<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:22472.wais]
MID-SESSION REVIEW OF THE PRESIDENT'S FISCAL YEAR 2006 BUDGET REQUEST
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, JULY 14, 2005
__________
Serial No. 109-9
__________
Printed for the use of the Committee on the Budget
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
JIM RYUN, Kansas JOHN M. SPRATT, Jr., South
ANDER CRENSHAW, Florida Carolina,
ADAM H. PUTNAM, Florida Ranking Minority Member
ROGER F. WICKER, Mississippi DENNIS MOORE, Kansas
KENNY C. HULSHOF, Missouri RICHARD E. NEAL, Massachusetts
JO BONNER, Alabama ROSA L. DeLAURO, Connecticut
SCOTT GARRETT, New Jersey CHET EDWARDS, Texas
J. GRESHAM BARRETT, South Carolina HAROLD E. FORD, Jr., Tennessee
THADDEUS G. McCOTTER, Michigan LOIS CAPPS, California
MARIO DIAZ-BALART, Florida BRIAN BAIRD, Washington
JEB HENSARLING, Texas JIM COOPER, Tennessee
ILEANA ROS-LEHTINEN, Florida ARTUR DAVIS, Alabama
DANIEL E. LUNGREN, California WILLIAM J. JEFFERSON, Louisiana
PETE SESSIONS, Texas THOMAS H. ALLEN, Maine
PAUL RYAN, Wisconsin ED CASE, Hawaii
MICHAEL K. SIMPSON, Idaho CYNTHIA McKINNEY, Georgia
JEB BRADLEY, New Hampshire HENRY CUELLAR, Texas
PATRICK T. McHENRY, North Carolina ALLYSON Y. SCHWARTZ, Pennsylvania
CONNIE MACK, Florida RON KIND, Wisconsin
K. MICHAEL CONAWAY, Texas
CHRIS CHOCOLA, Indiana
Professional Staff
James T. Bates, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, July 14, 2005.................... 1
Statement of Hon. Joshua B. Bolten, Director, Office of
Management and Budget.......................................... 6
Prepared statement of Mr. Bolten................................. 10
MID-SESSION REVIEW OF THE PRESIDENT'S FISCAL YEAR 2006 BUDGET REQUEST
----------
THURSDAY, JULY 14, 2005
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10 a.m. in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee), presiding.
Members present: Representatives Nussle, Bradley, Conaway,
Mack, Putnam, Ryan of Wisconsin, Hensarling, McHenry, Crenshaw,
Ros-Lehtinen, Diaz-Balart, Spratt, Neal, Baird, Allen, Cooper,
Schwartz, Moore, Cuellar, Jefferson, Edwards, Davis, and Ford.
Chairman Nussle. Good morning and welcome everyone, to this
Budget Committee hearing. Today, I am pleased to have with us
the Director of the Office of Management and Budget (OMB), Josh
Bolten.
Welcome back to the House Budget Committee.
He is here today to discuss the administration's midyear
update of our Nation's economic and budget outlook, which was
released yesterday.
So welcome back to the committee, Director Bolten. As is
the tradition, you joined us at the beginning of this year to
present the President's budget and your economic and fiscal
outlook at that time. This report is an update of those
findings.
I think it is useful to review that discussion and to help
put this report in context. The first chart, in February, you
projected a deficit for fiscal year 2005 of $427 billion.
Today, your projection for the fiscal year 2005 deficit has
dropped dramatically to $333 billion, a reduction of $94
billion, or 22 percent, over a span of just 6 months.
And since you were with us in February of last year when
you estimated the deficit of $521 billion, your deficit
estimate has fallen now by $188 billion, or 36 percent, more
than a third from that estimate. And I understand that these
numbers mark the best improvement in the OMB deficit outlook on
record for 6- and 18-month periods, it is the incredible
shrinking deficit. It is the fastest and deepest correction of
deficit on record, and I think it is something that all of us
cannot only take credit for, but be proud of. We have work to
do, but I think this good news, which we should pause and
recognize a little bit about how we got here.
You also reported yesterday that as a share of the Nation's
economy, which is really the way to measure deficits, it is the
way Chairman Greenspan measures deficits most, and economists
measure deficits; that the deficit for the current year has
returned to levels consistent with the average of the past 30
years and that is at about a 2.7 percent level. Now, no one is
here to say that we are satisfied, but to suggest that we are
somehow at some kind of record amount would, to me, seem
unreasonable. We are at a very manageable level if we continue
the current management plan we are under. And maybe most
important, you projected the surge in revenues and the decline
in the deficit will continue beyond the current fiscal year,
with the deficit falling to just 1 percent of GDP by 2008 and
continuing at that low level through 2010.
Included in that assumption is additional funding for the
war, and the policy proposals to fund Social Security. So we
are clearly making significant improvement in our budget
outlook in a relatively short amount of time.
I don't want anyone to mistake this for just some lucky
coincidence or that this good news should somehow precipitate
some kind of a new behavior. The good news, you reported
yesterday--a strong economy, higher revenues, and falling
deficit projections--all of these are a result of successful
leadership and policies of the President and Congress to create
jobs and control spending.
It is clear the tax relief plan that we passed in 2001,
2002, and 2003 helped to bolster our economic recovery and
continues to boost strong sustained economic growth and job
creation. And even with accelerated tax relief, our strong
economy is boosting tax revenues and driving Federal tax
receipts up nearly 15 percent over the same period last year.
No one was predicting back in 2001 coming out of a
recession, the gut punch of 9/11, the emergencies, the extra
spending for terrorism, and the extra spending for homeland
security, that we would have either this fast recovery in the
economy this quickly or this kind of sustained growth and
ability to pay down this deficit as quickly as we have
achieved.
Here is some of the best evidence of our strong economy:
Real GDP has increased for 14 consecutive quarters with the
strongest growth in 5 years and one of the strongest sustained
performances in nearly 2 decades. Over the past 25 months 3.7
million new jobs have been created and unemployment has fallen
from 6.3 percent, its highest, just 2 years ago, to 5 percent
last month. That means 95 percent of the people who want a job
in this country have got a job. Total employment is at a record
high of 141 million jobs and people working, and growth in
business equipment investment is at its best record level in 6
years.
Home ownership rates are at record highs, and a consensus
of the private Blue Chip forecasters--you don't have to believe
the Government forecasters; talk to the people who watch this
all the time in the private sector, and they say this kind of
economic growth and job creation is on track to continue.
Your budget last year on the discretionary spending
reminded us of the obvious and that was that the rate we are
growing was out of control. And at that time, I think we all
were cautiously optimistic that Congress could actually stick
to its budget. For the first time in a long time, we slowed the
rate of growth in spending. According to your own number,
Congress held the spending growth to 1.4 percent down from the
previous 5-year average of 6.3 percent.
This year, not only have we passed all 11 appropriation
bills in the House on time and ahead of schedule, but done it
with tight limits on spending according to this year's budget
resolution. So the budget is doing its part with a strong
bipartisan support of those 11 appropriations bills.
So the budget is doing its part; the economy is doing its
part; the appropriators are doing their part; this Budget
Committee is doing its part; and OMB is doing its part.
Everyone is doing a good job and the deficit is falling.
Clearly, this is good news for all of us, but we are far from
finished.
Of course, we have large deficits in the near term and we
have been told not only by you, Director Bolten, but everybody
from CBO (Congressional Budget Office) Director Holtz-Eakin to
Federal Reserve Chairman Greenspan. And while solid economic
growth and controls on discretionary spending are critical in
our efforts to reduce the deficit, we must continue, even
combined, they are not enough.
With the enormous set of challenges and costs heading our
way in the future; including retirement of the baby boomers;
skyrocketing medical costs; shoring up the need to sustain the
health and retirement systems; we need to get our arms around
the largest part of the Federal budget, and that is mandatory
spending.
Go to chart No. 7; people have seen this before. Our
mandatory spending or our spending that operates on autopilot
every year, currently takes up 54 percent of our total budget.
On chart 7, you will see that will continue to grow and
eventually consume 61 percent of our budget if we don't put
some constraints on that spending and some reforms in the
process. It would squeeze out every other priority: education;
veterans; ag; science; you name it, it is squeezed out if we
don't get our arms around Medicare, Medicaid, and Social
Security. The spending is going way beyond our means and far
beyond our ability to sustain it in the long term.
Nobody should sound the dinner bell today because we have
got good news on the deficit and because it is coming down at a
record pace. We have seen it as compared to our GDP at one of
the lowest rates, no one should get on the gravy train and
suggest that now is the time to bust the budget, now is the
time to go over our spending constraints and appropriations,
now the time is to go further in developing mandatory spending.
I am extremely proud of this committee being at the
forefront of this effort. I know we can always suggest that
there is more to do, and of course we know there is more to do.
Director Bolten, I commit to you that we will work
together, side by side with you, to accomplish the job of
continuing to grow the economy, continuing to restrain the
nonsecurity spending, continuing to make sure that we reform
our mandatory programs to make sure that this good news is
sustained far into the future.
With that, I will turn to Mr. Spratt for any comments he
would like to make.
Mr. Spratt. Mr. Chairman, thank you very much indeed. And,
Mr. Bolten, glad to have you back and look forward to your
testimony.
Mr. Chairman, a spike in revenues is welcome news anytime,
but I think in this case, it warrants a wary welcome at most.
We have no assurance that these revenues will be recurring, and
in any event, they leave the deficit at $333 billion, making it
the third largest in nominal terms on record.
Bear in mind, back in 2001, the Bush administration
projected a surplus of $269 billion for this year, assuming
that all their tax cuts would pass. This year's deficit will be
$600 billion off that mark.
Also bear this fact in mind: The bottom line gets worse
before it gets better. The deficit OMB projects for 2006 is
$340 billion. That includes only $13 billion to sustain our
deployments in Iraq and Afghanistan. When you adjust for the
likely cost for those deployments for the full fiscal year, the
deficit for next year 2006 has to be somewhere north of $350
billion. So it is a little early to start cheering.
Whatever the deficits are over the next 5 years, the
deficits over the last 5 years have left us a long-lasting
legacy of debt. Even if the debt begins to taper off in 2007,
there is a mountain of debt that has been built up since 2001.
When the Bush administration sent us their first budget, on
page 3, right at the front, the administration proposed to
retire $2 trillion in debt within 10 years. Far from paying off
this debt, the statutory debt ceiling has been raised three
times in the last 4 years by $2.2 trillion to make room for the
budgets of the Bush administration. And during 2006 the debt
ceiling will have to be raised again by some $750 billion, over
$3 trillion in debt ceiling increases in less than 5 years. As
a result, the Congressional Budget Office observes in its
monthly budget review for June, just published, that interest
on the national debt has become the fastest growing category of
spending in the budget, up $18 billion, 14.5 percent, this year
over last.
Even the Bush administration projects that the cost of
interest on the debt will rise by almost $100 billion between
now and 2010. Once more, the buildup of debt doesn't end even
if deficits do come down. Let us hope they do.
Look on the last page of the MSR, Mid-Session Review, page
44, Debt Subject to Statutory Limitations. And you will see the
debt issued by the Treasury increases from $7.9 trillion this
year to $10.7 trillion in 2010, a huge spike in the debt.
It is true that revenues collected are up, but they are
still below revenues projected. When the Bush administration
proposed and sold its budget with big tax cuts in 2001, the
Office of Management and Budget at that time projected that the
individual income tax would produce $1.118 trillion in 2004,
$1.118 trillion, assuming its tax cuts would pass. In fact, the
individual income tax generated $809 billion in revenues in
2004; that is $309 billion less than OMB projected. This
revenue shortfall, $309 billion, accounts for roughly three-
fourths of the deficit in 2004.
OMB further projected that the individual income tax will
produce and generate $1.157 trillion in 2005. Based on revenues
collected so far, it appears that the individual income tax
will generate about $929 billion in revenues for 2005, $228
billion less than OMB projected. This shortfall accounts for
about two-thirds of the deficit in 2005.
What should concern all of us is that the spike in revenues
that we are seeing may not repeat itself or fully recapitulate.
Two-thirds of the increase in individual income taxes over the
last 9 months has come in the form of nonwithheld taxes. These
are typically taxes paid on one-time capital gains, one-time
bonuses, stock options, and the type of income that may not
recur.
Beyond 2005, all of your revenue projections assume that
the alternative minimum tax (AMT) stays in place. You make no
assumption about repairing it, fixing it, replacing it, or
repealing it. That means revenues of $642 billion higher than
they would be between 2006 and 2015 if the AMT were fixed to
affect no more than the 3 to 4 percent of tax filers who are
affected by it today.
Politically, I think it is inevitable we do that, and yet
you don't address it at all in your budget, and it has a huge
effect on revenues.
Some of the increase in corporate income taxes are due to--
actually, increase in taxes are due to the fact that the bonus-
expiration provision expired on December 31. The most serious
shortcoming of the MSR: It dodges the big event, the elephant
in the room. What happens on December 31, 2010, because that is
when the tax cuts passed in 2001, 2002, and 2003, the extenders
and other things, will come up for renewal.
The Office of Management and Budget's forecast for the
future stops after 5 years, or in 2010, so we don't see the
effect of extending the Bush tax cuts. Using OMB's March
baseline, the best we have got, we picked up where OMB left off
in 2010 and we ran the budget out through 2015.
