 times.
Chairman Spratt. Thank you, Mr. Scott.
Mr. Simpson.
Mr. Simpson. Thank you, Mr. Chairman. Do you have any more?
I would be happy to yield.
Mr. Scott. When he gets the numbers, that would be best
when he gets the numbers.
Mr. Simpson. You mentioned you said instructed to construct
the baseline. Who instructs you to construct the baseline? How
do you decide what decisions you make? Are those in statute
somewhere, or are they just policy that CBO works up?
Mr. Orszag. They were contained in section 257 in budget
legislation. That section expired but there has now been a long
history of applying the rules in a particular way and we
continue to follow that long history of baseline construction.
Mr. Simpson. So it is up to you to determine what economic
assumptions you are going to use when different policies are
enacted?
Mr. Orszag. I suppose it is our responsibility to come up
with economic assumptions but the baseline concept is up to the
Congress and in particular up to the budget committees.
Mr. Simpson. I got the impression that you use
supplementals. You carry forward supplementals as continued
spending.
Mr. Orszag. That is correct.
Mr. Simpson. But by definition, aren't those supposed to be
emergency supplementals, one-time spending even though we go
more and more into that arena where we shouldn't and we should
get back to where supplementals are true emergencies. How can
you project carrying forward the cost of Hurricane Katrina?
Mr. Orszag. In this baseline we don't, but I think the
broader point with regard to the discretionary part of the
budget, a little bit above a third of the budget that you all
decide upon year by year, the baseline is not really a
prediction of what you are going to do in the future but rather
just some benchmark that inflates the existing year forward
period and it doesn't try to predict what you are going to do
on Homeland Security spending in 2010.
Mr. Simpson. But it bases those assumptions on what we have
done in the past?
Mr. Orszag. That is correct. With regard to that part of
the budget, it is a very simple rule.
Mr. Simpson. But using supplementals in projecting that
would seem to me to throw off the future projections.
Mr. Orszag. It could. On the other hand, if you look at the
pattern of discretionary spending growth over a long period of
time, our assumption in the baseline that it just keeps pace
with inflation goes another direction because over a longer
period of time discretionary spending has tried to rise more
rapidly than that--than just keeping pace with inflation.
Mr. Simpson. When you look at the cost of a tax cut, do you
look at the lost revenue that you would be assuming that the
economic activity remain the same and that you would lose that
much revenue because of a lower tax rate?
Mr. Orszag. Again, the Joint Committee on Taxation is
responsible for revenue scoring, and they will take into
account microeconomic responses. So the fact that people may
shift the form of compensation in response to tax changes but
not macroeconomic effects, we have in the past taken those
macroeconomic effects into account in dynamic analysis papers
that we have done outside of the formal scoring process. And I
think the distinction is important. In dynamic scoring, you
have to pick a certain number. That puts a lot of pressure on
organizations like CBO to pick the parameter values and small
changes and assumptions can bring changes in outcomes. So in a
dynamic analysis, we can present lots of different combinations
to give you some sense of not only the likely magnitudes but
how they vary on different assumptions, and that is a luxury.
That is not possible in a single scoring exercise.
Mr. Simpson. I guess when we reduced the capital gains rate
we had to estimate that it was going to cost the Federal
Treasury when everyone knows that it was going to bring in more
revenue and in fact it did bring in more, substantially more
revenue.
Mr. Orszag. There are two effects. The capital gains tax
rate. There could be a timing effect with more realizations and
also an effect in revenue in the very short term and the very
longer term effect. All of the analyses I have seen from Greg
Mankiw and others suggest that tax changes of that type when
you reduce the tax rate, the revenue is reduced over the long
term but not by as much as the effect itself because there is
some offsetting impact on economic activity and on capital
gains realizations. That offset is not--given the tax structure
of the United States is typically not large enough to offset
the cost.
Mr. Simpson. Is that true in every tax category?
Mr. Orszag. It will depend on where you start, and I don't
want to say in every category but there may be exceptions, but
in general, given the existing tax structure that we have in
the United States and with the level of rates that we have in
the United States, it is generally true.
Chairman Spratt. Mr. Moore.
Mr. Moore. Thank you, Dr. Orszag, for being here.
The Federal deficit now stands in excess of $8.7 trillion;
is that correct?
Mr. Orszag. That is the gross Federal debt.
Mr. Moore. $8.7 trillion; is that correct, and that is
projected to be the gross Federal debt, $8.9 trillion, by the
end of this year; is that also correct?
Mr. Orszag. We project gross Federal debt to be $8.9
trillion by the end of fiscal year 2007.
Mr. Moore. And the gross Federal debt was $5.6 trillion in
January of 2001?
