<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:89237.wais]
CBO'S BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2004-2013
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, SEPTEMBER 4, 2003
__________
Serial No. 108-13
__________
Printed for the use of the Committee on the Budget
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house04.html
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut, JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
GIL GUTKNECHT, Minnesota Ranking Minority Member
MAC THORNBERRY, Texas JAMES P. MORAN, Virginia
JIM RYUN, Kansas DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington DENNIS MOORE, Kansas
ROB PORTMAN, Ohio JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida CHET EDWARDS, Texas
ADAM PUTNAM, Florida ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado MIKE THOMPSON, California
DAVID VITTER, Louisiana BRIAN BAIRD, Washington
JO BONNER, Alabama JIM COOPER, Tennessee
TRENT FRANKS, Arizona RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, September 4, 2003................ 1
Statement of:
Douglas Holtz-Eakin, Director, Congressional Budget Office... 7
Prepared statement:
Hon. Jim Nussle, a Representative in Congress from the State
of Iowa.................................................... 3
Mr. Holtz-Eakin.............................................. 13
CBO'S BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2004-2013
----------
THURSDAY, SEPTEMBER 4, 2003
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:07 a.m. in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Shays, Thornberry,
Hastings, Portman, Brown, Putnam, Garrett, McCotter, Diaz-
Balart, Hensarling, Spratt, Moran, Hooley, Baldwin, Moore,
Lewis, DeLauro, Edwards, Scott, Capps, Baird, Cooper, Emanuel,
and Davis.
Chairman Nussle. Good morning. This is a full committee
hearing in which we will hear from the Congressional Budget
Office and the very distinguished director of that office about
the budget and the economic outlook for fiscal years 2004-13,
which was released last Tuesday.
Before I begin, I would like to acknowledge Rich Meade and
his new arrival. His daughter was born just before the August
recess. We welcome Rich back and congratulations on your new
addition.
Today our witness is Dr. Doug Holtz-Eakin, the Director of
the Congressional Budget Office.
Dr. Holtz-Eakin, once again, welcome back to the committee.
We look forward to your testimony here today. And welcome back
to the rest of the committee members. I hope everyone has had
an enjoyable and productive August. I know I did.
And today we will pick off--we will pick up where we left
off in July--and maybe even pick off, not the director though.
But we will pick up where we left off in July, looking at the
Federal budget.
As you may recall, we talked to the OMB Director just
before we left. And really, since our last hearing some things
have changed and some things have not. What has not changed is
that we still have substantial--and, in fact, slightly larger
than previously forecasted short-term deficits--$401 billion
for this year, $480 billion for next year as predicted by the
Congressional Budget Office. What has not changed is that these
deficits do matter. I believe that, I have always believed
that, and that is in part why we continue to address them in
the hearings we have today.
There are maybe some who don't think that deficits matter,
but I will leave that to their opinion. I believe deficits do
matter.
What has not changed is that this report generated the
usual round of finger-pointing. And if you didn't hear it, I
did, but that may be because I come from Iowa, and these days
there is always somebody else to blame for just about
everything. And what has not changed is that many of these same
people who are pointing fingers really don't have any answers.
There are a few brave souls that have come out and suggested--I
am not sure if it is bravery or lunacy, depending on your point
of view--but have decided that raising taxes at this point in
time, with the economy just barely getting moving again, would
be the thing to do.
I don't believe raising taxes at this time would or should
be an option.
So now let us talk about what has changed since we have
met. Since OMB released its report in July and since CBO closed
its books on its report over 2 months ago, our economy has for
the first time in a long time shown some signs of turning the
corner to sustained economic growth. We have had higher than
expected real GDP growth in the second quarter, stronger tax
relief-induced retail sales and manufactured durable good
shipments and orders in July, surging manufacturing activity in
August, and an outlook for higher than previously expected real
GDP growth in the second half of the year. And even without the
most encouraging recent economic news, CBO does project the
economy, quote, ``poised for a more sustained recovery.'' That
is the good news.
Of course, if you don't have a job yet from this recovery,
the economy has not yet turned the corner. And so there is more
work that must be done. So with that in mind, let us go over a
few things that I think most of us can agree on.
First, we share a concern over these deficits. Second, we
should be able to agree at this point that the tax cuts did not
cause these deficits. And according to CBO, had we not passed
the tax cuts, we would still have substantial deficits, about
$200 billion, and there would be many more Americans out of
work. And, finally, the recent economic news makes it clear
that the tax relief measures are doing precisely what they
intended to do, albeit at a slower rate than we would have
liked, and that is to help stem the job loss and get the
economy moving in the right direction.
So now that the economy is moving forward, we all need to
shift our focus to the other side of the ledger, which is
spending. CBO has done several models of the baseline, and
every one showed even greater problems ahead if we continue at
our current rate of spending. And as Director Holtz-Eakin has
testified to this committee before, we cannot simply grow our
way out of this problem. It must be a combination of economic
growth and spending restraint.
We have been very, I think, generous in our spending over
the past few years. I enjoyed sending out the news releases to
my constituents as much as anyone in the Congress and anyone on
this committee. But, my friends, the times have changed. Just
like the families and businesses we represent, we must adjust
our spending to reflect the current circumstances. And let me
just be clear. I am not saying and never have said that we have
to cut programs, benefits, or services. This is not about cuts.
What this is about is getting our spending down to a level that
is sustainable, which at present it is not.
For the past several years, government spending has well
exceeded the rate of inflation. This committee has spent a
great deal of time and effort this year discussing how best to
reduce waste, fraud, and abuse within our Federal Government's
mandatory programs. That effort is well under way in the
committees of this Congress, and I have no doubt that our
efforts will pay off in more efficient, reliable, well-executed
programs and in tax dollars better spent. Even if it is one of
those dollars better spent, that is better than we were the day
before.
But while the bulk of our Federal dollars are spent on the
mandatory side, we cannot pretend that our discretionary
spending does not count. Many of you have claimed dire concern
at the size of the current deficits. Trust me, I share that
concern.
So what I would suggest to you is this: Let us not add to
it. I think that sounds pretty reasonable. Let us not on the
one hand bemoan the deficits, then on the other hand demand
more spending. Let us all try and control ourselves. Let us all
acknowledge that we are not going to have any extra money for a
while, and actually stick to the budget. Let us try that for a
change as well.
At present, we have passed 11 of the 13 appropriation
bills, and I think we have done a pretty good job so far. But
the challenge for the remainder of the session of Congress is
to hold the line on the budget resolution level for
discretionary spending.
Let us not lose the lessons of the past few years or of
this report. CBO's report shows that it is incumbent on
lawmakers to control spending if they truly care about
achieving a balanced budget. We have to control what we can
control.
Let us use our time today with Director Holtz-Eakin to
discuss to what extent we must curb our spending to get these
deficits under control. And let us use this hearing to commit,
all of us, to doing what we know we need to do to get our
budget back in balance, keep the economy growing, and rein in
this body's out-of-control spending.
I want to thank the Director for his report and for the
many options that CBO has put in here. It is, I think, a
detailed report and one that I know we can use and will be
useful as we march ahead toward controlling this problem.
And now I would like to turn to Mr. Spratt for any comments
he would like to make.
[The prepared statement of Mr. Nussle follows:]
Prepared Statement of Hon. Jim Nussle, a Representative in Congress
From the State of Iowa
Good Morning. Today the Budget Committee will hear from the
Congressional Budget Office on its economic and budget update The
Budget and Economic Outlook: Fiscal Years 2004-13 which was released
last Tuesday.