Put up chart No. 5 please, the table; we will have it when
we come around to questions then.
Let me tell you what we did, because I think it is very
basic and very fair. We assume the Bush tax cuts and the
popular tax cuts like the R&D tax cut will be extended and we
use the Joint Tax Committee's estimates of what the revenue
effects will be.
We assume that the alternative minimum tax will be fixed,
politically, we think it is inevitable. The Treasury Department
tells by 2010, 30 million Americans will be paying AMT instead
of regular taxes, we assume it will be fixed.
We adjust outlays for the cost of our deployments in Iraq
and Afghanistan using CBO estimates after 2006. And we take up
the President's Social Security proposal at the point he leaves
off, extending it from 2010 to 2015. The President put in the
first 2 years of implementing his Social Security proposal; we
put in the balance through 2015. Here is the result we arrived
at, and we show you the chart--a deficit, over $600 billion, in
2015, and cumulative deficits over $4 trillion from 2006
through 2015.
So that is why we propose our wary welcome for the latest
news of the deficit, for the spike in revenues. We don't see
the deficit declining over the long run, 10 years, we see it
rising. When realistic items like those I just described are
factored into your forecast, we think it will set us back and
not move us forward.
If OMB's projections are taken to imply that we are on a
path to a balanced budget, we can just sit back and grow our
way out of the budget, we think it is dangerously misleading on
the eve of fully phasing in and making permanent all of the tax
cuts, leading people to believe that the deficit will keep on
declining when in fact it may be about to explode. That is why
we propose a wary welcome to the news today.
We look forward to questions that will allow us to probe
further the concerns we have, but we thank you for being here
and the work you do for our country.
Chairman Nussle. Director Bolten, welcome to the committee.
Your entire testimony, as written and presented, the report
will be made part of the record and you may proceed as you
wish. Welcome.
STATEMENT OF JOSHUA B. BOLTEN, DIRECTOR, OFFICE OF MANAGEMENT
AND BUDGET
Mr. Bolten. Thank you, Mr. Chairman and Mr. Spratt. Thank
you for the warm welcome back to the committee and the high
tone of the debate that you both set here.
Mr. Chairman, before I begin, I want--I don't normally
recognize folks that come with me to these hearings, but I want
to depart from that today because joining me at the table
today, one seat over to my right, is Dick Emery, who has served
in the Federal Government for 39 years, 20-some of those years
at OMB. He is the senior civil servant at OMB. He heads our
Budget Review Division, which is really at the nerve center of
all that OMB does. He is retiring tomorrow, and I just wanted
to acknowledge him. He has served Presidents and Budget
Directors of both parties with extraordinary capability and
loyalty.
I know I speak for a long succession of Budget Directors
when I express our collective thanks to him and our best
wishes.
Chairman Nussle. Congratulations, and we wish you all the
best in your retirement. And thank you for your service to our
country.
Mr. Bolten. Mr. Chairman, I am pleased to send Dick off
with some good news.
Since last February, when we released the 2006 budget, the
Nation's fiscal outlook has improved dramatically. The U.S.
budget deficit is falling and falling fast. The 2005 shortfall
will be $94 billion less than we projected--less than what we
projected 5 months ago.
We are seeing what happens when you have a strong economy--
more businesses investing, more people working, more income, so
Americans can spend and invest as they see fit. We are also
seeing more revenues coming into the Federal Treasury.
We arrived at this point, I believe, largely because of
this President's policies and this Congress' policies that have
promoted growth, especially the tax relief that many members in
this room were instrumental in putting in place.
Those policies have strengthened the economy, which is now
producing better-than-expected tax revenues. Of the $94 billion
decline in the deficit from last February, $87 billion comes
from stronger receipts, $7 billion comes from lower-than-
expected outlays.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Even as the Nation devotes the substantial resources needed
to fight and win the war on terror, the deficit is now
forecasted to fall from $412 billion, or 3.6 percent of GDP, in
2004 to $333 billion, or 2.7 percent of GDP, in 2005. At its
currently forecast level, the U.S. budget deficit for 2005
would be smaller than the deficits in 15 of the last 25 years
and, Mr. Chairman, as you pointed out, only slightly above the
40-year historical average deficit of 2.3 percent.
Under the President's fiscal policies, the budget deficit
is forecast to continue to fall to $162 billion in 2009, or 1.1
percent of GDP, less than half the size of the average deficit
over the last 40 years. That would significantly surpass
President Bush's goal of cutting the deficit in half from its
projected 2004 peak of $521 billion, or 4.5 percent of GDP.
This rapid improvement in the budget picture demonstrates
the significance of policies that contribute to sustained
economic growth. The implementation of the administration's
growth agenda, especially tax relief, restored growth, and
investment to the economy after multiple shocks, including a
stock collapse, corporate scandals, and the terrorist attacks
of September 11. Tax relief proposed by the President and
enacted by this Congress in each year from 2001 to 2004 reduced
income tax rates, raised incentives for small businesses to
invest in new equipment, dramatically reduced the tax rate on
dividends, and capital gains and phased out the death tax.
Once fully in place, tax relief produced the desired
results. The economy has grown by 12.4 percent since the
recession ended at the end of 2001. Employment is up by 3.7
million jobs since May of 2003 and the unemployment rate has
fallen to 5 percent, lower than the average unemployment rate
in each of the last three decades. Both inflation and interest
rates have remained low and business investment is strong.
Our improved budget outlook is largely a product of
collections of tax revenue which have grown significantly
faster than projected 5 months ago. After 3 straight years of
decline due to economic weakness, tax receipts will have risen
for 2 consecutive years as of the end of 2005. This Mid-Session
Review projects that tax receipts will rise 14 percent from
last year, the largest such year-over-year increase since 1981.
Federal receipts as a share of the economy are projected to
continue rising in future years as well.
Mr. Chairman, we can't yet identify with certainty the
composition of income that yielded this greater-than-expected
surge in tax receipts. The detailed data that would permit such
an analysis won't be available for many months. The data so far
does show, however, that all major categories of receipts--
corporate income tax, payroll taxes, and individual income
taxes--all of those are outpacing our original forecasts.
This experience of the Federal treasury generally has been
matched at the State level, as nearly all States are also
reporting income tax collections above forecasts.
Our improved deficit picture in the budgetary window does
not rely on assumptions that receipts will continue to grow at
this year's rate. Rather, these forecasts are well within the
range of experience in times of solid economic growth. With
these future gains, Federal receipts are expected to rise to
17.4 percent of GDP in 2005. By 2010, the ratio is projected at
18.1 percent, just about the historical average, even assuming
full extension of the President's tax relief program.
Tax relief has had a significant positive impact on the
economy, and that stronger economy is the source of the
improved tax receipts that we are able to report today. To
sustain economic growth, it is critical, Mr. Chairman, that
Congress makes tax relief permanent. Allowing this tax relief
to expire would endanger the economy's prospects, placing into
doubt gains in job creation and business investment that
contribute to increases in tax revenues and further reductions
in the size of the deficit.
Maintaining a strong economy will also require other
progrowth policies. The President's agenda for economic growth
includes passing a national energy bill; opening markets abroad
through accords like the CAFTA (Central America Free Trade
Agreement), which is soon to be before the House; instituting
regulatory reforms and limiting lawsuit abuse.
In this and future years, spending discipline will play a
vital role in deficit reduction. Each year of President Bush's
administration, he and the Congress have brought down the rate
of growth in discretionary spending unrelated to defense and
homeland security. This committee has demonstrated a continued
focus on spending restraint.
I am grateful for the partnership we have with you, Mr.
Chairman, and other members of this committee. I know the
President appreciates your hard work on behalf of the American
people to restrain spending and strengthen our economy.
Thanks to your work, Mr. Chairman, Congress passed a 2006
budget resolution that holds overall discretionary spending to
an increase below the projected rate of inflation, and it
assumed an actual reduction in nonsecurity discretionary
spending compared to last year's level.
Mr. Chairman, I am grateful, too, for the committee's
leadership in seeking mandatory savings through the
reconciliation process. This committee produced a resolution
agreeing to $70 billion in savings, and ultimately, the entire
Congress agreed to $35 billion in savings. This is the first
time since 1997 that Congress will have employed the expedited
reconciliation process to reduce mandatory spending.
As you noted, Mr. Chairman, the House Appropriations
Committee has demonstrated a similar resolve. Under the
leadership of Chairman Lewis, the appropriations bills have
been completed in the House on schedule, all within the limits
set by the budget resolution. We also appreciate the House's
support during the appropriations process to help meet our
goals for halting spending on poorly performing programs.
Through this work, the House has agreed to terminate or reduce
nearly two-thirds of programs proposed for termination or
substantial reduction in the President's budget, achieving more
than $6 billion in savings.
Even so, as you noted, Mr. Chairman, much work remains to
be done. The administration looks forward to cooperating with
the Congress to produce a final set of spending bills that
remain within the President's overall request and achieve a
reduction in nonsecurity spending while meeting the Nation's
priorities.
The Mid-Session Review we are presenting today contains
some items not included in the 2006 budget. The budget
resolution passed by the Congress just recently assumes an
additional $50 billion in 2006 for the continuing costs of
operations in Iraq and Afghanistan. This review assumes
enactment of that funding, which would increase outlays by $37
billion in 2006 and $13 billion in 2007 and beyond. The
administration expects to request additional 2006 funding from
the Congress when requirements for these operations can be
estimated more reliably. This review does not reflect the
effect of undetermined, but anticipated supplemental requests
for operations beyond 2006.
This update also includes the estimated budget impact from
the creation of personal accounts under the President's Social
Security reform proposal. Transition financing for these
accounts would not begin to take effect until 2009 under the
President's proposal, and it is easily accommodated within the
President's deficit reduction goal.
Although transition financing for Social Security is
incorporated into our deficit projections, it should not have
the same effect on capital markets as traditional Federal
borrowing. First, such financing would bring forward
obligations already owed in the form of future-promised
benefits, and as a result, would reduce existing future
obligations by a roughly equal amount.
Second, unlike debt issued to fund government spending,
there would be no net impact on national savings, amounts
deposited in personal accounts would be saved in a personal
account and invested in the capital markets.
As the Nation's near-term fiscal outlook improves, Mr.
Chairman, we have the opportunity and responsibility, as you
emphasized, to confront the real fiscal threat--a long-term
budgetary picture of steadily rising deficits from mandatory
spending programs. President Bush has proposed to address
Social Security's long-term insolvency while offering a better
deal for today's younger workers. As we continue to address the
Nation's long-term fiscal challenges, spending discipline and
progrowth policies, especially sustained tax relief, will be
essential to our success.
Mr. Chairman, thank you for having me here today and I
would be pleased to take your questions.
[The prepared statement of Mr. Bolten follows:]
Prepared Statement of Hon. Joshua B. Bolten, Director, Office of
Management and Budget
I am pleased today to report on the Office of Management and
Budget's Mid-Session Review of the Budget of the U.S. Government.
Since last February, when we released the 2006 Budget, the Nation's
fiscal outlook has improved dramatically. The U.S. budget deficit is
falling, and it is falling fast. The 2005 shortfall will be $94 billion
less than we projected just 5 months ago. We are seeing what happens
when you have a strong economy--more businesses investing, more people
working, and more income, so that Americans can spend and invest as
they see fit.
And with all those economic gains, we are also seeing more revenues
coming into the Federal Treasury. We have arrived at this point largely
because of this President's and this Congress' pro-growth policies,
especially tax relief. Those policies have strengthened the economy,
which is now producing better-than-expected tax revenues.
Of the $94 billion decline in the deficit from last February, $87
billion comes from stronger receipts; $7 billion comes from lower-than-
expected outlays.
Even as the Nation devotes the substantial resources needed to
fight and win the War on Terror, the deficit is now forecast to fall
from $412 billion, or 3.6 percent of GDP, in 2004 to $333 billion, or
2.7 percent, in 2005.
At its currently forecast level, the U.S. budget deficit for 2005
would be smaller than the deficits in 15 of the last 25 years and only
slightly above the 40-year historical average of 2.3 percent.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Under the President's fiscal policies, the budget deficit is
forecast to continue to fall, to $162 billion in 2009, or 1.1 percent
of GDP--less than half the size of the average deficit over the last 40
years.
That would significantly surpass President Bush's goal of cutting
the deficit in half from its projected 2004 peak of $521 billion, or
4.5 percent of GDP.
This rapid improvement in the budget picture demonstrates the
significance of policies that contribute to sustained economic growth.
The implementation of the Administration's progrowth agenda, especially
tax relief, restored growth and investment to the economy after
multiple shocks, including a stock market collapse, corporate scandals,
and the terrorist attacks of September 11, 2001.
Tax relief proposed by the President and enacted by Congress in
each year from 2001 through 2004 reduced income tax rates, raised
incentives for small businesses to invest in new equipment,
dramatically reduced the tax rate on dividends and capital gains, and
phased out the death tax.
Once fully in place, tax relief produced the desired results: The
economy has grown by 12.4 percent since the recession ended in
November, 2001. Employment is up by 3.7 million jobs since May of 2003,
and the unemployment rate has fallen to 5 percent, lower than the
average unemployment rate of each of the last three decades. Both
inflation and interest rates have remained low, and business investment
is strong.