Mr. Orszag. It may be correct. It may take me--but for the
sake of argument, that would be correct.
Mr. Moore. That would be an increase of more than $3
trillion in 3 years?
Mr. Orszag. Assuming that your original number was correct.
There are--obviously has been an increase in Federal debt
whether it is on a gross basis or public held basis of a few
trillion dollars over the past several years.
Mr. Moore. How much of our national debt now is held by
foreign nations, Doctor?
Mr. Orszag. Something like 40 percent now.
Mr. Moore. What would the number be?
Mr. Orszag. We have a section in the report that talks
about foreign ownership out of the publicly held debt, so it is
roughly 40 percent. I could get you--between 40 and 45 percent.
We will get you the exact number.
[The information follows:]
CBO Response to Mr. Moore
At the end of fiscal year 2006, foreign and international held debt
totaled $1.933 trillion--about 40 percent of debt held by the
public.\1\
---------------------------------------------------------------------------
\1\ Source: U.S. Treasury.
Mr. Moore. While we are talking here, can somebody back
there get you the number for the increase in the past 6 years
of our debt?
Mr. Orszag. [Nods head.]
Mr. Moore. Thank you.
Do we even have a ballpark figure for what the foreign debt
is right now?
Mr. Orszag. The foreign held debt of the United States is
roughly--the public debt that is owned by foreigners is roughly
$2 trillion.
Mr. Moore. What would be the effect if foreign nations
decided they didn't want to hold their debt for whatever reason
anymore? What would be the effect in our country?
Mr. Orszag. It would depend upon the response of other
players in financial markets. If there were significant change
in the willingness for foreign official entities and other
investors to hold other publicly held debt, one would expect
some adjustment process and depending on the speed of that
withdrawal and the response of other financial market
participants, it could either go smoothly or abruptly.
Mr. Moore. Could it have any impact on our interest rates
in this country?
Mr. Orszag. It potentially could, yes.
Mr. Moore. In what respect? Good or bad impact?
Mr. Orszag. Once would anticipate there would be some
upward pressure on interest rates and the extent of that upward
pressure would depend on the factors I was just mentioning.
Mr. Moore. Because people would have to, in this country,
would have to finance the debt, and there would be competition
for the funds available?
Mr. Orszag. Having more people sell public debt would drive
the price down and the interest rate on that debt up.
Mr. Moore. How much was the interest in dollar figures on
our national debt last year, if you know?
Mr. Orszag. 200 and--a little above--I was going to say 220
billion. $227 billion.
Mr. Moore. Do you have an estimate for what the interest
would be on that debt this year?
Mr. Orszag. 235.
Mr. Moore. Billion dollars.
Mr. Orszag. Correct.
Mr. Moore. And the gross is over $400 billion?
Mr. Orszag. That was net interest on publicly held debt
that I was giving.
Mr. Moore. Who is going to end up paying for this?
Mr. Orszag. Those outlays are part of the Federal budget
and ultimately will have to be financed either through
reductions in other spending or increases in revenue.
Mr. Moore. Or passed along to our children and
grandchildren to pay it.
Mr. Orszag. But ultimately that is not sustainable if one
can't just continue to pass more debt on to future generations
because ultimately you would have a debt spiral that----
Mr. Moore. We are passing substantial debt on to our
children and my seven grandchildren right now; isn't that
correct?
Mr. Orszag. We as a nation are not saving very much. That
means we are not passing on as much capital to future
generations as we could. I think we do need to remark upon the
low level of national savings in the United States, which has
one of two consequences. Either it means we will invest very
little in the United States or we have to borrow substantial
amounts from foreigners. In recent years we are mostly doing
the latter.
Mr. Moore. Thank you.
Chairman Spratt. Mr. Lungren.
Mr. Lungren. Thank you, Mr. Chairman.
Doctor, it is nice to see you here. I am not an economist
and I am not even a country lawyer. I am just a plain old
lawyer.
Mr. Orszag. Boy, am I getting nervous.
Mr. Lungren. But I am not a tax elixir, as someone
suggested over there and restated they meant tax cut elixir,
suggesting that is what we are looking for over here.
My problem is I come from a different perspective having
been gone for 16 years. I was here in the 1970s and 1980s. Do
you have a figure of what the average unemployment rate was
during the 1970s?
Mr. Orszag. I don't have it off the top of my head. We can
get it for you. It was higher than it was today.
Mr. Lungren. The interest rate.
Mr. Orszag. Higher than what it is today.
[The information follows:]
CBO Response to Mr. Lungren
The average unemployment rate from fiscal years 1970-1979 was 6.1
percent. From 1980 through 1989, the average rate was 7.3 percent.