Our witness today is Dr. Douglas Holtz-Eakin, the Director of the
Congressional Budget Office. Dr. Holtz-Eakin, once again, welcome back.
Also, to this committee, I welcome of you back. I hope everyone had
a productive August recess, and an enjoyable Labor Day.
Today, we will pick up just where we left off in July the outlook
of our Federal budget. Since our last hearing, some things have
changed, and some things have not. What has not changed is that we
still have substantial, and, in fact, larger than previously-forecasted
short-term deficits $401 billion this year, and $480 billion next year
as predicted by CBO. What has not changed is that I still believe these
deficits are a problem and that they must be addressed. What has not
changed is that this report generated the usual round of finger-
pointing about the cause of these deficits. And what has also not
changed is that those same people who are more than willing to point
fingers when our fiscal situation gets tough once again failed to offer
any sort of solution to get these deficits under control, or even
extend themselves to join with the efforts already under way.
Unfortunately, that too has not changed.
Now, let's talk about what has changed since we last met. Since OMB
released its report in July, and since CBO closed the books on its
report over 2 months ago, our economy has, for the first time in a long
time shown signs of turning the corner to sustained economic growth.
We've had higher than expected real GDP growth in the second quarter,
stronger tax-relief-induced retail sales and manufacturers' durable
goods shipments and orders in July; surging manufacturing activity in
August; and an outlook for higher than previously expected real GDP
growth in the second half of the year. And, even without the most
encouraging, recent economic news, CBO does project an economy quote
``poised for a more sustained recovery.''
So, with this in mind, let's go over some things I think most of us
can agree on: First, we all share a concern over these deficits.
Second, we should be able to agree, at this point, that the tax cuts
did not cause these deficits.According to CBO, had we not passed the
tax cuts, we would still have a substantial deficits--about $200
billion but there would be many more Americans out of work. And
finally, the recent economic news makes it clear that the tax relief
measures are doing precisely what they were intended to do albeit at a
slower rate than we would have liked and that is to help stem the job
loss, and get the economy moving in the right direction.
So, now that the economy is moving forward, we all need to shift
our focus to the other side of the ledger and that is spending. CBO has
done several models of the baseline and every one showed even greater
problems ahead if we continue at our current rate of spending. As
Director Holtz-Eakin has testified to this committee before, we cannot
simply grow our way out of this problem it must be a combination of
economic growth and spending restraint. We have been very, very
generous with our spending in the past few years.
I enjoyed sending out the good news press releases to my
constituents in Iowa as much as everyone else in this Congress. But my
friends, times have changed. Just like the families and businesses we
represent we must adjust our spending to reflect the current
circumstances. Let me be clear: I am not saying and never have said
that we need to ``cut'' programs, benefits or services. This is not
about cuts. What this is about is getting our spending down to a level
that is sustainable, which at present, it is not. For the past several
years, government spending has well exceeded the rate of inflation.
This committee has spent a great deal of time and effort this year
discussing how we best reduce waste, fraud and abuse in the Federal
Government's mandatory programs. That effort is well under way in the
committees of this Congress, and I have no doubt that our efforts will
pay off in more efficient, reliable, and well-executed programs, and in
taxpayer dollars better spent. But while the bulk of our Federal
dollars are spent on the mandatory side, we cannot pretend that our
discretionary spending doesn't count.
Many of you have claimed dire concern at the size of the current
deficits. Trust me, I share your concern. So what I would suggest to
you is, let's not add to it.
Sound reasonable?
Let's not, on one hand, bemoan the deficits, then on the other,
demand more spending. Let's all try that. Let's all acknowledge that
we're not going to have any ``extra'' money for awhile, and actually
stick to our budget. Let's try that, too.
At present, we have passed 11 of the 13 appropriations bills, and
we've done a pretty good job. But the challenge for the remainder of
this session of Congress is to hold the line on the budget resolution
level for discretionary spending.
Let's not lose the lessons of the past few years or of this report.
CBO's report shows that it is incumbent on lawmakers to control
spending if they truly care about achieving a balanced budget. Let's
use our time with Director Holtz-Eakin to discuss to what extent we
must curb our spending to get these deficits under control. And let's
use this hearing to commit all of us to doing what we KNOW we need to
do to get our budget back to balance. Keep the economy growing, and
reign in this body's out of control spending.
Thank you, and I now turn to Mr. Spratt for any opening comments he
may have.
Mr. Spratt. Thank you very much, Mr. Chairman.
And Dr. Holtz-Eakin, welcome to our hearing, and thank you
for the good work that underlies the August update.
Since May of 2001, every CBO report on the budget has been
worse than the one before it, and this update is no exception.
It shows that when the books are closed on fiscal 2003--less
than 30 days--the deficit will hit an all-time high, $401
billion. This exceeds the largest deficit heretofore recorded,
$290 billion, which was incurred in the last fiscal year of the
first President Bush.
The deficit CBO forecasts today is $156 billion more than
the deficit CBO forecasted for this year, 2003, as recently as
last March. And get this: the deficit for this year, forecasted
today, $401 billion, is $760 billion worse than the deficit
predicted for this year in 2001--$760 billion worse in one
fiscal year.
This record, bad as it is, will last for just one year
because next year the deficit will be even worse. Next year,
the deficit, as forecast here, is $480 billion. If you back out
the surplus in Social Security, and I think you should, the
surplus next--the deficit next year will be $644 billion.
Six months ago CBO came here and they projected a surplus
over the next 10 years of $891 billion, deficits in the near-
term, surpluses in the long-term, netting out to a surplus of
$891 billion cumulative. Of course, that depended on a critical
assumption, and that is that all of the expirations in the tax
cuts passed in 2001 and 2003 will actually be allowed to expire
as scheduled. But in 6 months' time that estimate of the
surplus has moved $2.287 trillion in the wrong direction to a
deficit of $1.397 trillion.
The worst news of all is that these deficits are here to
stay. In budget parlance, that is structural, not cyclical.
They are rooted in the budget, they are not going to go away,
fade away as the economy picks up. On the contrary, CBO assumes
growth that averages more than 3 percent a year for the next 10
years, as this chart indicates, more than 3 percent for the
next 10 years. And these deficits don't decline. They hover
around $300 [billion] to $400 billion a year as we pile on, as
a result, $3 trillion in additional debt over the next 10
years.
Now, it may seem to some who read this report superficially
that the deficits do diminish over time. But, if so, you should
read on and read carefully.
In the first sentence of the first chapter, CBO starts out
by saying, quote: If current laws and current policies do not
change, deficits will be $401 billion this year and $480
billion next year.'' The problem is, we all know that current
laws and current policies will change.
Nevertheless, by the laws we pass, budget rules and budget
procedures, CBO cannot assume that the billions of dollars in
tax cuts enacted in 2001 and 2003 and stipulated to expire will
be renewed and extended. CBO has to assume that these tax cuts
will expire as scheduled, even though the Bush administration
says that all of these tax cuts will be renewed and will be
extended. CBO's assumption that they will be allowed to expire
as scheduled as $1.564 trillion back to revenues. It is an
assumption that the alternative minimum tax won't be altered,
and we know politically will have to be fixed, or it will
capture more than 30 million taxpayers within 10 years. That
adds $400 billion more to revenues.
And since CBO cannot presume what Congress is about to
pass, it also can't presume that there is any cost for
prescription drug coverage under Medicare, which takes $400
billion out of spending. They also assume that discretionary
spending, which has grown, as the chairman has noted, 7 to 8
percent, will be reined in and held to the rate of growth of
inflation only, at current services expectation.