Our improved budget outlook is largely a product of collections of
tax revenue, which have grown significantly faster than projected 5
months ago. After three straight years of declines due to economic
weakness, tax receipts will have risen two consecutive years. This Mid-
Session Review projects that tax receipts will rise 14 percent from
last year--the largest such year-over-year increase since 1981. Federal
receipts as a share of the economy are projected to continue rising in
future years as well.
We cannot yet identify with certainty the composition of income
that yielded this greater-than-expected surge in tax receipts; detailed
data that would permit such an analysis will not be available for many
months.
The data so far do show, however, that all major categories of
receipts--corporate income taxes, payroll taxes, and individual income
taxes--are outpacing forecasts. This experience of the Federal Treasury
generally has been matched at the state level, as nearly all states are
reporting income tax collections above forecasts.
Our improved deficit picture in the budgetary window does not rely
on assumptions that receipts will continue to grow at this year's rate.
Rather, these forecasts are well within the range of experience in
times of solid economic growth.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
With these future gains, Federal receipts are expected to rise to
17.4 percent of GDP in 2005. By 2010, the ratio is projected at 18.1
percent, just about the historical average, even assuming full
extension of the President's tax relief program.
Tax relief has had a significant positive impact on the economy,
and that stronger economy is the source of the improved tax receipts
that are reported today. To sustain economic growth, it is critical
that Congress make tax relief permanent. Allowing this tax relief to
expire would endanger the economy's prospects, placing into doubt gains
in job creation and business investment that contribute to increases in
tax revenues and further reductions in the size of the deficit.
Maintaining this growing economy will also require other pro-growth
policies. The President's agenda for economic growth includes passing a
national energy bill, opening markets abroad through accords such as
CAFTA, instituting regulatory reforms, and limiting lawsuit abuse.
In this and future years, spending discipline will play a vital
role in deficit reduction. Each year of President Bush's
administration, he and Congress have brought down the rate of growth in
discretionary spending unrelated to defense and homeland security.
This Committee has demonstrated a continued focus on spending
restraint. I'm grateful for the partnership we have with you, Mr.
Chairman, and other members of this Committee; I know the President
appreciates your hard work on behalf of the American people to restrain
spending and strengthen our economy.
Thanks to your work, Congress passed a 2006 Budget Resolution that
holds overall discretionary spending to an increase below the projected
rate of inflation, and assumes an actual reduction in non-security
related discretionary spending compared to last year's levels.
I am grateful, too, for the Committee's leadership in seeking
mandatory savings through the Reconciliation process. This Committee
produced a Resolution agreeing to $70 billion in savings, and
ultimately, the entire Congress agreed to $35 billion in savings. This
is the first time since 1997 that Congress will have employed the
expedited Reconciliation process to reduce mandatory spending.
The House Appropriations Committee has demonstrated a similar
resolve. Under the leadership of Chairman Lewis, the appropriations
bills have been completed in the House on schedule, all within the
limit set by the Budget Resolution. We also appreciate the House's
support during the appropriations process to help meet our goals for
halting spending on poorly performing programs. Through this work, the
House has agreed to terminate or reduce nearly two-thirds of programs
proposed for termination or reduction in the President's Budget,
achieving more than $6 billion in savings.
Even so, much work remains to be done. The Administration looks
forward to cooperating with the Congress to produce a final set of
spending bills that remain within the President's overall request, and
achieve a reduction in non-security spending while meeting the Nation's
priorities.
The Mid Session Review we are presenting today contains some items
not included in the 2006 Budget. The Budget Resolution passed by the
Congress assumes an additional $50 billion in 2006 for the continuing
costs of operations in Iraq and Afghanistan. This Review assumes
enactment of this funding, which would increase outlays by $37 billion
in 2006 and $13 billion in 2007 and beyond. The Administration expects
to request additional 2006 funding from the Congress when requirements
for these operations can be estimated more reliably. This Review does
not reflect the effect of undetermined but anticipated supplemental
requests for operations beyond 2006.
This update also includes the estimated budget impact from the
creation of personal accounts under the President's Social Security
reform proposal. Transition financing for these accounts would not
begin to take effect until 2009, and is easily accommodated within the
President's deficit reduction goal.
Although transition financing is incorporated into our deficit
projections, it should not have the same effect on capital markets as
traditional Federal borrowing. First, such financing would essentially
bring forward obligations already owed in the form of promised future
benefits, and as a result, would reduce existing future obligations by
a roughly equal amount. Second, unlike debt issued to fund government
spending, there would be no impact on net national savings, because
every dollar of transition financing would be saved in a personal
account and invested in the capital markets.
As the nation's near-term fiscal outlook improves, we have the
opportunity and responsibility to confront the real fiscal threat: a
long-term budgetary picture of steadily rising deficits from mandatory
spending programs. President Bush has proposed to address Social
Security's long-term insolvency while offering a better deal for
today's younger workers.
As we continue to address the nation's long-term fiscal challenges,
spending discipline and progrowth policies, especially sustained tax
relief, will be essential to our success.
Chairman Nussle. I appreciate your testimony and I
appreciate the willingness you have to come before this
committee and come up to the Hill and talk to us individually.
I don't have any questions at this point. I think I have
made my statement pretty clear and so I will defer my question
time. And I will recognize Mr. Spratt for--just so members,
know, my understanding is we have four votes at any point here,
so I wanted to give Mr. Spratt the chance to ask those
questions.
We may have a vote and recess for that vote, so just so
members are alerted to that schedule. Mr. Spratt.
Mr. Spratt. Mr. Director, thank you again for your
testimony. Let me clarify what you are doing here in this so-
called Mid-Session Review.
What you are doing here is updating the budget submission
you made in February based upon what has happened to revenues
and what has happened to spending in the interim in preparation
for our bringing to final conclusion all of the budget in the
latter months of this fiscal year. In other words, you have
reflected the increase in revenues. You have reflected some
expenditure reductions and increases that weren't included.
But this is the tip of the big pyramid, and the base of the
pyramid is the February budget and it is still part of the
assumption on which you are resting your presentation this
morning. Let me show you what I am driving at.
From pages 19 to 44, you have recapitulated the major items
in your 2006 budget. You assume taxes and spending will be
enacted and carried forward in the projection you make here.
For example, just picking a few things at random: Perkins
loans, I picked them, $5.9 trillion, almost $6 trillion. We are
going to go to the colleges that have been allowed to keep
those funds and revert the funds to the Federal Treasury. You
are assuming that that will still be made law somehow--$5.9
billion.
I will lower the price tag for you.
Mr. Bolten. I knew it was a lot.
Mr. Spratt. Still part of your assumption.
Mr. Bolten. Are we continuing to assume the President's
proposed policies in our budget projections? The answer is yes.
Both those that save money and those that cost money, not all
of which we are likely to achieve.
Mr. Spratt. You would allow them to raise their prices,
market rates, as opposed to having a rate fixed upon historic
cost. That generates about $12.4 billion in revenues.
I am not telling you, but throwing out some things that are
highly controversial that I doubt will be enacted by this
Congress; but they are assumed in your budget both with respect
to revenues and expenditure reductions. We are still assuming
then, the PMA price setting was changed as a matter of law?
Mr. Bolten. We are continuing to assume all of the
administration's policies, both those that cost money and those
that save money. We don't anticipate getting all of them, but
my expectation is, there will be an offsetting effect between
the two of them; and we will, in fact, as we did last year,
come out roughly where we expected to come out, or as we are
this year, even better.
Mr. Spratt. As I read the charts, you are also expecting
over 10 years a $42-billion reduction in the cost of Medicaid,
still assuming that $12-billion reduction over the first 5
years, $42 billion over the full 10 years?
Mr. Bolten. I don't have the exact numbers off the top of
my head, but I believe that is roughly accurate. In the budget
resolution adopted by this committee and the Congress there is
a substantial reduction likely from Medicaid, assuming that
will be accomplished through the reconciliation process.
Mr. Spratt. As I recall, it was $10 billion over 5 and no
designation of what it would cost in the outyears.
One thing that is built into your baseline automatically is
an adjustment in physician payment rates under Medicare as a
result of something called the ``sustainable growth rate,''
which is a policy administered by MedPAC. As I understand what
you presented here, you say that certain things are going up,
but they have been offset by the decrease in physicians' pay
and doable medical equipment rates that will be dictated by the
sustainable growth-rate factor.
Are we still assuming that for 10 full years there would be
percentage reductions every year for 6 years and no recovery of
that in the baseline for Medicare spending? Physicians' pay
will be cut this year, next year, and the following year with
no restoration of it, it is a big number. If you simply froze
it in place, I understand that the cost will be $50 billion as
opposed to what is built into the baseline with the
implementation of this sustainable growth-rate factor.
Mr. Bolten. Mr. Spratt, we do assume the continuation of
existing law. That sustainable growth rate is part of the
Medicare law that was adopted by the Congress and signed by the
President.
Mr. Spratt. You are not proposing a change in the law?
Mr. Bolten. That is the law until there is such a change or
we have put in our budget requests a proposal to change it,
then we do assume it. I understand there will be a great deal
of interest in making some modification in that sustainable
growth rate. My hope and expectation is, we will be able to do
that within the budget levels that have been agreed to.
Mr. Spratt. The point I am driving at is that all of these
are fairly significant items, particularly when you take them
in the aggregate, and they are all controversial; and I would
say there is an odds-on chance of not making it through this
budget season.
A lot of this stuff you are proposing has been around the
track many times. You would propose to charge $250 to 7 and 8
Category veterans to use the veterans health care facilities. I
think that is about as dead a duck as there is in Congress. It
is not going to happen, and it is still here.
You would propose to have the USDA pay to have the food
inspectors paid by food processors. That has been around--for
the 20 years I have been in Congress, it has never passed.
There is a lot of stuff built into your assumptions and
baseline, that bottom of the pyramid, that I don't think is
going to happen; and it is going to have a big effect on your
bottom line unless we come up with alternative policies--and I
don't know what they are going to be--that will make up the
difference.
Mr. Bolten. Mr. Spratt, that makes the point I was trying
to make and that is, we assume in our budget projections the
implementation of the President's proposal, which is the proper
thing to do and always has been done.
Mr. Spratt. The question I am raising, is it realistic to
make those assumptions at this point in time?
Mr. Bolten. I think it is.
Mr. Spratt. Do you think it is realistic that Congress
would pass a $250 fee for veterans?
Mr. Bolten. We can talk about the veterans policy. But the
point I am getting at is, we have in fact proposed that policy
in the past and we have in fact come in at or below the
aggregate spending levels, just as we are this year.
The point I am trying to make is, yes, we include all of
our policies. Some of our policies save money, some of our
policies cost money; we don't expect to get all of them.
When we get to the final budget tabulation at the end of
the year, we will be at or maybe even better than where we
expected to be at the end of the year. We are ending up with a
final deficit figure very much lower than we expected to end up
with, and yet we have many of those same policies that
ultimately were not enacted assumed in our budget. We had other
policies that would have cost money that weren't adopted.
Mr. Spratt. The point I am trying to make is, if a major
part of your budget is based upon politically unrealistic
assumptions about fees that have been proposed and rejected in
the past, then the results you are holding out may not be
attainable.
Mr. Bolten. I think the results we are holding out are
entirely attainable, and our record shows not only are the
results attainable, but in fact we can exceed them. We are
exceeding our expectations this year in just the last 5 months
by $94 billion.
Mr. Spratt. Let us go to revenues, because that is the
biggest development since last February.
Last February you had a pretty robust estimate for this
year and next year with respect to revenues. It now turns out
it wasn't robust enough. The revenue growth has been even
greater than anticipated. I think you have added $87 billion to
2005. You are adding $95 billion to the baseline, already a
substantial number for 2006. And over the 5-year forecast, you
are adding $406 billion to what you are projecting in the way
of revenues back in February.
Most of the spike that we are seeing in revenues, if you
take individual income tax, for example, is based upon factors
that may not be recurring. It is 66 percent of the increase in
individual income taxes over the last 9 months is attributable
to nonwithheld income, which means typically taxes levied on
stock options, salary bonuses, and capital gains, which may or
may not be repeated in the following year.
I believe you used to be an employee of Goldman Sachs, let
me show you Goldman Sachs.
Mr. Bolten. I am smiling.
Mr. Spratt. We have been preempted by the floor.
Mr. Bolten. I remember the days when I made a lot more
money.
Mr. Spratt. You didn't get to deal with big numbers like
this.
Here is what Goldman Sachs says. We see the propects for
additional cyclical reduction limited to 2005. The tax bonanza
has been concentrated in the final settlements of 2004 tax
liabilities. This is why it suddenly appeared in April and May.
Thus the lion's share of this year's extra tax receipts
reflects last year's strong profits, and that means conditions
are not conducive.
You have carried these increments that have been added this
year and assume they will repeat themselves over the next 5
years. Do you think that is defensible?
Mr. Bolten. I think we have made very moderate projections
going forward. First of all, with respect to the analysis you
have just identified, I have great respect for and I know the
folks who produced these estimates, but I don't think they are
suggesting that our estimates are necessarily far off, No. 1.
And No. 2, this same team projected last year that the
deficit in 2005 would be $450 billion. We are actually coming
in at $333 billion, and that is just over the course of a
little more than a year that this team's calculations have been
off.