Mr. Lungren. The tax rates in the 1970s.
Mr. Orszag. Higher than it is today.
Mr. Lungren. Is there any impact on the employment rate as
a result of lower tax rates helping stimulate a private
economy?
Mr. Orszag. I think it is very difficult to draw that
connection. For example, someone put up a chart earlier about
growth rates during the 1990s when tax rates were also--
growth--job growth rates were higher than they were.
Mr. Lungren. But the tax rates were significantly lower
than they were in the 1970s?
Mr. Orszag. That is correct.
Mr. Lungren. There was a chart put up there I think when
Mr. Allen was speaking, and it talked about the dip that we had
in receipts, that we had in receipts and apparently the graph
didn't take into consideration your testimony because it showed
a leveling off of receipts below 18 percent, about 17.5 or 6
percent. As I understand your testimony, revenues measured as a
percentage of GDP have grown in the last several years. And I
believe you state here increasing from 16.3 percent in 2004 to
17.6 percent in 2005 to 18.4 percent in 2006 and that the last
figure is, quote, slightly higher than the average, 18.2
percent of the past 40 years; is that correct?
Mr. Orszag. That is correct.
Mr. Lungren. So we are now in the range of receipts as a
percentage of GDP that has prevailed over the last 40 years?
Mr. Orszag. That is correct.
Mr. Lungren. Even though the tax rates are significantly
less than they were in the first 20 of those 40 years?
Mr. Orszag. That is correct also.
Mr. Lungren. How much would it cost to fill the donut hole?
Mr. Orszag. Now that we have information on actual
enrollment in part D, we will be providing an updated estimate
of that in the near future.
Mr. Lungren. Do you have any range of what we are talking
about there?
Mr. Orszag. Rather than give you an incorrect number, if I
would be allowed to----
Mr. Lungren. Do you have a suspicion it will be an
insignificant number?
Mr. Orszag. It is clearly a significant number.
Mr. Lungren. When you talk about the employment
participation rate, and you project that forward, does that
consider any changes in immigration policy?
Mr. Orszag. That does not consider a change in immigration
policy. It assumes roughly a million people per year in net
immigration and that is new entrants minus people who leave.
Mr. Lungren. Isn't it a fact without immigration at the
levels we now have, legal immigration, let us just now talk
about that, we would have an even worse situation in terms of
being able to sustain the Medicare/Medicaid/Social Security
that we have built into the system as we look forward?
Mr. Orszag. Or another way of putting it is higher
immigration can help a bit but the effect is not as large as
one would initially think. And it depends in part on the skill
mix of people coming in. The reason is that you get more
revenue, but for example under Social Security you also then
have higher benefits based on the work history of immigrants.
Mr. Lungren. I thought one of the simple ways of looking at
our Social Security problem is the number of people working
versus the number of people who qualify for Social Security
versus what happened in the earlier years. And if we had
declining birth rates such that we do not have more people
coming into the work force over time, you build yourself into a
tremendous problem such as we see in Europe now and that
without some continuing immigration, such as we have seen in
this country traditionally, we have become another Europe.
Mr. Orszag. And again, the effect, though, tends to be
relatively modest because there is some effect on benefits and
it really does also depend on the skill mix. For example, if
low wage immigrants are disproportionately the increment, then
because the Social Security benefit formula is progressive, the
net effect is not as large as if they are high wage immigrants.
Greatly disproportionate.
Mr. Lungren. Thank you very much.
Chairman Spratt. Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman.
Well, according to CBO, the New England Patriots are in the
Super Bowl this weekend because under this sort of baseline
analysis, when you only look at the past, the Patriots look
mighty good. In fact, they looked really good in the first and
second quarter of the playoff game. But then everything
changed.
So my point is I am very worried that as interesting as
this academic exercise is, it really tells us very little about
the future. Fortunately both parties have reason to question
the validity of the baseline. You don't want to see all of the
tax cuts revealed. We don't want to see other things happen.
But when, for example, as you said earlier in your testimony,
just keeping the level of paying with AMT, that would cost us a
trillion dollars. That is not reflected in these numbers. That
shows you the extreme variability of the analysis.
It is interesting to me, too, what you said that the
requirement that CBO do this is under an expired law that lives
on as informal practice. I am not faulting you or CBO. I think
you have done as well as could be done given this constraint.
But this is a very poor way of looking at the future. The
President bragged in the State of the Union Address he would
have a balanced budget in 5 years. According to your numbers,
if we do nothing, if Congress ceases to exist for 5 years, we
would have a balanced budget in 5 years. So, you know, the
President has basically stated as a claim, you know, what you
say we would achieve on automatic pilot.