Given the fact--as you can see from the chart we are about
to put up, this bar chart--that 95 percent of the growth and
discretionary spending over and above current services for all
of discretionary spending--95 percent of the excess over and
above current services--has gone to homeland defense, national
defense, New York City relief, and airline relief, it is hard
to believe that we can hold it, rein it in to the level that--
at least to a level of inflation only.
When you just seize assumptions for political reality, what
is likely to happen in law and in policy, easily, you add $2
[trillion] to $3 trillion to CBO's 10-year surplus--10-year
deficit, which is already $1.4 trillion. And there is the
bottom-line result. Instead of having a surplus of $211 billion
in 2013, we have a deficit of $363 billion. The resulting
public debt over this period of time is about a $3 trillion
addition from $4.4 trillion at the end of fiscal year 2004, to
$7.4 trillion at the end of 2013. Resulting deficits total
$3.429 trillion.
Now, you can argue with the assumptions we have inserted in
order to make the CBO baseline forecast a realistic political
document, but for the most part we have tried to be not
contentious, and practical and farsighted in putting those
numbers in there. It is clear to me, we are looking at least in
the range of $3 trillion in additional deficits.
When OMB brought its mid-session review here in July, I
read it from cover to cover. And when I got through, I said,
what disappoints me most is there is no shock, no shame, and no
solution. OMB responded to these massive deficits by simply
saying, they are manageable, and by saying as to solutions that
if we continue to pursue our progrowth policies. We can grow
out of this problem, at least holding out that hope; and then
pointing to the possibility, the prospect by their reckoning
that in 5 years the problem will be cut at least in half, even
though they excluded from that 5-year projection the enormous
costs we are now incurring for the deployment of troops in Iraq
and Afghanistan.
Well, I don't think, Mr. Chairman, that these deficits are
manageable for that period of time. I think this is a looming
disaster. And, frankly, I think it is a moral outrage,
mortgaging our children's future so that we can have it all,
and mortgaging also--undermining two programs which the people
of this country look to as bedrock: Social Security and
Medicare. Because these deficits, if they are allowed to occur
as projected here, will do nothing more than put a ticking time
bomb under Social Security and Medicare for years to come.
There is a day of reckoning coming.
I am glad to see that the Director has acknowledged that
long-term deficits, particularly when they are perceived to be
permanent or intractable, can indeed be a detriment to the
economy, because I fervently believe that; and I think what you
have put before us is a call to action. We need to act now
before these deficits become so intractable, so difficult to
deal with that we simply can't turn this problem around.
Thank you again for coming. We look forward to your
testimony.
Chairman Nussle. Director, welcome. And we are pleased to
put your entire testimony into the record, and you may proceed
as you feel necessary.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. Holtz-Eakin. Mr. Chairman, thank you. Congressman
Spratt, members of the committee, thank you for the chance to
be here today.
What I thought I would do is briefly summarize what I think
are some of the key features of our summer update. The entire
report has been available for a little over a week, and I
submitted for my written testimony a summary of that report.
I thought I would begin by talking about facts in our
baseline projection, highlight three key features of those
particular projections, and then close with a short discussion
of the economic outlook, after which I would be happy to answer
your questions.
Let me begin with facts, which are summarized on the first
slide and which are available in front of you.
Our baseline projection anticipates a deficit of $401
billion in fiscal 2003, $480 billion in fiscal year 2004, $341
billion in fiscal year 2005, and total deficits of $1.4
trillion between 2004 and 2013. The pattern is that these
deficits occur all in the first 5 years; the last 5 years show
a very tiny surplus. The pattern throughout the budget window
is for sharp near-term deficits, followed by diminishing
deficits, and a return to surplus in 2012.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
The fiscal year 2004 deficit is the largest in dollar
terms; however, relative to GDP, 4.3 percent, it doesn't rival
the 6 percent that occurred early in the 1980s, which was the
largest number.
The final basic feature of the baseline projections is the
debt-GDP ratio, which is about 37 percent at the onset of the
budget window, rises to about 40 percent and then diminishes to
30 percent over the course of the budget window.
Now, I think there are three key features of our baseline
projections that merit attention in thinking about them. The
first and perhaps the one that might not need to be repeated,
but I think is worth highlighting for you, is that they are
baseline projections and are constructed according to the rules
of the baseline projections. In particular, they must follow
the implications of current law on both the receipts and the
outlay sides.
For these particular projections two features stand out. On
the receipts side, they assume the sunset of the tax cuts that
were put in place in 2001 and also the ones passed by Congress
earlier this year; and on the outlay side, we follow the
baseline rules in including the fiscal year 2003 supplemental
appropriation in the baseline appropriations and then inflating
those appropriations at the rate of inflation. In effect, that
supplemental appears in each year of the budget window,
properly adjusted for inflation.
The second key feature is that the basic patterns in these
projections are very similar to our March baseline projections.
They have the feature of having large near-term deficits
diminishing over the budget window and ultimately coming to
surplus. In this case, the near-term deficits are larger, they
reflect the actions taken earlier in the year both to cut taxes
and to increase outlays, resulting in higher near-term
deficits; and the budget comes to balance later in the budget
window than had been anticipated in March.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
The mechanics by which we come to balance over the budget
window is on the revenues side. Revenues grow at an average
rate of 7.5 percent over the budget window, rising from about
16.2 percent of GDP at their low in 2004 by 4.3 percentage
points, or 20.5 percent of GDP at the end of the budget window
in 2013.
On the outlay side, mandatory spending grows at an average
rate of 5.2 percent over the budget window. That can be
contrasted with GDP growing at about 5.1 percent over the
budget window, so a little bit faster than GDP. Discretionary
spending follows the baseline rules and grows at an average
rate of 3.2 percent of GDP, or more slowly than the economy as
a whole.
The final point that I would highlight about our baseline
projections is that they are subject to an unusual amount of
uncertainty. Baseline projections always face uncertainty. They
face uncertainty from the evolution of the economy in ways that
cannot be anticipated; they face uncertainty from the evolution
of the relationship between the economy and the budget,
technical factors in the lingo of our reports, which shift
through time. And we have in our report tried to document these
usual sources of uncertainty so that Members of Congress can
appreciate that, as we go farther out in the budget window, 5,
6, 7, 10 years, the degree to which these projections would
occur, even if we stuck to current law, becomes less and less
certain.
However, in this instance, we also felt there is a
substantial amount of uncertainty in the budget outlook that
derives from policy choices facing the Congress, and we
attempted to show the boundaries of the implications of some of
the policy choices that were clear and about which we had some
guidance.
In particular, on the receipts side, the tax cuts may or
may not sunset as a policy choice, and that delivers some
uncertainty to our baseline projections. There is uncertainty
about whether in fact the alternative minimum tax will evolve
on its current path, involving many more taxpayers toward the
end of the budget window. To quantify the degree of that
uncertainty, we took the most simple approach we could think
of, which is, to remove the mechanism by which more people end
up on the alternative minimum tax, namely due to inflation
alone, and index the AMT for inflation.
In addition, each House of Congress has passed the Medicare
prescription drug bill with a budget total of $400 billion over
the budget window. We took as our guidance in that area the
year-by-year information on the Medicare prescription drug
bill, as passed in the budget resolution earlier this year.
And also, on the outlay side, the path of discretionary
spending, as has been mentioned, may not follow the level in
the baseline rules of 3.2 percent. One might want to remove
from that baseline projection the 2003 supplemental alone, and
then follow that baseline projection. We present information
about that.