We are indeed making, very moderate projections going
forward. The increase in revenue this year at over 14 percent,
as the chairman pointed out, is remarkable. It is the largest
increase in revenue in 25 years, maybe the largest real
increase in much longer than that. We are not assuming,
however, that we are going to get that kind of 14 percent
increase year over year.
If you will look at--Mr. Spratt, if I may call up a chart.
If I could call up chart 6, what you see there in the medium
blue line is 2005, where we have receipts going up 14 percent.
In the years succeeding that, our projections show receipts
growing by about 6 percent, which is entirely consistent, in
fact a relatively moderate expectation for years of solid
growth in the 3 to 3.5 percent range, as we are now projecting.
Mr. Spratt. That 16 on a pretty big base, because you have
the $87 billion, $95 billion additions, assuming that the surge
will carry forward.
Mr. Bolten. Two points about that. First, with respect to
those elements that may have been--that may be one-time in this
14 percent increase, we were aware of those. Those are things
like the bonus depreciation, the repatriation of profits, and
even some of the elements of the increase in individual income
tax; and those were accounted for in our 2005 estimates.
But more than that, as you look into the outyears and you
look at historical precedent, when an economy is growing, there
is very little precedent for an actual fall in revenues from
the base you are operating from. So in terms of----
Mr. Spratt. I am not saying your fault, whether the surge
at today's level can be predicted forward. You do taper it off
a little bit. I notice the numbers, but 8 into--5 into 406
comes out to $80 billion a year. You have a fairly substantial
increase there that you are assuming will carry forward.
Mr. Bolten. I think so, but I think the projections going
forward are quite moderate and based on moderate assumptions on
economic growth.
Mr. Spratt. I have one more question, and we will be back.
Chairman Nussle. We will resume following the final vote on
the floor.
[Recess.]
Chairman Nussle. We will resume the budget hearing. Mr.
Spratt indicated that he had one final----
Mr. Spratt. Just in time.
Chairman Nussle. All right. I was actually going to
preserve your chance and go to Mr. Neal. But I will let you
ask--you said you had a final question. And then we will go to
Mr. Neal.
Mr. Spratt.
Mr. Spratt. Mr. Director, I would like to show you our
effort to try to extend this 5-year forecast to a 10-year
forecast using assumptions about numbers that are either yours
or CBO's, and this is a bit crowded. Do you have a copy of it
in front of you so that you can see it?
Mr. Bolten. I do, Mr. Spratt, and I appreciate the courtesy
of your staff in bringing it to me during the break.
Mr. Spratt. What we have tried to do is take this chart
through 2010, using your numbers, and then match it with the
CBO baseline for March of this year, and it is an uneven match.
I will grant you there is not a complete interface there, but
nevertheless we have connected the two.
And when you look at the bottom line, the very bottom line
in red, you will see what concerns me. The reason I ended my
testimony, my statement, with the concern about the dire
results we are looking at in those years, and why we don't
think that we are looking at a situation where the deficit is
going to decline and disappear. In fact, if all of the tax cuts
renew, if the popular tax measures like the R&D tax credit
renewed, if all of these renewed as of 2010, if the AMT is
fixed--and we think politically it has to be, Treasury
Department tells us 30 million tax filers will be paying that
AMT instead of the regular rate in 2010--if you assume those
things, if you put in the cost of the war--and let me tell you
what that is. We are assuming here as CBO assumed, they did a
model. CBO in effect said, look, we are not comfortable putting
in the full amount of the supplemental and running it out for
10 years, we think that overstates the cost of the war; on the
other hand, zero doesn't give you an accurate forecast. So they
tried to determine what would be, in the second 5 years from
2010 through 2015, what would be a fair approximation. And what
they have assumed is that beginning after 2006, the number of
troops will draw down in Afghanistan and Iraq to about 20,000
in each theater, 40,000 altogether, and that level will be
maintained as a steady state for the whole time frame here. The
cost of that is $384 billion.
We have assumed that the first 2 years of the
implementation of the President's Social Security privatization
plan will be enacted as you presume. Heretofore when we have
done that, we have been on rather tenuous ground, but now you
put those two numbers in your budget, so we are just hooking up
8 more years of what we expect to be the likely cost of that in
the first 10 years, per the actuaries at Social Security. When
you put all of that together, the bottom line after 2010 goes
dramatically upward from $275 to $478 to $481 billion in 2012
to a deficit of $534 billion in 2013, to, finally, a deficit of
$629 billion in the year 2015. The cumulative deficit for 2006
through 2015 will be $4.2 trillion. I don't think you would
call that a desirable result. Where are we wrong?
Mr. Bolten. Mr. Spratt, I believe the assumptions are wrong
in many places. First of all, in those subsequent 5 years that
are outside the budget window that we project and publish, you
are using a CBO baseline that I expect even CBO doesn't agree
with at this point, because you are using their March baseline,
and my guess is that when they come out in August this will
improve as well. We have not consistently agreed with the CBO
baseline as the right way to go forward, even if we were back
in March.
Second, I am gratified that you have assumed the inclusion
of $173 billion in transition financing for the President's
Social Security personal accounts. May I report to the
President that this reflects some support on your part.
Mr. Spratt. On Social Security?
Mr. Bolten. Yes, sir.
Mr. Spratt. I wouldn't want to misrepresent that to the
President.
Mr. Bolten. All right. I will defer on that, but I am
gratified that you have included that number in there.
Mr. Spratt. I am simply picking up with where you left off
using the actuaries' numbers.
Mr. Bolten. But I do want to highlight that number in
particular, because the--as I mentioned in my prepared
testimony, the transition financing that does need to be
incorporated into our deficit calculations is very different
from the addition of government spending because it is not in
the aggregate adding to the overall debt of the United States
in any substantial way. When we do transition financing for
these personal accounts, that is merely bringing forward an
obligation that the Federal Government already owes to the
retirees, letting them keep and invest some of their own money
sooner than the Government would otherwise have to pay it back
to them later.
Mr. Spratt. But instead of having a balance in the Social
Security trust fund resulting from the surpluses being
accumulated there to about 2018, that money would be put in a
private account, and therefore the surplus in the Social
Security trust fund will be smaller as an offset to the rest of
the budget.
Mr. Bolten. Sure. And the obligations that the Government
owes to that retiree later would correspondingly be smaller.
What I am emphasizing here about that----
Mr. Spratt. But for bookkeeping purposes, I think it will
be just as we booked it here. I think it will still diminish
the unified surplus.
Mr. Bolten. Absolutely. But what I am pointing out here is
that you would have to recognize the deficit effect, as we do
in our own budget calculations going up through 2010, we would
have to recognize the deficit effect of those--of allowing
people to keep some of their own money in personal accounts.
What I am pointing out is that is very different from
increases in government spending which, overall, add to the
long-term debt of the United States. I am assuming that, and in
fact we should anticipate that along with the creation of these
personal accounts there would be other reforms made to Social
Security that would make the system sustainable on a long-run
basis, bring it back into solvency. And I think the effect of
all that on the budget cannot be viewed as anything other than
a tremendous improvement over time.
Mr. Spratt. But you are arguing effects now, the economic
effects. What I am arguing for starters is just the bottom
line; what are the numbers going to be. Look at the subtotal,
the President's omitted agenda beginning in the year 2011. This
is the sum of the further cost of the war, an AMT fix, and
Social Security privatization for the most part, including debt
service after those adjustments are made: $211 billion in 2011;
$251 in 2012; $289 in 2013; $329 in 2014; and an additional
$373 billion in 2015.
Aren't those numbers pretty much by the book? Wouldn't you
agree that if these policies are implemented we would have--or
carried forward, we would have an adjustment to our bottom line
in those relative magnitudes?
Mr. Bolten. I think what I was trying to say, Mr. Spratt,
is that I don't agree at all to the assumptions, and I don't
think any fair observer would agree with the--as I said, the
continuation of the CBO baseline. I don't think a fair observer
would anticipate necessarily that we, in 2015--that is, 10
years from now we would be spending $28 billion on the war in
Iraq and Afghanistan.
And with respect to the AMT that you have incorporated some
calculations in there, the administration does believe that the
AMT needs to be reformed. We believe that it can be reformed in
the context of an overall budget-neutral fundamental tax
reform.
So I don't--I have to say I don't accept any of the
assumptions that produce these numbers. And from my
perspective, I don't think they at all change the outlook or
the fundamental trajectory, the very positive trajectory on
which our budget deficit situation appears to be headed not
just in the next 5 years but in the years beyond.
Now, if I can add one thing, Mr. Spratt. If you were to
take this chart even farther out, I would be in complete
agreement with you that we face a very serious problem that the
chairman himself highlighted in his opening statement, and that
is the tremendous unfunded liability in our entitlement
programs: Social Security, Medicare, and Medicaid. That problem
arises because of the retirement of the baby boom generation,
the explosive growth in health care costs that we have
experienced over the last several decades, and the actuaries
project will continue, and those are problems that I think need
to be addressed on their own.
There is, in my judgment, there is nothing that can be
done--even if we were to take your view of increased taxes,
there is nothing that could be done on the basis of taxes or
discretionary spending that could alter that trajectory in any
substantial way. We need fundamental reform of our entitlement
programs. But if what you are asking me about is the next 5
years, probably even the next 10 years, I believe our budget
trajectory is very positive and based on very sound policy.
Mr. Spratt. But you sort of make my point, which is this is
no time to be running huge deficits. We should be saving and
preparing for the extraordinary demands that our entitlement
systems and our aging society will impose upon us in the very
foreseeable future. Indeed, if we kept our books the way the
rest of the world and the whole business community keeps its
books, by accrual accounting, these numbers would look several
times worse than they apparently do, particularly since these
are liabilities we know we have incurred already. These are not
promises that are empty promises. We have promised people
things based upon things they have done in reliance upon our
promise; and knowing that, we should be booking those
liabilities.
But I am simply saying to you, I think adjustments of the
magnitude we have got here for the omitted agenda are
reasonable.
Let me ask you about the alternative minimum tax. As long
as it is on the books with no adjustment, no patch or anything,
it means that you will actually have sort of a tax increase by
virtue of the AMT. It is kind of a hidden increase in the
budget, because every year people pay higher than the posted
rates of taxes who are affected by the AMT. Wouldn't you agree
it has to be fixed, changed, or repealed; something has to be
done before it reaches $30 million tax dollars?
Mr. Bolten. Yes, the administration does agree that the AMT
tax----
Mr. Spratt. But you don't have that anywhere in your
projections over the next----
Mr. Bolten. We believe that the AMT can and should be
reformed in the context of overall budget-neutral fundamental
tax reform.
Mr. Spratt. And you would agree there is going to be some
significant cost for Iraq and Afghanistan certainly after 2006,
and probably for some years to come.
Mr. Bolten. I was explicit about that in my testimony. But
what I wouldn't agree to is that by 2015 anybody can tell us
that we are spending $28 billion in Iraq and Afghanistan.
Mr. Spratt. Well, that is 20,000 troops in Iraq and 20,000
troops in Afghanistan and in the theater, it is about two
divisions. Let us hope we are not. I hope you are right on that
one. But it is not an unrealistic assumption on CBO's part. We
will have a substantial troop presence. Particularly in a place
like Afghanistan; 20,000 troops in a country that size is not a
large assumption.
Mr. Bolten. Mr. Spratt, I don't know how anybody can pre-
direct what the situation there will be in 2015 or in fact
whether--if there is to be a continuing presence there a full
10 years from now, whether that is not entirely absorbable
within the regular defense baseline.
Mr. Spratt. Well, the bottom line that we are not sharing
today is we are looking after 2010 and we see some dire results
after 2010; by our calculation, a deficit in the year 2015 of
$629 billion and a total accumulation of debt of over $4
trillion. So that gives us grave concern, No. 1, that we are
not on the path to a declining deficit. And No. 2, if people
get euphoric about today's numbers, it may take some of the
unction, some of the impetus for moving forward and making
those hard decisions away from us.
Mr. Bolten. Mr. Spratt, I want to endorse your call against
irrational euphoria and second the chairman's comment that this
is not the time to ring the dinner bell, this the time to
redouble our efforts at spending restraint. I believe the
President's budgets reflect that, and we look forward to
working with you to accomplish their objectives.
Mr. Spratt. Thank you, sir.
Chairman Nussle. Mr. Bradley.
Mr. Bradley. Thank you very much, Mr. Chairman. Pleasure to
be here this morning.
Director Bolten, I am glad that you are here with good news
on the budget. Going from $521 billion projected a year or so
ago to $333 billion is indeed not just a step in the right
direction but significant progress. And I think it is important
to note that a growing economy is incredibly important for
that, coupled with fiscal restraint.
And so I am pleased that your message has stayed that we
need to continue to grow the economy and exercise fiscal
restraint.
Let me, since I am on both this committee and the Veterans'
Committee, let me touch on briefly an issue where there has
been some projection snafus, and thankfully, due to, among
others, the leadership of the chairman of this committee as
well as the administration, progress made to fix those
veterans' spending problems.
But my question is: Are you assured that the projections
that you have given us over the last couple of weeks--there is
the $975 million shortfall and now potentially another $300
million in this fiscal year and perhaps as much as $1.7 billion
in fiscal year 2006--are you relatively assured that those
numbers now are accurate and they will not change again?