My purpose is to not fault CBO or the methodology. I just
want realism in the numbers and to me we are not achieving that
with this exercise. So I would like to work with you in the
coming months to figure out a better way to come up with
projecting into the future so that we have a more realistic
handle on things.
Can you think of any ways right now that we could do this?
Mr. Orszag. Having grown up in Massachusetts, I am still
having to get over your first comments.
There are a lot of different ways of trying to construct a
baseline and obviously I think having the budget committees
revisit those baseline rules to explore whether some updates or
tweaks would make sense and would be welcomed. But I would say
there has to be a core principle behind the combination of the
baseline and the scoring rules which is that the cost of a
policy change shows up at some point. So it shows up either
when you score the provision and then it can be carried forward
in the baseline or it shows up--the full cost has to show up at
some point, and we don't want a situation in which costs just
disappear from the combination of the baseline and the scoring
process.
So, for example, one can imagine a system in which a tax
change that was officially temporary would be scored as
permanent. So an AMT change for 1 year would be scored as
permanent and then from thereafter that would be included in
the baseline. That may or may not lead to more clarity about
future budgetary outcomes, but I think what is important is
that the costs show up at some point. The current system
achieves that objective and any alternative system needs to
achieve that objective also even though there are different
ways of achieving it.
Mr. Cooper. If you look at your analysis under Medicare you
assume that we are going to cut physician's pay 10 percent next
year. That is wildly unrealistic if you look at congressional
behavior in the last 4 years. We have always saved the doctors
at the last minute. So many of our assumptions seem to be based
on premises like this, and by the way, just freezing doctor
reimbursement under Medicare would cost $5 trillion. That is
not giving the docs a pay raise. That is freezing reimbursement
because the formula under BBA 97 is skewed to expect a 30
percent cut in finance pay. Who thinks that is going to happen?
So I am just worried that this is a little bit like the
medieval argument how many angels can dance on the head of a
pin.
In my 30 remaining seconds, the gross interest that America
had to spend last year to service its debt was $406 billion.
That is on page 74 of your analysis, and you point out very
helpfully that the rate of growth of interest, spending growth,
interest spending is four times faster than the rate of
increase for the non-interest spending. That should alarm the
members of this committee. If you look at the CR we will pass
this week, that is, what, $463 billion we are going to spend,
406 billion just on interest. So that is the tax you can't
repeal. That is a tax that can never go away unless you bill
budget surpluses and that is the tax that is growing at a rate
four times faster than all other spending. So I would urge my
colleagues to focus on pages 71 through 74 of your analysis
because while we can't trust the future necessarily, we can
trust the historical numbers.
Mr. Orszag. If I could make two comments, Mr. Chairman. The
first is obviously the pressure that is put on the baseline
process and then relatedly the scoring process when provisions
are wildly anticipated to be continued, are written in official
law as being temporary, and you could perhaps include the
sustainable growth rate formula under Medicare in that and
perhaps include the revenue provisions in that also. I know you
know this, but I think it is worth pointing out that that
creates awkwardness regardless of how either we are going to
ignore the official law or not ignore it but reflect it in a
different way, or we are going to have baselines like the one
that we presented to you today that many observers may not
believe are realistic.
And just very briefly since I have been asked and I know
there is interest in gross debt, since I was able to find it,
the publicly held debt, that did rise from $3.3 trillion in
2001, at the end of 2001, to 4.8 trillion at the end of 2006.
Mr. Cooper. Thank you.
Chairman Spratt. Mr. Bonner.
Mr. Bonner. Doctor, I would like to follow my colleague
from Tennessee in hoping for realism in the numbers. I guess I
would like to get your views on the realism and the facts. Many
people who run for Congress or other jobs in life made campaign
promises and then when we catch that car, they have to try to
reconcile their promises with the reality of the job. In your
view, if we allow the tax cuts of 2001 and 2003 to expire, is
that in effect a tax cut or a tax hike for those who promised
that they would never raise taxes?
Mr. Orszag. I am not going to get into the semantics game.
If they allow those provisions to expire, the revenues would be
higher if they did not expire.
Mr. Bonner. Okay. Many people outside of this body back in
our communities and our States sometimes believe that many of
us inside this body have done a very poor job of handling the
exploding growth in entitlements. What in your view are some of
the principal factors in the structure of the entitlement
programs that have fostered such a rapid growth and, in
general, what kinds of options are available to us in Congress
to alter the structure of these programs to make them more
sustainable for the long term?
Mr. Orszag. With regard to the first question, the ongoing
increases in Medicare, Medicaid and Social Security,
particularly the first two of those where most of the projected
increase occurs, reflects both ongoing health care cost growth,
which exceeds economic growth. Over the last 40 years, health
care costs per beneficiary have grown 2.5 percentage points a
factor than economic growth.