One might imagine either slower discretionary spending
growth--and we show the implications of slower growth in our
alternatives as well--or one might imagine that discretionary
spending will grow at the pace of recent experience. As
guidance for that, we took the average rate of discretionary
spending growth over the past 5 years, which is 7.7 percent--
that excludes the 2003 supplemental--and showed the
implications of that through the budget window. That 7.7
percent was representative of both defense discretionary and
nondefense discretionary spending over that window, in which
they grew at about that rate, at 7.8 and 7.6 percent,
respectively.
And within the nondefense discretionary spending, we
experienced rapid growth in a wide number of budget areas--
health, education, aviation, and housing to name a few. So we
felt that was representative of the kinds of things that we
could quantify.
What I show in the chart are the implications for the
future path of fiscal balance at the extremes of different
combinations of those possible policy futures. And I think they
highlight the importance of the policy choices that face
Congress. To the extent that one were to put together the upper
extreme, we would arrive at balance sooner and reach larger
surpluses. If one were to put together the bottom end of that
band, those deficits would reach, at the end of the budget
window, 7 percent of GDP, larger than the historic high as a
fraction of GDP, and would involve a level of debt-to-GDP that
is more than twice as high as that in the baseline projection.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
We also face some uncertainty that we were unable to
quantify in our budget projections--in particular, the future
path of the budget as it is affected by ongoing operations in
Iraq and the global war on terrorism. We have since then done
some analysis at the request of Senator Byrd, which I would be
happy to discuss if the committee is interested. And there has
also been recent interest in the particular costs of addressing
energy problems in the aftermath of the blackout in August.
Those kinds of uncertainties are not reflected in these numbers
in any way.
Looking forward, I think that using debt-to-GDP as a fiscal
indicator is a useful thing for the committee. The numerator,
the debt, summarizes in a cumulative fashion all differences
between receipts and outlays as the policies get put into
place. The denominator reflects the performance of the economy,
which is also affected by policy choices. And I wanted to spend
the closing few minutes of my remarks talking about our outlook
for the path of the economy for both the near-term and the
long-term.
Our projections have two pieces. The near-term projections
are CBO's attempt to forecast to the best of its ability the
cyclical recovery of the economy from the recent recession and
the dynamics of that recovery. Over the longer term, after 2
years, we make no attempt to anticipate business cycle
fluctuations of any type, but instead focus on the long-term
growth of potential GDP, the full employment level toward which
the economy typically returns, and get the long-run path of the
economy in some rough sense.
Our short-term forecast does show that the economy does
pick up in the near-term, rising to close to 4 percent real GDP
growth in 2004. In the path of that recovery, unemployment
comes down somewhat slowly, lingering in the neighborhood of 6
percent over the next 18 months. That reflects the net effect
of two opposing forces. As the economy picks up, we do
anticipate that job creation will rise and payroll employment
numbers would improve.
At the same time, however, our reading of the evidence is
that during the recent cyclical downturn, a greater than
typical number of individuals chose not to participate in the
labor force. As the economy begins to grow more quickly and
jobs begin to be created, those individuals will likely return
to the labor force. That increase in the labor force
participation will slow the decline in the unemployment rate in
the absence of other influences.
We expect that inflation will remain modest in the near-
term and that, as a result, we will not have any sustained
impacts of inflation on our economy.
Now, this particular forecast really hinges on, I think,
our reading of the degree to which sustained economic growth
is, in fact, about to begin; and the key to that really comes
in two pieces. On the up side, the economy will only have
sustained economic growth if we have a resumption of robust
business investment, and our reading of the evidence is that we
have begun to see a firming of business fixed investment.
Financial conditions, which we talk about in the report, which
include not just the stance of monetary policy as evidenced by
the Federal funds rate, but also a broader index of financial
conditions, have moved from having a net negative posture in
the economy to being roughly neutral and, as a result, will no
longer restrain business investment.
Our reading of the degree to which businesses have
accumulated a capital overhang and, as a result, had excess
capital to work off seems to suggest that the process has
largely run its course with some sectoral exceptions. And as a
result, on the up side, it does appear that we are about to see
a more sustained growth in business fixed investment that will
provide economic growth.
The other main ingredient in sustained economic growth
would be the absence of a falloff in household spending,
particularly in personal consumption expenditures. The risk of
that falloff would stem from households' desire to rebuild lost
wealth perhaps from the falloff in equity markets over the past
several years. We look at the risk of the potential for a sharp
rise in the saving rate that would be coincident with such a
falloff, and our reading of the evidence is that particularly
in the presence of a fiscal policy that will over the next 2
years provide $120 billion to the household sector, and in the
third quarter of this year alone $120 billion at an annual
rate, the household sector could actually raise its savings
rate and maintain its rate of consumption without risk of near-
term falloff in the overall rate of economic growth.
Over the longer term, we expect the economy to average
about a 3.3 percentage-point growth between 2005-08, and then
at the end of the budget window, for the years 2009-13, to grow
at an average rate of 2.7 percent.
Now, as this committee is probably aware, the key to long-
run economic growth is productivity growth, and it is worth
highlighting that the decline in our long-term economic growth
rate is not the result of a forecast that we expect
productivity growth to decline. On the contrary, our baseline
includes a labor productivity growth of about 2.1 percent,
which is quite close to the levels reached in the post-1995
acceleration productivity. Instead, that slower rate of
economic growth reflects a slowdown in the rate of growth in
the labor force that is the first leading edge of the impacts
of the retirement of the baby boom population.
As those workers begin to retire, we will see a slowing in
the growth in the labor force and the overall hours available
to the economy. Our projections reflect that slowdown both on
the economic side and also on the budgetary side where we, at
the same time as we see this economy slowing down, in those
last years we will see growth in the number of Medicare
beneficiaries, for example, rise from something like 1.5
percent a year to between 2 and 3 percent a year. So within
this budget window on both the budgetary and economic side we
will begin to see the initial impacts of the retirement of the
baby boom population.
The final point I would make about our baseline projections
is that they reflect a good-faith effort for us to incorporate
the impacts of current policies on both the path of the economy
and on the receipts. In particular, the future path of fiscal
policy can have a substantial effect on economic performance.
On the spending side, the degree to which additional
spending raises deficits and crowds out investments is
incorporated into our projections of the future of both capital
accumulation and, thus, productivity growth.
On the receipts side, we are faced with a fairly tricky
analytic problem, quite frankly, because the future path of the
economy will depend on what individuals and businesses expect
about the future of tax cuts. It may be the case that
individuals expect tax cuts to be permanent; it may be the case
that they expect them to sunset on schedule as provided by the
law; and it may be the case that individuals and firms believe
something in between.
In constructing our baseline projections, we followed the
spirit of baseline projections and assumed that individuals
expect the tax cuts to sunset as provided in the law. This
affects our underlying economic forecast as the increase in tax
rates has incentive effects on labor supply that would diminish
the supply of labor toward the end of the projection window and
as the increase in deficits in the near-term and decrease in
the long-term affects the rate of capital accumulation in the
economy.
At the level of receipts, we know that the provision of a
sunset in the tax code provides incentives to shift activities
across years. We have done our best to accommodate that in our
baseline path for receipts, but would acknowledge that the
particular structure of these sunsets raises even greater
uncertainty about how the private sector will actually behave
than might normally be the case.
At any rate, I thank the committee for your patience in
this quick overview of our report, and I look forward to
answering your questions.
[The prepared statement of Mr. Holtz-Eakin follows:]
Prepared Statement of Douglas Holtz-Eakin, Director, Congressional
Budget Office
Mr. Chairman, Congressman Spratt, and Members of the Committee, I
am pleased to be here today to discuss the Congressional Budget
Office's (CBO's) update of its baseline budget projections for 2003-13.