Mr. Bolten. Mr. Bradley, thank you for that comment and
thank you for the question. We did have a substantial error in
our 2005 and 2006 calculations in the amount of money that
would be needed for veterans medical care. The error was based
principally on a miscalculation of how many veterans would be
coming new into the system. The Veterans Administration was
projecting about 3 percent less than the 5.2 percent increase
in the population that they ultimately are now seeing coming
into the system in this year in 2005, and we now have to
project forward into 2006.
Secretary Nicholson has done a good job of trying to get
his hands around that problem. I know that you and some other
members of the committee have been very actively involved in
ensuring that he does do that. He has taken a very careful look
at their projections. He has taken a very careful look at how
the mistake was made and how we can prevent it in the future.
And I think he has made a great deal of progress in that and he
has the full support of OMB in ensuring that, because the
President's direction to me on this matter is, as it always has
been, to ensure that our veterans get the best possible quality
care and the care that they have been promised and the care
they are entitled to.
Mr. Bradley. Thank you for that answer. I am pleased that
you have taken steps in working with Secretary Nicholson to
rectify the situation, make sure that the projections are
correct in the future. And I hope that you can address this if
you wish. Part of taking those steps is to increase
transparency of budgeting, working with some of the outside
veterans groups on the budgeting, and perhaps you can address
that.
But the second part of my question, and perhaps we could
have slide No. 17, is the improved quality of care of the
Veterans Administration hospitals and the facilities. There
have been a couple of newsworthy news reports, both in ``U.S.
News and World Report'' and the ``Washington Monthly,'' that
have talked about the improving quality of care at the VA. And
my question to you is that 10 years ago that wasn't the case,
and there were a number of reports that said the quality of
care was not that good.
Would you discuss the changes that have been made to
turning around that quality of care that is so important for
our Nation's veterans? And perhaps as I look at these charts,
that has a major component in why we have been able to turn
that around.
Mr. Bolten. Mr. Bradley, this administration came in with a
high-priority task of ensuring that our veterans got the best
possible quality health care. Historically that has not always
been the case, and I think we have made tremendous progress in
the 4\1/2\ years since this administration has been in place. I
think Secretary Nicholson can report today that we are serving
more than a million more veterans than we have in the past with
better-quality health care on a faster basis than they have
ever been able to do before.
You noted some outside reports. I noticed that one of my
colleagues just passed me an article that you referenced from
``U.S. News,'' entitled ``Military Might: Today's VA Hospitals
are Models of Top-Notch Care.'' Now, this is not a case for
complacency. There is a still a great deal more that Secretary
Nicholson believes needs to be done. There are still many
elements of veterans health care that need to be improved--both
in terms of dollars, as the chart you have just put up shows,
and in terms of commitment to ensuring high-quality care. I
think the record has been and will remain a very strong one.
Mr. Bradley. If I might just have a few more seconds, Mr.
Chairman, certainly anecdotally when I talk to veterans in my
district, they are always concerned about the level of funding,
but I always hear the quality of care is dramatically
improving. Your or Mr. Nicholson's former predecessor,
Secretary Principi, was very helpful in my district in opening
up a new outpatient clinic, and those have been a tremendous
success. So I would agree with you that there is always work to
be done. But the VA health care system is among the best health
care in our country today and certainly you and Secretary
Nicholson and Secretary Principi deserve credit for that. And I
thank the Chairman for yielding me the few extra seconds.
Chairman Nussle. I thank the gentleman. One note of concern
that I would forward is that obviously a lot of attention has
been given to the underprojection this year. As I understand it
this is on the heels of I believe at least 2, maybe 3 years of
where we had more than enough resources available in VA health.
So, I don't know if it is as much of a question, as it is a
concern that we do want to hit this a little bit more on the
dime, and it is difficult to budget without having accurate
projections. I realize that is singing to the choir, because
you can't do it either. This is the concern, and it makes news
when it is underprojected, but this is not news. This has,
unfortunately, been a projection challenge that has been
ongoing for the last couple of years.
I don't know if there is anything there that you would like
to comment on, Director, but that is an observation that I
have. We have got to hit this a little bit tighter if we are
going to be able to make plans for the future in our VA health
and VA budgets.
Mr. Bolten. Mr. Chairman, if I may comment briefly. I think
you are absolutely right. And there have been 3 consecutive
years preceding this one in which there was more money
requested by the administration and more money appropriated by
the Congress for the medical care portions of the veterans
services than was actually needed in that year. I think the
appropriations have exceeded the VA medical care needs by over
half a billion dollars in each of the proceeding 3 years. So
our calibration----
Chairman Nussle. I don't remember any complaints about
overprojection.
Mr. Bolten. Our calibrations haven't been precise and you
certainly want to--in the case of VA medical care, I think you
certainly want to overshoot than undershoot. The President and
I know Mr. Bradley, other members, and you were all committed
to ensuring that there is never a shortfall in what we provide
our veterans.
If I can add one other comment, though, to Mr. Bradley's
comment, and that is that indeed the reputation and I think the
reality of the quality of care in the VA system has improved
substantially in recent years. This may have contributed to the
additional unexpected inflow of veterans into the system,
because it is an increasingly attractive system, particularly
compared to what is available in the private sector. Secretary
Nicholson believes that that may have contributed to the size
of the unexpected inflow of the veterans into the system. That
is not to excuse the error, but it must be a partial
explanation.
Chairman Nussle. Thank you. Mr. Neal.
Mr. Neal. Thank you very much, Mr. Chairman. I think part
of that is also the number of veterans who are using the
prescription drug benefit of the VA? Is that a fair assessment?
Mr. Bolten. My guess is it is. And my guess is the
prescription drug benefit is one of the attractions that draws
a lot of members into the VA.
Mr. Neal. So you have people that perhaps might not have
used it in the past, but because of the cost of prescription
drugs they have moved in that direction.
Mr. Bolten. Yes. What Secretary Nicholson told me is that
you often have a situation where a veteran who is otherwise
eligible for veterans care, but is getting his care elsewhere
in the private sector but not getting prescription drug
coverage, decides to go over to the VA to get the prescription
drugs. They find out that they like the system overall and move
all of their health care over into the VA system.
Mr. Neal. OK. Thank you, Mr. Bolten. Let me ask you, when
can we expect next year to receive a supplemental request for
the wars in Iraq and Afghanistan?
Mr. Bolten. I don't know that we will depend entirely on
the actions on the ground. What I can tell you is that the $50
billion reserve that this committee put into the budget
resolution, which we are assuming in our projections going
forward, will take us substantially--assuming that level or
something like that level is actually enacted by the Congress,
which I think is a reasonable expectation--will take us
substantially into 2006. Exactly how far into 2006 it will go.
I will continue to argue that we should wait as late in that
process as possible before requesting supplemental funding so
that we can get as precise an estimate as possible of how much
money we will actually need before we make that request to you.
Mr. Neal. Well let me ask you then, Mr. Bolten. You can
state with certainly, however, there will be a request for a
supplemental next year?
Mr. Bolten. No, I can't state with certainty, but with a
high degree of likelihood I think.
Mr. Neal. OK. You mentioned that any fair observer, before
when you were responding to Mr. Spratt's questions. Do you
think Lawrence Lindsey was a fair observer of the budget
process and the needs for dollars for Iraq and Afghanistan?
Mr. Bolten. I think Larry Lindsey is a brilliant economist
and I am sure others would say he is a fair observer.
Mr. Neal. You know where I am going, Mr. Bolten. You know
exactly where I am going. How come when he suggested that it
was going to cost at least $300 billion, the reaction from the
administration was so negative? I mean, the administration said
that in some instances we are going to be welcomed as
liberators; and others, we would be out of there in no time.
And recently, I mean, a high-ranking member of the
administration suggested that the insurgency was in its last
throes.
And I am just curious as to why, when Mr. Lindsey raised
the specter of a $300 billion price tag, that there were such
long frowns at the White House.
Mr. Bolten. I don't recall exactly what it is that Dr.
Lindsey said.
Mr. Neal. He said it was going to cost $300 billion at
minimum.
Mr. Bolten. Well, regardless, I recall----
Mr. Neal. You picked the term ``fair observer,'' Mr.
Bolten. Any fair observer, I think you said. That is what we
are trying to be here today, fair observers.
Mr. Bolten. Dr. Lindsey, I don't recall what his projection
was, I don't recall the context. I don't recall even the frowns
at the White House.
Mr. Neal. Would you recall that he was relieved of his
responsibilities shortly thereafter? You don't recall that
either?
Mr. Bolten. No, I do recall that he left. I don't think
there was any connection at all.
Mr. Neal. Do you want to check with your assistants that
are here about that $300 billion price tag? Would they agree
with the number that I have offered?
Mr. Bolten. It doesn't matter to me to answer this
question.
Mr. Neal. That is the point. The point that I am trying to
make, Mr. Bolten, is I understand precisely what you are
saying. It is very hard to gauge what this is going to cost.
But that is the trouble when we look at--and I was a cosponsor
with Mr. Weller of the depreciation issue, and I think you
would agree that that has bumped up revenue.
Mr. Bolten. I am sorry. Which proposal?
Mr. Neal. The accelerated depreciation exploration.
Mr. Bolten. Yes.
Mr. Neal. So would you agree that that has bumped up
revenue?
Mr. Bolten. Yes, and that was included in our projections
when we made our initial projection in 2005.
Mr. Neal. And it is hard to suggest, for example, that all
of the numbers that you have given us today have just been
based upon administration strategy, isn't it, given the fact
that we all know that we are going to need another supplemental
for Iraq come perhaps next spring? I know administration
officials have suggested to me that it could be in February or
March of next year. Is that a fairly accurate suggestion?
Mr. Bolten. I don't know when it will come forward. My
expectation is we will need additional supplemental funding for
the wars in Iraq and Afghanistan.
Mr. Neal. And in the past, the two supplementals have not
been put on budget; is that the case?
Mr. Bolten. They have been emergency supplementals, which I
believe was then, is now, and will be the right way to handle
any sort of war funding.
Mr. Neal. OK. I appreciate you responding to the question.
But there are a lot of uncertainties, and I think that it
is also fair for those of us who are a bit more skeptical on
this side to at least raise the specter, these numbers being a
temporary snapshot as opposed to a long-term snapshot, I think
as Mr. Spratt has accurately pointed out.
Thank you, Mr. Chairman.
Chairman Nussle. Thank you. Mr. Ryan.
Mr. Ryan. Thank you Chairman.
Let me just add on to what my friend Mr. Neal said. And
then I just had a question about tax receipts. Slide No. 14 is
what I am going to reference.
Each year we have our deficit projections, we have our
budget projections. The administration has their policies,
Congress enacts its policies. It all comes out in the wash and
the macro effect that we have seen is the deficit is down by a
historic precipitous drop. And so in years past, we have had
supplementals for Iraq and Afghanistan. We may have acted on
some of the administration's policies, and we may not have
acted on some of the administration's policies. That happens
every single year.
Taking all of that into effect, I think it is important to
note that we have an incredible thing happening here. The
deficit went down by $94 billion this year. We are down from
$521 just a year ago, from our projections. That is good news,
and that is very, very important.
So what I wanted to simply ask you, Mr. Bolten, is I
realize, you know, we want to take you for everything that you
have in your budget that you propose and if we don't hit that,
that is going to blow up our deficit projections; but we have
not ever acted on everything that the administration has
proposed in its budgets, yet we are still overperforming
against the benchmark that we have plodded toward in performing
on reducing this deficit. And one of the things that is doing
this are income tax receipts and tax receipts in general.
And so the question that I just really want to ask, which
is really interesting to me, on slide No. 14, if you take a
look at 2002 we had a large drop in tax receipts. In 2003 we
had a significant drop in tax receipts. And in July of 2003,
that is when the tax cuts were enacted. Now, the 2001 tax cuts
were tax cuts that were slowly phased in over time. The 2003
tax cuts were the acceleration of those 2001 tax cuts in
addition to the--I think the bonus depreciation. So the tax
cuts actually took effect really in 2003, in July I believe it
was; and so then you see immediately thereafter, in 2004, a
surge in revenues. In 2005 we have this huge $260 billion
increase in revenues.
So the question I have, Mr. Bolten, is to what extent since
those tax cuts passed have we increased revenues above what we
projected them to be? And how much of that is attributable to
this declining deficit?
Mr. Bolten. Well, first of all, Mr. Ryan, I think you have
stated the case better than I did to begin with. You are
exactly right that the revenue projections that we have, the
good news we have today is the result of increased revenues
coming into the Treasury as a direct result of economic growth
that was ignited, I believe, by the tax cuts.
The numbers you point out are accurate. The 2003 tax cut,
which accelerated the reductions in rates, brought them
forward. The following year, with those tax cuts fully
implemented, was a year of rising receipts, after the first 3
consecutive years of falling receipts since the 1920s.
Mr. Ryan. So income tax receipts went up as well.
Mr. Bolten. Yes.
Mr. Ryan. So we lowered income tax rates, yet after that
lowering of those rates, the rates from those lower tax rates
were actually higher than they were before at the higher tax
rates.
Mr. Bolten. They were indeed.
Mr. Ryan. What is the difference in projections? I think,
you know, Austin may have that behind you there. What is the
difference in projections that you had from 2003 on up when
those tax cuts took place?