Then, secondarily, the aging of the population. So, as the
population ages, costs go up in both Medicare--in both the
health programs and in Social Security.
In terms of options for restraining the emerging imbalances
in our different entitlement programs in some sense it is very
simple. Spending is projected to exceed revenue, so you need
some combination of lower spending and higher revenue. The
combination is really up to you, but the precise details are
obviously what is important, and there again I think it is
really up to the Congress and to the President to decide the
best way forward.
What I would say is that, on the health care side, as--
returning to the discussion we had before, there is at least
some opportunity for constraining cost growth, spending growth,
in a way that neither impairs innovation nor harms health,
which is the ultimate objective of those programs, and that is,
in a sense, a central--I think should be a central focus of
effort, to find the ways in which we can take cost growth out
of the health system without impairing health or innovation.
Mr. Bonner. Sticking with health and going back to my
previous question about people who run for office making
campaign promises, we have a Presidential election coming up in
2 years, and some of the candidates are already promising, one
in particular, every American should have universal health care
within 6 years.
Since health care is such a dominant part of the topic
today, can you envision, as a noted and respected economist, a
scenario where we can afford to provide universal health
coverage for all Americans and, at the same time, get a handle
on the growth of this very explosive part of our economy?
Mr. Orszag. I am told that when a health economist died and
went to heaven, St. Peter let him ask one question. He said,
will we have universal health insurance? And St. Peter said,
yes, but not in my lifetime.
I think that, obviously, there are ways of getting to
universal health insurance systems; and evaluating the cost is
something that we are very actively engaged in. I wouldn't want
to characterize the costs as being either insignificant or
catastrophic. It depends in part on precisely what you do; and
we are seeing different models emerging from the States, from
Massachusetts, California and others, in terms of how one
could, at the State level, move to a more universal coverage.
Mr. Bonner. Mr. Chairman, if there is no objection, my
colleague--our colleague Mr. Garrett had one other question.
Could I give the balance of my time to Mr. Garrett?
Chairman Spratt. Sure.
Mr. Garrett. I would like to join the gentleman from
Tennessee to be so willing to raise the issue that you raise as
far as reforming. This question goes on the baseline issue.
Correct me if I am wrong. If you are looking at a tax on the
law on the books that is set to expire in x number of years, 3
or 4 years, your baseline will assume that it will end at that
time for your projections going forward?
Mr. Orszag. With one caveat, which is that revenues that
are dedicated to particular trust funds are assumed to
continue. But, generally, yes.
Mr. Garrett. And, secondly, you are looking at a spending
program that is authorized and the authorization is going to
expire in X--the same number of years, you will assume what in
that case, on the spending side of the equation?
Mr. Orszag. Generally, that they are continued, but, again,
there are exceptions on that side, also.
Mr. Garrett. Can you explain why you treat one as
continuing even though the law has expired and the other one
you treat differently?
Mr. Orszag. Again, I think the key concept is that the
costs show up at some point. So, for example, SCHIP is coming
up for reauthorization. When that program is scored, even if
the reauthorization only applies for 5 years, we will assume
that those changes continue out and score those changes. So the
costs are paid for at some point. In that case, you know, when
the reauthorization occurs; and then those higher levels would
be carried out and incorporated into a future baseline.
One could do the same thing on the revenue side. So, for
example, one could say, you do a 1-year AMT fix, we are going
to score that as a 10-year change, and then that will be
incorporated into the baseline thereafter. The key thing is
that the costs show up at some point. The existing system
basically achieves that.
There are others--and we would look forward to working with
you on it--that could achieve it also and that might address
some of the at least perceived asymmetries that you have
touched upon.
Mr. Garrett. Thank you again. I appreciate working with the
gentleman on that.
Chairman Spratt. Thank you, Mr. Garrett.
Mr. Berry.
Mr. Berry. Thank you, Mr. Chairman.
Dr. Orszag, God bless you for taking on this job; and we do
appreciate very much you being here.
Mr. Orszag. Thank you.
Mr. Berry. You say that we are going to save or have $265
billion less spent on the Medicare Part D over the next 10
years than we had anticipated. That is less money that the
government is going to spend?
Mr. Orszag. Correct.
Mr. Berry. Do you have any information about how that
impacts--how our seniors are impacted and the people who
participate in the program? Are they spending more or less or--
and also the providers?