CBO projects that the Federal Government will incur deficits of $401
billion in 2003 and $480 billion in 2004 under the assumption (mandated
by statute) that current laws and policies remain the same (see table 1
on page 5). Those deficits reflect the recent economic slowdown as well
as legislation enacted over the past few years that has reduced
revenues and rapidly increased spending for defense and many other
programs. Although such deficits for this year and next year would be
smaller than those of the mid-1980s relative to the size of the
economy, they would reach record levels in nominal dollar terms.
The economy now seems poised for a more sustained recovery. CBO
anticipates that gross domestic product (GDP) will rise by nearly 4
percent in calendar year 2004 after growing by less than 2 percent in
the first half of this year. Signs of faster growth in consumer and
business spending, rapid growth in Federal purchases, tax cuts for
businesses, and a slightly more accommodative monetary policy have
improved the economic outlook for the rest of 2003 and for 2004.
Partly because of that economic growth, CBO's baseline projections
show deficits that diminish and then give way to surpluses near the end
of the 2004-13 period--under the assumption that no policy changes
occur. In particular, the baseline assumes that the major tax
provisions of the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA) will expire as scheduled in 2010. It also assumes (as
required by the Balanced Budget and Emergency Deficit Control Act of
1985) that budget authority for discretionary programs will grow at the
rate of inflation--which is projected to average 2.7 percent over the
next 10 years. Furthermore, the baseline does not include possible
policy changes such as the introduction of a prescription drug benefit
for Medicare beneficiaries. Various combinations of possible actions
could easily lead to a prolonged period of budget deficits, although
other scenarios could be more favorable. In addition, economic and
other factors that deviate from CBO's assumptions could affect the
budget considerably--in either a positive or a negative direction.
Regardless of the precise course of the economy and future policy
actions, significant long-term strains on spending will begin to
intensify within the next decade as the baby boom generation begins
reaching retirement age. Driving those pressures on the budget will be
growth in the largest retirement and health programs--Social Security,
Medicare, and Medicaid. Federal spending on those three programs will
consume a growing proportion of budgetary resources, rising as a share
of the economy from 8 percent in 2002 to a projected level of nearly 14
percent in 2030.
the budget outlook
CBO projects that if current laws and policies remain unchanged,
the recent surge in Federal budget deficits will peak in 2004. In the
ensuing years, under CBO's baseline, deficits decline steadily and give
way to surpluses near the end of the 10-year projection period.
Deficits are projected to total $1.4 trillion between 2004 and 2008;
the following 5 years show a small net surplus of less than $50
billion.
Revenues have slid from a peak of 20.8 percent of GDP in 2000 to
16.5 percent this year and are anticipated to drop again next year, to
16.2 percent. From that point on, the trend reverses, as projected
economic growth pushes revenues in the baseline up from 17.4 percent of
GDP in 2005 to 18.7 percent in 2010. Under current laws and policies,
revenues are projected to climb more rapidly thereafter because of the
expiration of EGTRRA, reaching 20.5 percent of GDP in 2013.
Whereas revenues are expected to diminish in 2003, CBO anticipates
that total outlays will rise--from 19.5 percent of GDP in 2002 to 20.2
percent this year. Under the assumptions of CBO's baseline, outlays are
projected to peak at 20.5 percent of GDP in 2004 and then to begin a
gradual decline as a share of the economy. By 2013, outlays are
projected to account for 19.3 percent of GDP. That decline is mostly
attributable to the baseline's treatment of discretionary spending,
which is assumed to grow at the rate of inflation over the projection
period (or at about half the rate of growth projected for the economy).
Since CBO last issued baseline projections in March, the budget
outlook has worsened substantially. Half a year ago, CBO estimated that
the deficit for 2003 would total $246 billion, the deficit for 2004
would decline slightly to $200 billion, and the cumulative total for
the 2004-13 period would be a surplus of $891 billion. Now, CBO's
estimate for this year's deficit has risen by $155 billion and for next
year's by $280 billion. For the 10-year period from 2004 through 2013,
projected deficits have increased and projected surpluses have
decreased by a total of nearly $2.3 trillion (see table 2 on page 6).
Compared with the projections in the March baseline, revenues have
declined by $122 billion for 2003 and by $878 billion for the 2004-13
period. Changes resulting from legislation, mostly the Jobs and Growth
Tax Relief Reconciliation Act of 2003 (JGTRRA), account for the
majority of the decline through 2005. After that, technical estimating
changes explain most of the drop in projected revenues relative to
those in the March baseline.
Outlays are $33 billion higher for 2003 than previously projected
and a total of $1.4 trillion higher over the 10-year period, largely
because of legislation enacted since March. Extending supplemental
appropriations enacted in April and August over the 2004-13 period, as
required for CBO's baseline projections, accounts for $873 billion of
that total, and additional debt-service costs resulting from both tax
and spending legislation account for most of the rest.
the economic outlook
CBO's forecast for the next year and a half anticipates that the
growth in overall demand for goods, services, and structures will pick
up. The growth of consumer spending will remain modest because
consumers are likely to save much of the money that they receive from
the accelerated tax cuts under JGTRRA to rebuild their wealth.
Businesses are likely to begin to restock, rather than draw down, their
inventories and to increase their investments in structures and
equipment. As a result, real (inflation-adjusted) GDP is expected to
grow by 3.8 percent in calendar year 2004, up from 2.2 percent in 2003
(see table 3 on page 7). CBO's forecast assumes that the rapid rise in
the Federal Government's spending will contribute to growth for the
next few quarters, but thereafter, under the assumptions in CBO's
baseline, such growth will slow.
CBO does not anticipate a quick reduction in the unemployment rate
from its current level. Typically, the unemployment rate falls when the
growth of real GDP exceeds the growth of potential GDP (the highest
level of production that can persist for a substantial period without
raising inflation). But even though the GDP growth that CBO is
forecasting exceeds its estimate of potential GDP, CBO expects that the
unemployment rate will average 6.2 percent for calendar years 2003 and
2004. In part, the sustained high rate of unemployment reflects caution
on the part of employers, who--if they follow recent patterns--are not
likely to resume hiring immediately as demand begins to grow. In part,
it also reflects the likelihood that people who have been discouraged
in their job searches by the economic weakness of the past few years
are now likely to resume them--and be tallied among the unemployed.
The near-term outlook is subject to a number of risks. Foreign
economic growth and foreign demand for U.S. goods may deviate from the
assumptions in CBO's forecast. The residual effects of certain economic
developments in recent years--the large reduction in households' equity
wealth, the fall in the personal saving rate, businesses' productive
capacity that remains under-used, and the increased dependence on
foreign financing--may also continue to dampen growth more than CBO
assumes. However, favorable economic fundamentals--such as low
inflation and rapid growth of productivity--may set the stage for
another long period of robust growth.
Between 2005 and 2008, the growth of real GDP is projected to
average 3.3 percent, and between 2009 and 2013, 2.7 percent. In CBO's
projections, the growth of real GDP slows as the gap closes between GDP
and its potential; once that gap has been eliminated, real GDP grows at
the same rate as potential GDP.
CBO expects that inflation, as measured by the consumer price index
for all urban consumers, will average 2.5 percent from 2005-13, while
the rate of unemployment will average 5.3 percent. The projection for
the rate on 3-month Treasury bills averages 4.6 percent during the
2005-13 period and that for 10-year Treasury notes, 5.8 percent. All of
those projections are virtually identical to the ones published by CBO
last January.