Mr. Bolten. Mr. Ryan, I may have a number for that. If I
don't have it at my fingertips I will submit it for the record,
because it is a very substantial number. However, I don't have
it fingertips.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Mr. Ryan. That is something I would be interested in seeing
and we will get it later.
The last point or question I have is Mr. Spratt correctly
lined up the fact that we do have a tax tidal wave coming in
this country at the end of the decade. We have the alternative
minimum tax coming in each year. We have the President's tax
cuts going away. In your baseline you do project, don't you,
that we are going to extend those tax cuts, correct?
Mr. Bolten. Our baseline assumes the permanent extension of
all of the President's tax cuts except for those like the bonus
depreciation which were intended to----
Mr. Ryan. Which were already temporary. And I would just
simply say--as a member of Ways and Means who serves on this
committee as well--to Mr. Spratt that, you know, that is the
reason we are having a tax commission, to rethink how we can
better have a tax system to make us more internationally
competitive, have a fairer, simpler tax system to improve our
economy. But also to fix some of these problems that are on the
horizon; not just the lack of permanency for these tax cuts and
expiring provisions, but things like the alternative minimum
tax. That is why we do have the President's Commission coming
back, I think at the end of September now, to visit these
issues.
So it is not as if that is an issue that is just hanging
out there that no one is paying attention to. Not only does OMB
and this committee budget in our projections the extension of
those tax cuts, we are also trying to think through how best to
move forward with respect to the AMT and these other tax
provisions so we can get this kind of success that we are
seeing here today.
I see my time has expired so I thank you, Chairman.
Chairman Nussle. Thank you. Mr. Allen.
Mr. Allen. I remember it wasn't so long ago when Alan
Greenspan sat in that chair, and when asked about the effect of
tax cuts, I think he accepted the tax cut reduction in taxes on
dividends. But other than that, he said there is no significant
continuing effect from the tax cuts passed in 2001 and 2003.
That is what I recall.
I have a specific question, and I am not going to--I can't
call Alan Greenspan back to testify today, but that is my very
clear memory of what he said.
I wanted to ask you, Mr. Bolten, a question about the
Medicaid program. The President's budget proposes deep cuts to
the Medicaid program, and the actuaries at HHS (Health and
Human Services Department) have estimated gross savings of $20
billion over 5 years and net savings of $12 billion over years.
When the CBO reviewed the President's proposals, they were
unable to provide estimates for many of them due to a lack of
detail. Representatives Spratt and Dingell sent a letter to you
on April 13 of this year asking for more information about the
administration's Medicaid proposals. The letter expressed a
concern, which I share, that cutting Medicaid will merely shift
cost to the States, which are already struggling with their own
financial problems; secondly, to beneficiaries who can ill
afford them; and third, to providers in the form of lower
payment rates.
The letter that was sent on April 13 requested estimates of
the impact on States' analysis of the effect on beneficiary
cost-sharing and coverage and the effect on provider groups.
Representatives Spratt and Dingell have yet to receive an
answer to that letter. And I will be glad to provide you with a
copy.
But the question is: Can we expect an answer soon--and by
what date--to that particular letter? I will hand it to your
staff.
The White House,
Office of Management and Budget,
Washington, DC, June 20, 2005.
Hon. John M. Spratt, Jr.,
Committee on the Budget, House of Representatives, Washington, DC.
Dear Representative Spratt: Thank you for your letter of April 13,
2005, regarding Medicaid proposals included in the President's FY 2006
Budget.
We support Congress's effort to restrain spending growth within the
Federal Budget in the recently passed FY 2006 Budget Resolution. The
President's FY 2006 Budget was designed to accomplish the same goal by
addressing program integrity challenges currently facing Medicaid,
which provides health insurance for more than 46 million Americans.
Many States believe Medicaid's rules and regulations are overly
burdensome, and the State-Federal financing system remains prone to
abuse.
The President's FY 2006 Budget proposed a range of program
integrity proposals designed to restore the credibility of the Federal/
State matching system and address other payment concerns. The program
integrity proposals would help reduce payment inefficiencies and curb
questionable financing practices that have been used by a number of
States to avoid the legally determined State matching funds
requirements.
Now that Congress has passed the Budget Resolution, we look forward
to having further discussions with Congress on the specific Budget
proposals. The Administration has not yet submitted any Medicaid
legislation related to the FY 2006 Budget, but is eager to pursue our
proposed reforms. We will continue to discuss these proposals with
Congress as the authorizing committees develop their legislative
proposals for FY 2006.
Thank you again for your interest in the Budget and Medicaid. We
look forward to working with the Congress to develop workable policies
to make the Medicaid program more efficient while continuing to provide
critical access to health care.
Sincerely,
Joshua B. Bolten,
Director.
Mr. Bolten. Thank you, Mr. Allen. We will provide, if we
have not already done so, we will provide a prompt response.
But what I would like to say about the proposals in the
President's program on Medicaid, which I very much hope will be
taken up by the Congress and adopted in the reconciliation
process, are not drastic cuts in the Medicaid system. They are
proposed savings that will reduce the rate of increase in the
cost of the Medicaid system from about 7.4 percent annually to
about 7.2 percent annually. So the alarm that has been sounded
about a drastic cut, I think is entirely unwarranted.
Second, the President's proposals do not depend at all on
reducing the provision of care to beneficiaries. What the
President's proposals go to is program integrity to ensure that
the Federal Government is paying only its fair share vis-a-vis
the States, or even vis-a-vis individuals. We have a number of
individuals who are out there who are effectively gaming the
system by asset transfers and so on. The President's proposals
are directed to trying to clamp down on the various games that
have been played to attract Federal money where it does not
belong, not an attempt to try to dig in at all on beneficiaries
who are the poor people who need these medical services and the
people we are trying serve.
Mr. Allen. I understand that. And I certainly agree that
those who are gaming the system need to--that issue needs to be
dealt with, both with respect to individuals who are
transferring their assets to family members so that they can
qualify for Medicaid, and I understand you have issues with the
way some of the States calculate their Medicaid reimbursement
from the Federal Government. But back home at the State level,
the kind of reductions that are being talked about in my State,
and my understanding is around the country, are not perceived
that way. They are perceived as reductions. And whether it is
the rate of increase or the absolute amount makes no difference
to the States because they have rising demand for Medicaid
services all the time both in terms of costs and the number of
people covered. And so it is perceived that the only way the
States can cope with the kinds of reductions that are being
proposed is by cutting benefits. Do you have a----
Mr. Bolten. Well, I think what that highlights is that as
Medicaid costs skyrocket, it is not just the Federal Government
that bears an additional burden. It is really the States that
are bearing the most difficult burden, which I think should be
directing the conversation toward a rethink and reform of the
way that we approach Medicaid so that we are sure that we are
focusing our dollars on those most in need; not just for the
benefit of the Federal Treasury but for the benefit of the
State treasuries as well, which are increasingly stressed by
their Medicaid obligations.
Mr. Allen. I have just one very quick follow-up. You have
included estimates for Medicaid cuts of $12.2 billion in your
projections. CBO says the number is $7.6 billion. The budget
resolution we passed says $10 billion. Isn't the $12.2 billion
number that you have used overstating the savings, if either of
the CBO or the budget resolution itself is the more accurate
number?
Mr. Bolten. I don't think so. I think it is a disagreement
among the scorekeepers and actuaries as to what an individual
policy will produce, and I think it is a legitimate
disagreement that experts can disagree on. We believe that ours
is more accurate. The fundamental point is that I don't think
the policy changes are based on that. They are, I believe, good
policy changes regardless of how much you believe they will
ultimately save the Federal Treasury.
Mr. Allen. OK. Thank you very much. I appreciate your being
willing to respond to that letter promptly. Thank you.
Chairman Nussle. I am just wondering, does the
administration have a response to the letter requesting the
Democratic leadership to appoint Members to the Medicaid
Commission so that we can actually go through and reform the
proposal, consider options, and consider what the Governors
have called probably one of the most unsustainable policies
that they have to deal with? I am just wondering if the
administration has gotten a response to that letter yet.
Mr. Bolten. Interesting question, Mr. Chairman. I don't
know whether there has been a formal response. I do know that
there has been no effort to contribute Members to that
commission.
Chairman Nussle. That is kind of what I thought. Mr.
Crenshaw.
Mr. Crenshaw. Thank you, Mr. Chairman.
And thank you, Director, for being here today and bringing
the good news about the economy growing and the deficit
shrinking. And I know you believe, and I believe a lot of
people believe, that the tax relief that we put in place has a
significant impact on the economy and therefore revenues have
grown. You let people keep more of what they earn, they get to
decide how to spend, to save it, and invest it. But the other
part is putting the brakes on spending that I think has helped
bring about this good news.
And I have the privilege of sitting on not only this Budget
Committee but also the Appropriations Committee. And after we
wrote the budget that when you take out homeland security and
defense spending, the actual discretionary spending went down
this year I think .8 percent. And the Appropriations Committee
kind of followed the budget guidelines, adopted the spending
bills, and the full House has now passed all of those. And so
we have that in front of us.
So we have kind of--I hope, as we have seen the tax relief
work and then we have seen controlling spending work, part of
that has to be evidenced by the good news that we see here
today.
So let me ask you a little bit about both sides of that. On
the tax relief side, I think you just said that your
projections include making permanent these tax relief packages
we put in place, and I think that is good news. But we haven't
done that yet. And so could you comment on what happens if we
don't make those tax cuts permanent, which kind of is also
another way of asking what if we hadn't have put these tax
relief packages in place to start with, where would we be
today? I don't think we would be talking about the good news
that we have.
But could you comment on that, on your view of where tax
relief has brought us, and then what would happen if we didn't
go ahead and make permanent the tax relief that we put in place
before?
Mr. Bolten. Mr. Crenshaw, thank you. Let me look back first
and say where would we be today in the absence of the tax cuts
that the President proposed and you all enacted. I think
history will judge those tax cuts as among the best-timed and
most effective tax cuts in the economic history of the United
States. There have been a number of economic studies done that
demonstrate that putting in place the tax relief in the way
that you did and at the time that you did was essential to
bringing growth back into the economy and especially to
bringing job growth back into the economy.
According to one study I believe done by the Treasury
Department, there would have been in 2004, 3 million fewer
people working in the absence of the tax cuts than actually
ended up working, because we got the economy growing again. So
that is looking backwards.
Now, I don't think anybody can fairly disagree with that
assessment now looking back in history. Looking forward, we do
have a number of people disagreeing that we need to keep these
tax cuts in place. I think it is essential that we do so.
Raising the tax rates at this point, beyond what is included in
the Tax Code as it now exists, in other words repealing some
portion of tax cuts that you all put in place; whether it is
the rates; whether it is the child credit; or the small
business expensing, all of those elements I believe are
important to sustaining the good economic growth that we are
projecting out into the future years. We are not projecting
spectacular economic growth, we have made conservative
estimates. We are projecting growth in the 3 to 3\1/2\ percent
range mostly out over the next 5 years.
In order to realize those moderately good revenue increases
that are on the chart that Mr. Spratt and I were talking about
at the beginning of this hearing, we need to have that economic
growth. If we don't have that growth, I believe that revenues
will fall far off of our expectations, and our deficit
situation could be substantially worse.
Mr. Crenshaw. Thank you. Let me ask you just finally the
question of--as we watched the deficit shrink so dramatically.
Talk about your view of the deficit in terms of raw numbers, in
terms of a percentage of GDP. I mean, where are we kind of
historically; because it seems to me after this dramatic drop,
the projected deficit being a little over $300 billion, where
does that fit kind of in a perspective over the last 10 years,
as a percentage of GDP or as a raw number? Because it certainly
appears when it drops that dramatically, that that has to be
good news.
Mr. Bolten. If I may, Mr. Crenshaw, let me put back up
chart 5, which shows our projections of the deficit as a
percent of GDP. I emphasize, that is actually the right way to
look at a deficit in the context of what are the resources
available in our economy to pay off the debt created by that
deficit. The dotted line you see there is the 40-year
historical average. That is 2.3 percent over the last 4 years
is the average deficit, it is the average budget position of
the United States over the last 40 years. You will see that
with these new numbers, we are bringing the 2005 deficit very
close to that level. What we expect actually to happen is 2.7
percent. That is just .4 percent over the 40-year historic
average.
Looking back over the last 25 years, assuming we do end up
at 2.7 percent of GDP in 2005 that will be a smaller deficit
than we have experienced in 15 of the last 25 years. It is not
a place to stop for satisfaction. It is not a place, as the
chairman emphasized, to ring the dinner bell, but it is a place
to say well done so far; the economic plan is working.
Now, we have more to do to ensure that we keep economic
growth going forward and to ensure that we are not overspending
while we are experiencing that growth.
Mr. Crenshaw. Thank you. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman. I want there to be
good news on the deficit. As policy cochair to the Blue Dog
Coalition, we would welcome an administration's success on the
deficit. But we also want the truth. We want facts, not
fiction. I am a little worried that particularly my Republican
colleagues may be a little overexcited today with the so-called
good news that has been presented.