Mr. Orszag. There would be a corresponding--well, we need
to parse a couple of the pieces. The cost per beneficiary
piece, which is the majority of the change resulting in lower
government spending, would also have beneficial consequences
for beneficiaries. In other words, as the bids come in from the
prescription drug plans at lower amounts, there can be benefits
for consumers, also. Correspondingly, there is lower income to
the plans, but that is because they have figured out that they
can offer the plans at lower rates and still be profitable.
Mr. Berry. Right. The anecdotal information I have is our
concern is the seniors that are involved in these plans are
actually getting to be worse off because their copays are going
up, their premiums are going up, and the actual service that
they have available is not--actually not as good, even though
they are offering more plans. The plans are making money, but
the pharmacies are not making money, and the seniors are having
more difficulty getting their medicine.
We have absolutely just an onslaught of seniors coming to
our office asking for help. So I would love to see some
information on that, if you have it available.
Mr. Orszag. Sure. Let me just actually note--there is one
discussion about cost, there is another about confusion and
complexity, and especially at the beginning part of this
program there did seem to be concerns about how complicated
some of the choices were for senior citizens, for beneficiaries
to make.
Mr. Berry. Right.
The other comment I would have is not so much a question. I
guess in the end it will be a question, but, since 1981, I have
been told over and over again, you know, if you just cut taxes,
that this wonderful economy is just going to bubble up out of
the ground and everything is just going to be absolutely
magnificent for the United States of America; and we did that
as a Nation as a matter of public policy.
Then I remember so well a fellow named Daniels, who was
Director of OMB at that time, in April of 2001 coming to the
Blue Dogs and explaining to us that, if we just did that, that
the great danger that it presented to the country was that we
would pay off all the debt and there wouldn't be a safe place
for people to invest their money because you couldn't buy a
U.S. Treasury bond. And that not only did we have a projected
$5 trillion surplus at that time, but it would grow and
compound itself to the point where we would just be run over
with money.
It appears to me, you know, I don't think you have got to
be all broke out in brilliance to just see if we keep doing
what we are doing that we can in not too distant in the future,
not too far away, we can bankrupt the Nation and hand over to
our children and grandchildren a God-awful situation.
I agree with my colleague from Tennessee. We could have one
little segment here of these numbers--we have got your
baseline, then we have got the on-budget, and then we have got
the off-budget. And just pick one, and you can come up with a
scenario that would be absolutely wonderful to present to the
American people, but, in the end, we owe this money. We are
borrowing more money all the time, and when you cut taxes and
borrow the money to pay for it and actually increase spending,
it appears to me that that would also stimulate the economy on
the short term in an irresponsible way.
I don't know if any of this that I am saying makes any
sense to you. I know you are a lot smarter than I am. I never
would question that.
Mr. Orszag. I don't know about that.
Mr. Berry. But at some point if we are going to be a
successful Nation, don't we have to change what we are doing
and be more responsible about it and deal with health care
costs and be responsible about taxes and expenditures?
Mr. Orszag. I think there is no question that there is a
very broad consensus among analysts, economists and others that
constraining health care cost growth and, in particular,
raising national savings would both be beneficial over the long
term for our economic performance.
Mr. Berry. Thank you.
Chairman Spratt. Mr. Conaway.
Mr. Conaway. Thank you, Mr. Chairman.
Doctor, thanks for being here. I appreciate earlier the
conversations, your hesitation to use the word ``pay'' for tax
cuts. I am going to count it, and earners, wage earners and
businesses pay taxes. Governments collect it. So we don't pay
for tax cuts in that traditional term, and I appreciate you not
using that phrase any more often than we are all subject to
using it. We all use adjectives in an attempt to try to
influence, to try to move people one direction or the other.
My good colleague put up a slide earlier on job growth and
admitted during his presentation that it was inaccurate, but he
put it up, I guess, to try to influence it. I guess at some
point in time it was better than it is right now.
I would caution you in your reports for use of adjectives.
Under economic outlook, you talk about post-solid gains, which
is a positive adjective--this is under page five, just to make
sure you know I read all the way to the end of your deal. Just
be careful with your use of adjectives as you talk about things
going up and things going down, because it is always in the eye
of the beholder as to which is important.
I agree with my colleague from Tennessee that the
projections are wrong on their face most times. We can project
next quarter. We can project pretty good this year. Who knows?
The last 2 years, the other side has--and Mr. Berry did
earlier--reflected back on the projections from the late 1990s
which projected trillion dollar surpluses. Those were
inaccurate at the time they were done, but yet we seem to have
to cling to them as if they have some authority today. Yet they
really don't because the circumstances on which those
projections were based didn't turn out to be the reality we
faced. It is not good/bad. It is just the way it is, and to
continue to use those dated projections as some sort of an
argument to support arguments I think is misplaced. So I agree
with Mr. Cooper in his comments that we have got to be careful
in how we use those.