TABLE 1.--PROJECTED DEFICITS AND SURPLUSES IN CBO'S BASELINE
[In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Actual Total, Total,
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004-2008 2004-2013
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
On-Budget Deficit (-)......................................... -317 -562 -644 -520 -425 -421 -434 -426 -417 298 -143 -105 -2,444 -3,833
Off-Budget Surplus\1\......................................... -160 -162 -164 -179 -199 -219 -237 -255 -273 -289 -304 -317 -999 -2,436
Total Deficit (-) or Surplus.................................. -158 -401 -480 -341 -225 -203 -197 -170 -145 -9 -161 -211 -1,445 -1,397
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
\1\ Off-budget surpluses comprise surpluses in the Social Security trustfunds as well as the net cash flow of the Postal Service.
TABLE 2.--CHANGES IN CBO'S BASELINE PROJECTIONS OF THE DEFICIT OR SURPLUS SINCE MARCH 2003
[In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total, Total,
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004-2008 2004-2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Deficit (-) or Surplus as -246 -200 -123 -57 -9 27 61 96 231 405 459 -362 891
Projectedin March 2003........
Changes
Legislative
Revenues............... -53 -135 -77 -20 -13 -17 -11 -4 4 2 2 -263 -270
Outlays................ 46 92 101 105 117 129 140 150 162 172 184 544 1,352
------------------------------------------------------------------------------------------------------------------------
Subtotal............. -99 -227 -178 -126 -130 -146 -151 -155 -158 -169 -183 -808 -1,622
Economic
Revenues............... -16 -13 -12 -12 -15 -17 -19 -23 -20 -12 -8 -70 -151
Outlays *.............. -12 -31 -34 -25 -16 -16 -17 -20 -24 -28 -118 -223
------------------------------------------------------------------------------------------------------------------------
Subtotal............. -16 -1 18 21 10 * -3 -6 * 11 21 48 7
Technical
Revenues............... -53 -51 -51 -51 -55 -50 -45 -41 -39 -40 -34 -258 -457
Outlays................ -13 1 6 12 19 27 33 39 44 47 51 66 280
------------------------------------------------------------------------------------------------------------------------
Subtotal............. -40 -51 -58 -64 -74 -77 -78 -80 -82 -87 -86 -324 -737
Total Impact on the Deficit or -155 -280 -218 -168 -194 -223 -232 -240 -240 -245 -248 -1,083 -2,287
Surplus.......................
Total Deficit (-) or Surplus as -401 -480 -341 -225 -203 -197 -170 -145 -9 161 211 -1,445 -1,397
Projected in August 2003......
Memorandum:
Legislative Changes to
Discretionary Outlays.....
Defense................ 27 54 62 65 66 68 70 72 74 75 77 315 683
Nondefense............. 6 14 17 18 19 19 20 20 21 21 22 87 19
------------------------------------------------------------------------------------------------------------------------
Total................ 33 68 79 83 85 87 90 92 95 96 99 402 873
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
Note: * = between -$500 million and $500 million.
TABLE 3.--CBO'S CURRENT AND PREVIOUS ECONOMIC PROJECTIONS FOR CALENDAR
YEARS 2003-2013
------------------------------------------------------------------------
Forecast Projected Annual
-------------------- Average
---------------------
2003 2004 2005-2008 2009-2013
------------------------------------------------------------------------
Nominal GDP (Billions of
dollars)
August.................... 10,836 11,406 \1\ 14,09 \2\ 17,94
8 3
January................... 10,880 11,465 \1\ 14,15 \2\ 18,06
4 6
Nominal GDP (Percentage
change)
August.................... 3.7 5.3 5.4 4.9
January................... 4.2 5.4 5.4 5.0
Real GDP (Percentage change)
August.................... 2.2 3.8 3.3 2.7
January................... 2.5 3.6 3.2 2.7
GDP Price Index (Percentage
change)
August.................... 1.5 1.4 2.1 2.2
January................... 1.6 1.7 2.1 2.2
Consumer Price Index\3\
(Percentage change)
August.................... 2.3 1.9 2.5 2.5
January................... 2.3 2.2 2.5 2.5
Unemployment Rate (Percent)
August.................... 6.2 6.2 5.4 5.2
January................... 5.9 5.7 5.3 5.2
Three-Month Treasury Bill Rate
(Percent)
August.................... 1.0 1.7 4.2 4.9
January................... 1.4 3.5 4.9 4.9
Ten-Year Treasury Note Rate
(Percent)
August.................... 4.0 4.6 5.7 5.8
January................... 4.4 5.2 5.8 5.8
------------------------------------------------------------------------
Sources: Congressional Budget Office; Department of Commerce, Bureau of
Economic Analysis; Department of Labor, Bureau of Labor Statistics;
Federal Reserve Board.
Note: Percentage changes are year over year.
\1\ Level in 2008.
\2\ Level in 2013.
\3\ The consumer price index for all urban consumers.
Chairman Nussle. Thank you.
Since there has been some comparison to 2001 and the
projections of CBO in May of 2001, let me just for the record
make sure that we have this clear.
In May of 2001, was funding for September 11 included in
those projections?
Mr. Holtz-Eakin. No.
Chairman Nussle. The war with Iraq?
Mr. Holtz-Eakin. No.
Chairman Nussle. The war with Afghanistan?
Mr. Holtz-Eakin. No.
Chairman Nussle. Global war on terrorism?
Mr. Holtz-Eakin. No.
Chairman Nussle. The emergency spending for the Pentagon or
New York City and victims?
Mr. Holtz-Eakin. No.
Chairman Nussle. How about the economic stimulus package
that was voted on in a bipartisan way?
Mr. Holtz-Eakin. No.
Chairman Nussle. If we could put up chart No. 1, I would
like to move to that.
These are based on the report that you have showing that
these are, by and large, spending-driven deficits. Each one of
those instances that I am talking about required spending,
required spending above and beyond the call of duty, above and
beyond what was budgeted for as a result of profound emergency
that this country is facing, has faced, and continues to face
and will continue to face.
And so I understand that there will be a continuation of
comparing this to this huge change prior to 2001, but I am
going to continue to remind colleagues and everyone that I can
that obviously quite a bit has changed. If people want to
continue to think in September 10 thinking, then they are
certainly allowed to do that, but we need to think in September
12 and beyond thinking, and it is going to require some new
priorities.
Spending-driven deficits not only have a macro impact, but
on an individual basis--if you would show me chart No. 2. This
is just amazing to me that spending, if you look at it on a per
capita basis, what each taxpayer would be footing if in fact
the spending continues at this rate, it is going to be
astronomical. Spending at this rate is what is contributing to
and causing the large deficits that we see, and spending has
got to get under control.
You made a comparison of the deficit to the economy.
Certainly, in nominal terms, the deficit is as large as it has
ever been in history. But compared in terms to the power of our
economy, which you were talking about, the GDP, would you cover
that one more time? Why is it better or why is it appropriate
to talk of these deficits in terms of a comparison to the
economy as opposed to comparison to previous total dollar
deficits from years before?
Mr. Holtz-Eakin. Well, I think the spirit is the same as
the spirit when one applies for a mortgage or any other
personal loan. The first question a lender will ask and the
question capital markets will ask is, what is your income? What
is your ability to repay this loan? And comparing the deficit,
the borrowing relative to the income in the economy, the gross
domestic product, is the appropriate comparison.
Chairman Nussle. And in those terms, and I believe that was
the chart you were showing--I don't know which chart that is,
but it is the chart that is showing the comparison of CBO's
March 2000 versus August 2003 baseline.