Mr. Crenshaw mentioned earlier that he is an appropriator
and that we have good news on spending reductions. Well, let me
put in for the record the Cato Institute report which points
out that the record for this administration is not one that you
would want to brag on. The title of the report is called--and
this is by Stephen Slivinski--it was issued May 3, 2005. It is
called ``The Grand Old Spending Party: How Republicans Became
Big Spenders.'' And it says in its summary that President Bush
has presided over the largest overall increase in inflation-
adjusted Federal spending since Lyndon B. Johnson. Even after
excluding spending on defense and homeland security, Bush is
still the biggest spending President in 30 years.
His 2006 budget, which you have recently revised
projections on, doesn't cut enough spending to change his place
in history either. So the time for self-congratulation is way
premature.
You had mentioned, especially in response to Congressman
Spratt's question, that you are assuming the implementation of
the President's proposals. Well, you probably know the old
schoolyard phrase, ``The word `assume' makes an ass out of you
and me.''
Will the President of the United States enforce his budget
by using his veto power or his rescission power or both, twin
powers that he has never used in his Presidency? We have had no
adult supervision of this Congress because President Bush is
the first President since James Garfield in 1881 never to have
used his veto, and poor Garfield was only in office for 6
months. President Bush has never used his rescission power.
President Clinton used it 163 times and president Reagan used
it 602 times. But after 5 years, President Bush has never used
his rescission power. So it is not enough to assume that the
President's budget will be implemented.
Y'all have let Congress run the show and Congress is not
known for its fiscal restraint. We need a partnership here
between the White House and Congress because the President's
budget assumes, for example, $12 billion in Medicaid cuts.
Well, the President will have the ability to enforce that. The
President's budget assumes $10 billion in student loan cuts.
Well, the President has the ability to enforce that. Will he do
it?
That is the challenge that we face, because getting
overexcited about a relative decline in the size of the deficit
looks a little ridiculous, because that means basically we are
going to borrow a little bit less money from the Chinese this
year to fund our overspending.
It is like the navigator of the Titanic saying, well, the
iceberg isn't as far off as we thought. It is little further
off than we thought.
Mr. Bolten, you are a very intelligent man and you know
that your former employer is questioning a lot of the estimates
you are making, because a business entity like Goldman Sachs
looks at a more complete picture than artificial and
constrained budget rules that we are obligated to use in this
body. And the real budget deficit, even according to your
numbers, seems to me to be these.
While the deficit may look like $333 billion projected, you
will also be borrowing $176 billion. From whom? Our Nation's
seniors, by borrowing from the Social Security surplus.
So the real deficit, the on-budget deficit that our Nation
faces, even according to your own numbers, is over $500
billion. In fact, it is $508 billion. Is that a cause for
celebration or relief? Is that good news? Granted, it is
slightly less huge than we thought, but it is still the third
largest deficit in American history.
And the other two prize winners were also contributed by
this White House.
Now you can say with some reason it is not, as a percentage
of GNP, quite as large as some others, but this is not a record
to be proud of. It took the first 204 years of our Nation's
history to accumulate 1 trillion in debt. And now we are doing
it almost every 18 months. And there has never been a President
since Lyndon Baines Johnson to have sanctioned this much
spending. And there hasn't been a President since James
Garfield never to have used his veto.
Will this policy change?
Mr. Bolten. Mr. Cooper, I will endorse your call for a
partnership between the Congress and those, including on the
other side of the aisle, who have a genuine interest in forcing
discipline. The President certainly does. He has had one and
will continue to have one.
On his behalf, on dozens of occasions last year, I included
in Statements of Administration Policy a veto threat on
appropriations bills if they exceeded the limits to which the
Congress had agreed in its budget resolution and which the
President had presented in his budget, the President's senior
advisors would recommend that he veto the bill. In no case, Mr.
Cooper, as the bills came down to the President for signature
was it necessary for the President to exercise that veto
because those appropriations lived within the budget limits
that were set by the Congress in the budget resolution and in
the President's budget. I anticipate we will be achieving
similar success this year.
The President's 2006 budget on the discretionary side asked
for that discretionary spending to grow by no more than the
rate of inflation, which is around 2.4 percent total
discretionary spending and that there be an actual cut in the
nonsecurity elements of discretionary spending. As Mr. Crenshaw
and the chairman both emphasized, this House has delivered on
that, has delivered appropriations bills. If the House versions
were adopted, that would keep overall discretionary spending
below the rate of inflation and would produce an actual cut in
the nonsecurity elements related to that.
I am very hopeful, as we take those bills into conference
with what is produced in the Senate, we will come to a final
resolution that produces those results that the President asked
for, as they did last year which precluded the need to exercise
a veto.
On Social Security, Mr. Cooper, you are absolutely right
that it has been the practice of this administration just as it
has been the practice of administrations for decades going
back, Democrat and Republican, to count the budget deficit on a
unified basis, that is, including the Social Security surplus
in the deficit calculations. That is the practice of CBO and
the practice of everybody who looks at it. It is the right way
to look at the borrowing needs of the United States because it
is our cash position.
If the concern is that money is being taken from the Social
Security system and spent on current needs with just an IOU for
the future, I would submit to you that the best way to prevent
that from happening is to ensure individual retirees are able
to keep money in their own accounts and invest it as they see
fit rather than putting it into the Treasury coffers to be
spent by the Federal Government.
Chairman Nussle. Mr. Edwards.
Mr. Edwards. Thank you, Mr. Chairman.
Mr. Chairman, I am glad we are not adding over a billion
dollars a day to the deficit, as we have been over the last
several years, having gone from the highest surplus in the
American history to the highest deficit. But I have a hard time
thinking, Mr. Bolten, that my two children, two sons who are 8
and 9, are going to celebrate as a historically positive event
tax cuts that help take us from the largest surplus to the
largest deficits in American history.
And I have a hard time believing--while they may not
understand it today, a hard time thinking that they will
someday thank the administration and leadership in Congress for
only adding this year $912 million a day to the national debt
burden on their backs. When my children wake up tomorrow
morning, they will have nearly a billion dollars more on their
backs than they did today. I don't find that cause for great
celebration. In fact, I think it is one of the powerful
statements made today, how much the Republican leadership and
Congress has changed--I think, in my opinion, even out of touch
with a lot of Republican grass-roots thinking that we should
celebrate a budget that is going to be $333 billion in debt
added to our $7 trillion-plus national debt.
The fact is, this is the third largest deficit in American
history. The fact is, without the Social Security surplus, this
year's deficit would be more than a billion dollars a day; in
fact, I believe more than half a trillion dollars in 1 year.
We have the largest trade deficit in American history. So
the reality is that some of the economic growth we are seeing
today is like a drug-induced high, except this time the drug is
the deficit, and selling off American manufacturing, and basing
jobs in foreign countries and borrowing money from them. And
now we are starting to see the end result in what I think is
unbelievable fiscal policy, the Chinese wanting to buy American
oil companies. That is one of the end products of this unsound
fiscal policy in my opinion.
What really concerns me, if you look at classical
economics, it would say that in a time of relatively low
unemployment--which you are heralding, Mr. Bolten--and strong
economic growth, we should have a surplus this year, not a huge
deficit. And I don't think that portends well for the future.
Let me point out, the fact is that the promise of reducing
the deficit, that the administration's own policies created to
reduce its own self-induced deficit by half over the next few
years, is assuming we are going to balance that budget or
reduce that deficit on the backs of veterans. I will say today,
as I have said for the last 2 years, this administration has
underfunded veterans health care services.
The VA health care crisis we face in America right now
should be a surprise to no one. It was not a surprise to the
disabled American veterans last year, this year, or the year
before last year. It wasn't a surprise to the American Legion,
and it wasn't a surprise to the Veterans of Foreign Wars. And
it wasn't a surprise to the Democrats on this committee, myself
included, who offered 2 years in a row amendments to add $2
billion to VA health care, which we said was needed to prevent
cuts in veterans health care services during a time of war.
Those amendments were rejected by virtually every Republican on
this committee and not supported by the administration.
I am glad, Mr. Bolten, OMB is now saying, the
administration did get it wrong, and we are underfunding VA
health care. But I do want to point out, I hope every veteran
watching this today, Mr. Chairman, heard Mr. Bolten speak on
behalf of the administration in saying, in his opinion, we
funded the VA health care system too much money for about 3
years running.
Let me go on the record and say, every major veterans
organization in America will vehemently disagree that we funded
too much money for VA health care over the last several years.
The reality is, some of that reserve fund that I assume you are
referencing was being saved because the underfunding of the VA
budget was so bad our VA administrators knew they had to cut
out some very important services this year and last year to
cover the shortfall that the administration was proposing.
My question to you, Mr. Bolten: Does the administration
stand by its projections for VA health care spending for the
next 5 years? If so, do you admit that that is going to cause a
cut in veterans' health care services? And if you don't stand
by that projection, are you admitting that the country
shouldn't really trust the numbers you are projecting that
would reduce the deficit by half?
Mr. Bolten. Mr. Edwards, let me address the veterans
situation and emphasize, what I was stating about the previous
3 years of veterans funding was a fact, and that is that the
administration requested more than what was actually needed to
be spent on veterans medical care. The Congress appropriated
more than what was needed to be spent.
Mr. Edwards. With that, I disagree strongly.
Mr. Bolten. The record will reflect that very clearly, and
it was contained in carryovers from year to year within the
veterans care budget.
If I can--put up chart 16, if we can. I think this
graphically demonstrates, Mr. Edwards, this administration does
not have a record of underfunding our veterans' needs. What you
see here is that over the course of the preceding 8 years,
spending within the Veterans Administration grew by $10
billion. Over the course of the succeeding 4 years, it
increased by $24 billion.
We can go back a second to chart 15. The bulk of that
increase was in veterans health care spending. The blue line
represents the medical care spending, what you see, that has
been increased by a total of 50 percent over the last year.
Mr. Edwards. Didn't the number of veterans increase?
Mr. Bolten. It did, by about 1 million people. With the
various reports that I discussed earlier with Mr. Bradley, I
think the report from the field has to be that over the course
of the preceding years. The quality and the speed of care that
our veterans are getting has improved, has improved
dramatically, and may be one of the reasons why we are getting
so many more veterans than we expected into the system.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Now, as to our projections going forward, as to our
calculations about how we will fully meet the needs of our
veterans, as soon as the administration recognized that we did,
indeed, have a shortfall, that there had been a miscalculation
about how many veterans were coming into the system, Secretary
Nicholson sought the additional funding. We got $1 billion in
additional supplemental funding in 2005.
There will be a 2006 budget amendment forthcoming that will
take care of all of the needs we anticipate. I want to be sure
that we are clear on the record that this administration's
record on veterans medical care funding, I believe, is very
strong.
May I take 30 seconds, Mr. Chairman, and respond to one
other thing in Mr. Edwards' presentation?
Mr. Edwards. Mr. Chairman, if you extend his time, will you
extend my time by the same amount?
Chairman Nussle. You asked one question at the end and
expected him within 3 seconds to answer the question. I have
been very generous with time. I will give the witness an
opportunity.
Mr. Edwards. Just match the time that you add to him.
Chairman Nussle. This is a hearing for the witness. If you
would like to testify as a witness, we will extend the hearing
and let you testify to your heart's desire. What we would like
to do is get the testimony from the witness here today and move
on.
The witness may respond.
Mr. Bolten. Thank you, Mr. Chairman. I will take only 15
seconds because I will have a further chance to address this,
but I would just say, Mr. Edwards, far from creating the
deficit situation that the administration found itself in as it
entered into office, I believe the administration's policies
brought us out of that.
The deficit that the President encountered as he was
entering into office was already baked in, the result of very
slow economic growth. The economic growth policy that this
President and this Congress put into play is what has brought
us out of that and enables us to show a declining deficit out
over the next 5 years.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman. A lot of the discussion
has turned on the utility of the tax cuts and the wisdom of
extending those tax cuts, and I think you have gotten the gist
of the argument that has played out. People on this side of the
room tend to think that the tax cuts were a bit outside.
I want to turn the conversation away from the size of the
tax cuts to how the tax cuts were structured. One of the
concerns that I certainly have, and I think a number of my
colleagues on this side have, to an overwhelming degree the
beneficiaries of these tax cuts were people at the top end of
the economic sphere.
It is obvious people who pay more taxes get bigger tax
cuts. I am talking about the fact that people who are mid-
income wage earners, relatively low-income wage earners are
still paying taxes. The amount of reduction over the last
several years has been very low. I have seen data in my
district, where the median income is not a high one, the
average wage earner pocketed about $36 to $42 a month in tax
relief.
What I want to explore with you is, if a different policy
had been pursued, if we had had roughly the same number of tax
cuts, but it shifted the benefit more toward people of the mid-
income section, where we also have had a stimulative impact
that you celebrate, could we have had an even greater
stimulative impact?
One of the things from the business section of the ``New
York Times'' today, headline, ``How Long Can Workers Tread
Water, Income Gains Go Mostly to the Affluent.'' We know well
before seeing this that in our economy in the last several
years, wages from the service and manufacturing sectors, where
most people work, have been stagnant. We know there is a
greater gap between skilled workers and unskilled workers than
what we had 10 years ago. And the proposition that I would want
you to comment on is, if we had pursued a strategy of
concentrating our tax relief more toward middle-income
Americans, what would the stimulative impact have been? Can we
conclude that the stimulative impact would not have been as
good, or greater than what we had?