Broad numbers, we are currently spending about 20 percent
of GDP on the Federal budget. Federal spending projections at
CBO and other places show that in the next 50 years or 45 years
growing close to 50 percent of GDP. My comment is that, at 50
percent, you know, free market enterprise or our system of
government, it is more of a threat to our way of life at that
level than at almost any other thing we have got going on these
days.
In your judgment--you know, I don't think the Federal
Government take half, the central government take half, and you
and I and our families take the other half and continue to grow
and prosper and provide the opportunities we all want to hand
off to our grandkids. Where in your mind is the crossover? I
think 20 percent is the gag threshold now. But where in your
mind is Federal spending and related revenues--if we are going
to have a balanced budget, Federal spending as a percentage of
GDP, where do you think it is unsustainable from a free market
system so that we then have to go to some other kind of an
economic way of life that would sustain that continued growth?
Where is that number in your mind?
Mr. Orszag. I don't think that there is a single number, in
part because how you raise revenue affects the economic
implications. So, you know, corporate income tax is different
from an individual income tax that is different from a value-
added tax. And we see a variety of experiences in European
countries. In the Scandinavian countries, there has been
relatively good overall economic performance with higher
revenue-to-GDP ratios, but that partially reflects the mix of
revenue that they have.
Mr. Conaway. Did it also reflect their--okay, Scandinavian
country with an economy of where on the scale against the
United States? The United States is the largest economy in the
world. Scandinavian country----
Mr. Orszag. Tends to be small.
Mr. Conaway. Where? Less than some of our States, I would
argue.
Mr. Orszag. Certainly less than California, yeah.
Mr. Conaway. I am curious, being able to look at small
models like that and projecting that onto an economy that is as
large as the one we have here, if that is accurate.
Mr. Orszag. Oh, I didn't mean to imply any----
Mr. Conaway. Sweden, we could stand 70 percent rates here
and spend that.
Mr. Orszag. No, I don't mean to imply that at all. All I
was saying is that there are countries that have relatively
high revenue-to-GDP ratios that still experience relatively
rapid growth, but they have particular mixes of taxes, not to
say that that would work or it has any implications for the
United States but just to say that the mix of revenue does
matter.
Mr. Conaway. All right. So you think we can sustain a 50
percent of GDP----
Mr. Orszag. I didn't say that.
Mr. Conaway [continuing]. On the largest economy in the
world, is that your statement?
Mr. Orszag. No.
Mr. Conaway. Okay. We are at 20 now. We are muddling along
ever so poorly. Give me a range. Where do you think--is it 30
percent, 35, 40? Where is it--we hit the wall, if you run a
marathon, it is at 20 miles. Where is it that we hit the wall
in this? I can't hold you to this, obviously. But----
Mr. Orszag. It all depends; and, as a marathon runner, I
know from experience that where you hit the wall, if you do,
depends on what kind of----
Mr. Conaway. So your testimony is, Peter, 50 percent will
work if you have the right mix of tax collection scheme.
Mr. Orszag. No. I do think at 50 percent of GDP--and I
don't want to be pinned down to a specific number, but at 50
percent of GDP there would be significant economic consequences
from raising that much revenue as a share of GDP.
Mr. Conaway. Okay. Just--so, in other words, reducing
spending and related revenues--I mean, somewhere in there we
have got a wreck.
Mr. Orszag. Again, this goes back to where why I think we
need to bend that health care curve. But, yes, trying to meet
the entire projected increase in health care spending solely on
the revenue side----
Mr. Conaway. Government spending.
Mr. Orszag. Government spending, but it is mostly health.
Mr. Conaway. Yeah. But we still have to pay for national
defense and all those other kinds of things.
Mr. Orszag. Would involve significant adverse economic
consequences ultimately.
Mr. Conaway. Thank you, Mr. Chairman.
Chairman Spratt. For her patience and forbearance, the
gentlelady from Connecticut, Ms. DeLauro.
Ms. DeLauro. I thank the chairman, and I want to say thank
you to Dr Orszag. I appreciate the content of your testimony,
the breadth of knowledge and the clarity with which you address
the issues.
Let me move to a different topic. I don't think it has been
discussed, at least I haven't heard it since I have been
sitting here; and it may be that because I have just become the
Chair of the Agriculture Subcommittee of Appropriations that I
am going to move in the direction of farm programs.
Mr. Orszag. Okay.
Ms. DeLauro. And just a couple questions in this area with
this preface. As I understand it, and just that in terms of the
2007 baseline, what CBO has done is to revise its cost estimate
for the main farm support programs from what was an August,
2006, forecast. The areas of change is in the commodity price
programs, mandatory conservative programs, crop insurance.