Mr. Holtz-Eakin. Chart No. 2.
Chairman Nussle. Chart No. 2, OK.
That shows, I believe, the comparison as a share of GDP.
And compared to the economy, how does this deficit stack up to
previous deficits?
Mr. Holtz-Eakin. Well, as you can see in the chart, the
previous largest deficit is 6 percent of GDP in the early
1980s. The fiscal year 2003 baseline deficit is 3.7 percent;
the fiscal year 2004 baseline deficit is 4.3 percent of GDP,
and it diminishes thereafter.
Chairman Nussle. Now, I understand the next chart that you
show. Showing the fact that there is uncertainty,
demonstrates--if anything--that we should not be complacent as
a result of this. But I do think that some perspective is in
order.
There seems to be some dispute as to how severely these
deficits will impact the economy. Would you cover that? You
covered it briefly, but would you cover that one more time as
far as the impact, both currently and in the future how these
deficits can and will impact the economy?
Mr. Holtz-Eakin. Certainly.
First, with respect to the particular lines on this chart,
the CBO does not offer those as forecasts in any sense. We are
trying to illustrate the range of possible outcomes under
alternative policy choices, simply to highlight the fact that
the ultimate path will depend heavily on policy choices.
In terms of the impact on the economy, I think it is
important to recognize that the ultimate impact of deficits is
to diminish national savings. The mirror image of that is that
it increases spending at any point in time. If the Nation
decides to save less, it will spend more.
At times when the economy is slack and the private sector
is not spending, households and businesses, those actions can
support private demand and minimize cyclical impacts. At times
when the economy is at full employment, the diminishment of
saving and spending places more pressure on the economy's
capacity to produce. It can drive up interest rates and
diminish capital accumulation, which slows the pace of economic
growth going forward.
In our current situation, I think, looking backward, given
the cyclical status of the economy, there is no particular
evidence that the deficits per se have had striking economic
damage. However, looking forward, were we to run sustained
sizable deficits, especially a magnitude of 7 percent GDP, then
there would be harm to the rate of capital accumulation and the
pace of future economic growth.
Chairman Nussle. Then let me just close by--what I take
away is that deficits do matter. They may not matter--they may
not have a dramatic impact today, but they will if they are
sustained. And I would agree with that, deficits to do matter.
And you can control spending; that is the one thing that we can
control, because there is a lot of uncertainty out there.
The uncertainty in March of 2001, looking back, of course,
is obvious. Looking forward may be just as obvious.
So getting this under control by controlling spending and
getting the economy to grow so that our income can grow, so
that the GDP can grow, so that our comparison of these deficits
in the future can continue to be as small or as slight as
possible is the most important effort that we can put forward.
As far as ticking time bombs, you know, I understand that
there will be a complaint that there is a ticking time bomb for
Medicare or for Social Security. But I can tell you that the
time bomb is currently there if we do nothing. The bomb is
already set to go off, No. 1. And No. 2, adding a trillion
dollar drug package to it as what was offered on the floor by
the minority party without it being paid for or offset even in
their own budget, I think sets the bomb off even sooner.
So I think we have to control spending, get the economy
moving again. These deficits do matter, and sticking to the
plan that we have in order to make sure that we get them under
control, I think, is the best thing that we can do at this
point.
Mr. Spratt.
Mr. Spratt. Thank you, Mr. Chairman.
Let me show you once again chart No. 4, our chart No. 4,
showing growth, budget projection already assuming growth. This
one right here. There you go.
Just a reminder that these are the rates of growth assumed
by CBO and by OMB in their forecast for the next 10 years. They
have got substantial growth, real growth factored into the
forecast all the way, and the deficits don't go away even
though the economy is growing for 10 straight years at 3
percent real rate of growth.
Now, let me show you in the battle of the charts, chart No.
5 to contest your chart along the same lines. It is a layered
chart just like yours. And I would ask Dr. Holtz-Eakin to
comment upon it, but let me first explain it.
A large part of the reason for the disappearance of the
surplus is, in a sense, overestimation or misestimation. It is
called economic and technical factors, but it means that the
surplus, based upon projecting and forecasting conventions
being used at the time, was overstated. That is the top layer.
Back it out, and you have got a much-less surplus.
The next layer is defense and homeland security. Homeland
security is a rubric that didn't even appear in the budget 2 or
3 years ago. Defense has been increased by more than we
anticipated in 2001, and that adds substantially. The other is
other spending.
But the bottom layer is tax cuts. And the interesting thing
about the bottom layer is, if you take it away, if you take the
tax cuts away, the budget is back in balance in 2005.
Dr. Holtz-Eakin, I know I am asking you to pass judgment on
something you have just seen, but do you see any obvious flaws
in this analysis?
Mr. Holtz-Eakin. Indeed, we have attempted to do a similar
kind of analysis. I won't pretend to be able to do chart math
in my head; but we have done similar decompositions. I would be
happy to work with you on it.
Mr. Spratt. Could you share your chart with us or your
background work with us?
Mr. Holtz-Eakin. Yeah.
Mr. Spratt. Have you got it available?
Mr. Holtz-Eakin. I have it here.
Mr. Spratt. How do your procedures break down amongst
economic and technical adjustments?
Mr. Holtz-Eakin. For the fiscal year 2004, economic and
technical changes account for 41 percent of the change from
2001; legislative changes account for 59 percent of the
changes. Outlays are 24 percent of those, revenues are 31
percent of those, legislative changes and net interest, I
guess, would be the remainder.
Mr. Spratt. Well, in 2004, is that the changes since March?
Mr. Holtz-Eakin. Yes.
Mr. Spratt. I was talking about----
Mr. Holtz-Eakin. From January--sorry. From January 2001.
Mr. Spratt [continuing]. Using the time frame '01 through
'11?
Mr. Holtz-Eakin. No. That is from January 2001.
Mr. Spratt. OK.
Mr. Holtz-Eakin. My apologies.
Mr. Spratt. We might put a request in the record for you to
at least check these numbers and maybe to replicate them using
your own similar analysis.
[The information referred to follows:]
[CBO resolved this matter with the Member's office.]
Mr. Spratt. But that brings up a point with respect to this
year. We have seen the budget worsen by $156 billion since your
last report in March. And if I read your report correctly, you
say that two-thirds of that was within our control. Two-thirds
of that was--more than two-thirds was legislative action.
In the past, we have come to find that the economy has
taken a greater toll, terrorism has taken its toll, war has
taken its toll. But since March, the toll that has been taken
has been taken by Congress itself, by legislative action, is
that correct, two-thirds of it?
Mr. Holtz-Eakin. Yes, that is correct.
Mr. Spratt. And a large share of that was in the 2003 tax
cut, or the previous--how much of that was due to the tax cut?
Mr. Holtz-Eakin. For fiscal year 2004, $135 billion was in
revenues on the legislative side, and $92 [billion] in outlays.
Mr. Spratt. Of the $5.6 trillion that you forecast in 2001,
do you know how much of that, for 2001-11, you would now
estimate to be the applicable baseline surplus for 2001?
Mr. Holtz-Eakin. Not off the top of my head, but we could
get that.
Mr. Spratt. Could you get us that for the record?
Mr. Holtz-Eakin. Yes, sir.
[The information referred to follows:]
[CBO resolved this matter with the Member's office.]
Mr. Spratt. Let me show you one other chart and ask you if
this comports with your understanding, and that is chart No. 6,
the bar chart showing increases in spending.
What this chart shows is how much of the increment in
spending over and above current services for defense and
nondefense programs, where it went, where did the increment go
after other programs were funded at current service levels.