And the second question I want to pursue with you is
related to that. In the budget submitted by your
administration, there has been--the numbers ebb and flow a
little bit, but by and large there has not been a commitment to
worker training or to preparing workers to retool to do the
work that is available in the wake of globalization, the work
that is available in this new economy. And I am sure some in
the administration would say there have been nominal increases,
but I think you would agree this is an area of underinvestment
in the budget and in our economy.
What if we had a much greater investment in training people
to do the work, sharpening peoples' job skills? What if we had
a greater investment in K-12 education or for that matter in
Perkins grants or Pell grants, all of the things that might
allow the public education system in this country to move
people into stronger economic footing? Would that not have a
significant stimulative impact?
And the final point I want you to cover is a generic point
about this whole proposition, tax cuts lead to growth which
leads to more revenue. Sometimes when I hear these arguments
play out, they have a little bit of the force of theology. A
lot of people on the other side of the aisle believe in this so
much that they don't want to be too troubled by what the Old
Testament says, but they really like the New Testament stuff,
or they like the way it sounds.
Just some basic numbers that I raised with you and Mr.
Holtz-Eakin, with Secretary Snow, and with the chairman: As I
understand it, you look at corporate tax receipts, and
individual income tax receipts, right now they are about 16
percent of GDP. That is the lowest level we have had since
World War II--around 22 percent in the 1990s, around 28 to 30
percent in the 1960s, around 25 percent in the 1980s.
Obviously, in the 1980s, 1960s, and 1990s, we had sustained
significant economic growth across all economic class lines;
and if this theology had a little bit more force, it would seem
we ought to be having some of the greatest growth we have had
since World War II, based on tax rates going down so low. Those
are the three propositions I want you to comment on in 15
seconds or whatever time the Chair will give you.
Mr. Bolten. Thank you, Mr. Davis.
If the Chair would allow me a couple of minutes to respond
on each of those. May I start with chart 9? I will take them in
reverse order because I can remember the last one.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
This is a chart showing what percent of GDP is taken by the
Federal Government in taxes. You see them dropping--the share
of the GDP dropping off dramatically in the first 2 years of
this administration. It might be facially attractive to some on
that side to attribute that to tax cuts, but in fact there is a
very little element of tax in that drop-off. It is principally
related to bad economic performance.
We experienced a stock market bubble at the end of the
1990's and into 2000. With the bursting of that bubble, with
the onset of recession at the beginning of 2001, Federal
revenues just fell off of a cliff. This was before even the
beginning implementation of any of the President's tax
policies.
The point I want to make to you with this chart is, what
you see with our projections is here in 2005, we are actually
restored to about a 17.4 percent of GDP tax take of the economy
and projecting out. Going forward with the President's tax cuts
fully implemented, we project ourselves out close to the 40-
year historical average of taxes being taken out of the
economy.
Mr. Davis. But you project slower growth over that period
than we have had 40 years prior to that.
Mr. Bolten. You mean the 5 years going forward? I think our
growth is actually projected to be just about average solid
growth. We are projecting between 3 and 3.5 percent GDP growth.
That is consistent with Blue Chips and it is not spectacular,
but it is healthy growth in the economy.
Let me turn quickly to the training point because I don't
want to try the chairman's patience here.
The administration has made a strong investment in our
training programs. They are indeed troubled because many of
these programs are not delivering the kinds of results that
they should be. Secretary Chao has been working, and will be
working further, to try to ensure that our training programs
are targeted to actually achieving results rather than just
getting money out the door. I think she has made a number of
improvements and there are more improvements on the way, but I
would join in the sentiment that a well-targeted and effective
training program can be very useful in preparing our citizens
to participate in a strongly growing and--contributing to a
strongly growing economy. So I would associate myself with that
sentiment that you expressed.
Finally, on taxes, if I could have chart No. 10, I want to
begin by challenging your assumption that the tax cuts that the
President and this Congress put in place somehow shifted the
burden of taxation away from the upper income more toward the
lower income. What this chart shows, the blue bars are what
would be the tax take from these earnings categories if the tax
cuts had not been implemented. The yellow bars show what they
are now with the full implementation of the President's tax
cuts.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
I will just take a set of bars in the middle, top 5
percent, that is, people making over $140,000, so people doing
reasonably well; in the absence of the President's tax cuts,
those people would have been paying 51.7 percent of our total
income tax take. After the President's tax cuts, they pay 54.1
percent of the total income tax take.
What has occurred with the President's tax cuts, although
you correctly observed that if you are the one paying a lot of
taxes and there is a cut, you are bound to be saving more
dollars than somebody who is not paying a lot of taxes. What
has occurred with the President's tax cuts is that a larger
share of the burden of our income tax is now borne by our
upper-income citizens than ever before. What you see on the
right side there is the top 10 percent of income earners in
this country are now paying close to 66 percent of the total
income tax take in this country, up from 64 percent.
So the economists can have arguments about what kind of tax
cut is the most stimulative. I think most economists will tell
you, depending on the situation, the one that produces the most
economic growth may be the one that is targeted toward the very
top rate, the very top marginal rate is the most effective
thing to do. They may tell you that a cut in the capital gains
tax or the dividend tax has been most effective in spurring
business, investment and growth. Regardless of what the result
of that argument is, the result of the President's tax cuts has
been that the wealthy bear a greater share of our income tax
burden than they did in the past.
Mr. Davis. I will try to keep it inside 10 seconds.
My concern, Mr. Bolten, is not so much the relative share,
but the fact that the bottom line is that we have had slow wage
growth. We have had rising tuition in a lot of States. We have
had rising State income taxes. We have had rising prices.
People are concerned about food and gasoline. And I would like
to see some policy.
Because, frankly, we have not had a sustained round of
significant tax cuts for people earning under $80,000 in the
last 30 years in this economy; and if we were so fixated on
getting stimulation out of our tax cuts, I would want to see us
move in that direction.
Chairman Nussle. Ms. Schwartz.
Ms. Schwartz. Thank you, Mr. Chairman. I appreciate it.
What I wanted to ask, specifically, is about the interest
payments that we are making on the debt. And I appreciate what
was said already about the fact that we are seeing a smaller
deficit being created this year than in the past. That doesn't
say that we--as the chairman said in his opening remarks,
rather large--he said, large deficits in the near term. I want
to talk about what that means to the American people and the
people in my district, who are not aware of how much money is
going into interest payments by our Government.
And just to reflect on it for a moment, we passed a
bankruptcy law not too long ago in Congress that the President
signed quite enthusiastically, and we actually did that,
calling on individual families to take personal responsibility
for their finances. But I think it is very important for the
American people to say we may not be doing all that we could on
the Federal level and acting responsibly in the way we create
these budgets.
And it is not just what we say, but what we do and what is
reflected in these many charts. But basically the spending plan
has to reflect basic budgetary principles. We have to meet our
obligations. We have to work within the resources we have. And
we have to make smart investments that will ensure the well-
being of our Nation now and into the future.
And just answer this ``yes'' or ``no,'' if you would: Isn't
it true that the Federal Government is spending more on
interest payments on the debt that we have--more than we are
spending on education, veterans' health care or the
environment?
Mr. Bolten. Ms. Schwartz, I don't know whether it is true
or not. It may be true.
Ms. Schwartz. I will give you some numbers and I am sure
your team could help you. In 2004, the Government spent $160
billion on interest payments, more than double the
appropriations for education, training, and social services,
which was $78 billion; five times more than the amount spent on
the environment, which was $31 million; five times more than we
spent on veterans' health care which was $29 billion.
By the year 2010, under the current administration's
policies, we will be paying $312 billion in interest payments,
4 times greater than Federal funding for education, over 10
times more than projected spending on the environment, and more
than 10 times more than expected on veterans.
That is stunning to me as a new Member of Congress that we
are spending those sums of money.
So while we may be proud that we have less of a deficit
this year than previous years, we do have this enormous debt in
this country that is costing us a great deal, and it is
freezing out our ability to make the kind of investments that
we need to in Americans, in education, in health care, and in
the environment and some of the economic stimulus that will
help us now and into the future.
How do we get out of this box is what I would ask you
about, given that you have said that we are actually pretty
optimistic about things? The American people have to
understand, the priority of this administration is really much
more on paying this interest payment than getting our fiscal
house in order.
Mr. Bolten. Ms. Schwartz, I have to say I agree
wholeheartedly with a lot of what you just said, and the
priority for this administration is in fact on ensuring that
there is growth in the economy. This is what people really need
to prosper themselves, and to restrain spending, the
combination of which brings us into some sort of fiscal
balance.
Let me put up chart 22, if I may, and just talk a little
bit about that, because in celebrating the good news today, I
had intended to be clear--and I know the chairman was clear in
his opening remarks--in indicating that it is an improvement
over where we have been, and I believe a strong vindication of
the policies we have been pursuing.
Does that mean it is time to ring the dinner bell?
Absolutely not.
What this chart shows is that as you look out into the
future and as we plan our budgets, we need to be cognizant of
where we are taking the situation in the future. You will see
that the part that is growing enormously as a percent of GDP is
the dark blue part, the entitlements and our mandatory
programs. The green part, the interest payments of the Federal
Government, are the obligations that we have to pay. There is
no option about that. If there is a debt, you have to pay it.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Ms. Schwartz. Unless we are doing well enough to pay down
principal. That is what we ask people to do, as well.
Mr. Bolten. That is the administration's objective, and we
have urged a variety of measures of spending restraint. I don't
believe you can get there by tax increases that will harm the
economy and make it more difficult.
Ms. Schwartz. In my remarks, I didn't make that suggestion.
Mr. Bolten. Some of your colleagues have. If that is not
the right way to go, then the right way to go is spending
restraint, which the President has indicated in his budgets,
and the House of Representatives has indicated in its
appropriations it is willing to accept.
The reason I put this chart up is that spending restraint
in appropriations is only a part of the story for making us
look good out over the next 5 or 10 years, which is the budget
window I have been reporting on.
The budget window beyond that is not favorable at all, and
it is reflected by the enormous growth in that blue area.
Because that blue area grew so much, the green area grows
correspondingly as well. It is the enormous unfunded liability
in our entitlement programs that really threatens our fiscal
situation and makes it very difficult for us to plan to try to
pay down any of the interest. On the contrary, it means that
interest itself could contribute to overwhelming the ability of
our resources to pay for our debts.
What that says is, in addition to continuing progrowth
policies and exercising restraint with our appropriated
spending, we need to pursue fundamental reform in our
entitlement programs. I believe this President has stepped
forward in a major way with his Social Security plans. We also
need to look at the Medicare and Medicaid systems as well.
Chairman Nussle. I thank the gentlelady. I recognize myself
now for my question time, just to say a couple of things. One
is, I think this is a great way to end. The gentlelady and our
witness today have kind of brought us to the threshold of the
next big project that our committee is going to undertake
together, with obviously the other committees of Congress, and
that is called reconciliation.
It is a huge project, and it was in large measure the blue
area that was being discussed in your testimony, and it is the
hardest area to control.
The most difficult votes and some of the biggest challenges
are coming. I have checked my schedule, and I didn't see any
celebration on my schedule today. I am not celebrating, but I
am optimistic. When I see that real GDP has increased for 14
consecutive months, that gives me some optimism about America.
With the strongest growth in 5 years, that gives me optimism.
When I hear we have created 3.7 million jobs in the last 25
months, that gives me optimism, that doesn't make me frown.
There has been a lot of frowning around here today. And I
understand there are challenges out there and no one has
scheduled a celebration. However, we should be optimistic about
the fact that we have an unemployment rate that has fallen from
6.3 percent 2 years ago to 5 percent now, meaning that 95
percent of Americans who are out there and want a job--and I
remember back to my college days what the definition of full
employment was, that is pretty darn close to full employment
from the old textbook models of what full employment is all
about, where the other 5 percent are in school or looking for
work or in transition.
Total employment at record highs; 141 million people are
working. In fact, my son is one of them, he just got his first
job as a teenager. Growth in the business equipment investment
is the best in 6 years, and home ownership rates are at record
highs. The gentleman who spoke earlier about people who are
particularly at middle income and lower income, and owning a
home is a gigantic part of being self-sufficient and being
secure. And then, as I said in my opening, you don't have to
believe us here today. You can look to what the private
forecasters are saying, and they expect this kind of growth to
continue. That makes me optimistic.
I understand we have work to do. I was the first one to say
it, I will be the last one to say it, I have no doubt. But I
also know that we will be joined in this effort by a number of
other committees as we try and do the spade work this year with
the reconciliation process to get that under control. It is
about reform, not just reduction in spending, but reforming it
to deliver a better quality product to the people we are trying
to serve.
This committee is leading that effort, and I am proud of
the leadership and I am proud of the leadership the President
has made.
You have been very generous with your time here today, as
well as in your delivery and how calm you have been; and I--do
you have a celebration on your schedule today? Maybe you
deserve one, but we do appreciate your coming up and spending
time with us, and we look forward to that opportunity again in
the near future.
Mr. Bolten. Mr. Chairman, I thank you and Mr. Spratt and
all the members for their courtesy.
Chairman Nussle. If there is nothing else to come before
the committee, without objection, we will stand adjourned.
[Whereupon, at 1:05 p.m., the committee was adjourned.]
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