In the commodity price support program, again my
understanding is is that there has been about a $30.8 billion
drop in the forecast. Let me just--the drop projected
essentially because of CBO's forecast for continued high crop
prices over the long term that are substantially above the
historic average in the area of corn and wheat and soybeans,
and one of the, again, premises of this effort is the strong
demand for corn-based ethanol.
The question is--two questions--is what is the budget
impact if crop prices do not maintain historically high levels?
And in terms of past projections in a historical context here,
what happened in the Congress's reauthorization of the 1996
Farm Bill? Because this will impact the discussion over the
farm bill which is coming up for reauthorization.
Under the estimates for the 1996 bill, how long did CBO
project crop prices to remain high? How long did it take until
the agricultural market shifted the crop prices and crop prices
fell? What were the results in terms of the Federal farm
support costs?
Mr. Orszag. So, first, with regard to the change in
projections----
Ms. DeLauro. What happens if we do not maintain these
historically high?
Mr. Orszag. If you have lower crop prices, that drives up
the cost of the price support programs, and it also drives up
the cost of--sorry--if we had lower prices, the price support
programs go up in cost, and I think what we have seen in this
baseline relative to August is, for example, higher corn prices
and other grains prices driving down the cost of, in
particular, the Commodity Credit Corporation, which is I think
the roughly $30 billion reduction over 10 years that you
referred to. If prices do not remain high and instead go, you
know, are lower, the cost level would be higher than we
project.
Ms. DeLauro. Mm-hmm. But is the impact of the--let me just
ask the question on the high price projected on the strong
demand for corn-based ethanol, with oil prices going from $75
to $55, any concern that that would drive down the cost for--
the demand for corn-based ethanol?
Mr. Orszag. I would note that we do in the assumptions
assume some sort of walking back from current pricing for a
variety of factors, and I would also note we consult in depth
with a variety of experts in the agricultural field in order to
undertake these projections. So there is a little bit of
softening in prices relative to current levels that is embedded
in the baseline; and in the outyears, for example, the price
per bushel for corn is somewhat lower than it is for 2007.
But I think the underlying structural point that you noted
is that we do see significant demand for corn coming from
ethanol-related activities, and that is a structural change
that is likely to keep prices higher than they would otherwise
be in the absence of that source of demand.
Ms. DeLauro. With what, 20 seconds left, what is, again,
the historical perspective and what happened in 1996 and what
were the results in terms of the Federal farm support cost?
Mr. Orszag. Prices were projected to be relatively high at
the time of enactment. They turned out to be lower than
projected. The, you know, farm prices are highly cyclical. But
I would note that, while that did happen and it may happen
again, this underlying driver of ethanol-related demand makes
it somewhat different than the situation we faced in the mid-
1990s.
Ms. DeLauro. Okay. Thank you very much. Thank you, Dr.
Orszag. Thank you, Mr. Chairman.
Chairman Spratt. Another question?
Mr. Scott. I did have another question, Mr. Chairman.
Just for the record, we did find out the revenue increases
in the 40 years prior to the Bush administration, revenues
increased 38 of those 40 years. During the Bush administration,
revenues decreased in each of the first 3 years of the
administration. The records that we are using only went back to
1938. We were unable to find any time where the revenues
actually decreased three consecutive years.
Chairman Spratt. The gentleman's point is so noted, and the
record will show it.
Dr. Orszag, we appreciate very much your being here, your
diligence in answering these questions, and we look forward to
working with you in particular on the analysis of the
President's budget which will be coming on Monday. We need it
as soon as we can possibly get it from you, because we are
trying to get to the floor by the week after February 15, out
of committee by the 15th and on the floor the week after. So
that is an ambitious schedule.
Mr. Orszag. Did you say February 15?
Chairman Spratt. Yeah. That is too ambitious. March the
15th.
Mr. Orszag. You gave me a little bit of a heart attack, but
that is fine.
Chairman Spratt. But we hope we can have it by the 1st of
March, if at all possible.
Mr. Orszag. That is our goal.
Chairman Spratt. Thank you so much and for your superb
staff for the excellent work you do for us.
Mr. Orszag. Thank you very much, Mr. Chairman.
Chairman Spratt. Before we adjourn, I would like to ask
unanimous consent, Mr. Scott, that all members be allowed to
submit an opening statement for the record. Without objection.
Mr. Scott. I have no objection, Mr. Chairman.
Chairman Spratt. I would also ask unanimous consent that
members who were not allowed--did not have the opportunity to
ask questions be given 7 days to submit questions for the
record.
Thank you very much.
[Whereupon, at 12:27 p.m., the committee was adjourned.]
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