By our calculation, in each of 3 years 95 percent of it
went to the Iraqi war, the response to terrorism, New York City
relief, airline relief, things related to defense, war--and the
war on terrorism in particular--and recovery from the
catastrophe in New York.
Does this square with your understanding of the increments
in spending that we have been experiencing?
Mr. Holtz-Eakin. Well, we can certainly check. I am not
familiar with the percentages. I would be happy to do so.
Mr. Spratt. Well, if you could check this, we would
appreciate it. Because it shows how difficult it will be to
rein in spending if what we are talking about is wartime
spending, with 150 troops deployed who have to be supported,
with the reconstruction cost about to come to us. CQ says that
it could be $65 billion, per Bremer's request. It is going to
be awfully hard to rein in that kind of spending and sustain
the commitment we have made and the battle against terrorism.
And one final point--two final points. Show me chart No. 16
again. This is a little hard to see. No, it is not as hard as I
thought to see. The top line is outlays, and interestingly
enough, the outlays this year are still as a percentage of GDP
lower than they were in the Reagan administration and lower
than they were in the year 2000, when we had a surplus in the
budget, a $236 billion surplus in the budget.
But the interesting thing here is, this is an object lesson
for how to rectify the problem. As you can see, in 1992, which
was the year before Clinton came to office, the budget outlays
started downward as a percent of GDP until they got to just
over 18 percent of GDP. Every year during the Clinton
administration spending as a percent of GDP came down.
By the same token, we passed some tax increases in 1993 as
part of Clinton budget, and they tended to tilt the code
progressively toward upper bracket taxpayers who made out the
best during the halcyon days of the 1990s. As a consequence,
revenues as a percentage of GDP went up, and the difference
between outlays in revenues there, which is about 3 or 4
percent of GDP, is a surplus that emerged in those years.
Now what we have got are outlays going up and revenues
coming down, just the opposite of what we had before. And that
is the definition of a deficit and a long-term deficit at that.
We would like for you, if you would, to take these three
charts--we will give you copies of them--and let us know if
there is anything incorrect, wrong, analysis or facts, because
this is the way we see the problem.
[The information referred to follows:]
[CBO resolved this matter with the Member's office.]
Mr. Spratt. My one final point is, as I look at your
projection, baseline projection, your current services
projection, if you don't factor in the things that you have got
on charts 1-6--Medicare, repeal the tax cuts, in particular--
you get to almost no deficit by the year 2011, close to the end
of our time frame. The biggest factor there is your assumption
that the tax cuts won't be repealed, they will simply repeal
themselves, they will be allowed to expire as scheduled, as you
put it.
So basically you are telling us there, we should simply
leave the code alone and let these tax cuts expire as they were
proposed to expire when they were originally passed; we can see
daylight by 2011.
Mr. Spratt. We will be out of the deficit by 2011.
Mr. Holtz-Eakin. And maintain the other projections,
assumptions.
Mr. Spratt. The other projections, too. Thank you very
much.
Chairman Nussle. Mr. Brown.
Mr. Brown. Mr. Chairman, thank you for coming and being
with us today, Director Holtz-Eakin.
If I could pick that same chart back up that Mr. Spratt had
earlier, would that be possible? The last chart that showed the
decline I guess of--yeah, this one. That is correct. Right.
It looked to me that the decline in the outlays was
starting actually in 1982, and I just wanted to bring that to
the attention of the group. I also would like to make a point--
--
Chairman Nussle. Would the gentleman yield?
Mr. Brown. Yes.
Chairman Nussle. Just one other observation. It is kind of
interesting that we are now calling the 1995 close-down-the-
government budget a Democrat budget. I think that is kind of
interesting that we finally come full circle now and that is
being claimed as a Democrat budget. That is kind of
interesting.
Mr. Spratt. Let me point out in fiscal 1983 outlays as a
percentage of GDP you hit an all-time high of 23.5 percent for
peacetime. It may look like 1982 on that chart but, in 1983,
the midst of the Reagan years, 23.5 percent. When Bill Clinton
left office, it was 18.5 percent, 5 full percentage points of
GDP less than what it was in the peak of the Reagan years.
Chairman Nussle. Would the gentleman continue to yield?
I am just wondering, too, I don't remember one Reagan
budget--boy, maybe my memory is slipping, but I don't remember
one Reagan budget that came in that was not claimed to be dead
on arrival. In fact, I don't remember a Bush budget that was
not claimed to be dead on arrival. So it is kind of interesting
how now all of a sudden these Presidents are in charge of
spending when the Constitution under article 1 says that
Congress is in charge of spending. Just kind of an interesting
observation. So you may want to take that into consideration as
you are analyzing these very interesting charts.
Thank you for yielding.
Mr. Brown. Mr. Chairman, one further question. If we had
not passed the tax cuts, what impact would this have on
receipts? I mean, you would have to take into account the
increase in the productivity of the American people by giving
them more money to spend. If we had not passed the tax cuts,
would we be better off or worse off on that chart?
Mr. Holtz-Eakin. The 2001 tax cuts I think are widely
recognized as having provided some support for the household
sector for personal consumption housing expenditures and the
more recent ones for both consumption expenditure and
investment.
The precise numerical impact is, unfortunately, impossible
to tell, because in the absence of the tax cuts it is quite
likely that monetary policy would have been very different and
the future path of the economy is just simply not knowable. So
we know that in broad terms the economic impact was to support
those sectors of the economy at a time when they are
economically weak, but I don't know how much that would have
specifically affected the overall performance of the economy
and as a result the impact on receipts.
Mr. Brown. But you would almost have to agree that it would
have to have some positive benefit?
Mr. Holtz-Eakin. It had some beneficial impacts in
supporting the private demand in the economy.
Mr. Brown. OK. Thank you.
Chairman Nussle. We have two votes on the floor, so we will
adjourn and come back after the second vote.
[Recess.]
Mr. Shays [presiding]. Sorry for the delay, Mr. Director;
and we will commence our questions with Mr. Moran from
Virginia.
Mr. Moran. Thank you, Mr. Chairman.
I wanted to refer to your very, very well done budget and
economic outlook. It is nice to have you on board, and I think
that the misgivings that some folks had have been put to rest,
because it is a very good one and I think an objective report
that you have provided us with.
On page 12 you lay out the budgetary effects of policy
alternatives that you were not required to include in your
baseline but are fairly obvious in terms of their budgetary
impact and their likelihood of being enacted.
First place, the chairman and the ranking member and I
suspect the leadership of the majority are absolutely
determined to extend the expiring--the sunsetted tax
provisions, and when that happens--not if, but when that
happens--it is going to add another $1.6 trillion to the total
deficit.
We also know that the leadership of the House and Senate
are going to fix the alternative minimum tax. So that is
another $400 billion, as you say in your table on page 12.
We also know that both parties have agreed to a Medicare
prescription drug plan. The lowest number is $400 billion. It
could be twice that, but we know that it is going to be at
least $400 billion over the next 10 years.
Then there is an issue as to discretionary appropriations,
and given the fact that the Congress in the White House's same
party under the leadership of the majority has increased
spending by over 7 percent a year--and, of course, that is
spending that has been requested by the White House. And it
looks now--even today we read the papers. We are looking at
another $60 billion for the war in Iraq, and that is probably
just a starting point. If we go by current historical
experience, in other words, the last few years, we talked about
adding another $2.8 trillion to the deficit over the next
decade. Let's be conservative and just add half of that, $1.4
trillion.
So we add all of that up, plus the deficit that you told us
about everyone agrees upon is a reasonable but conservative
estimate. So we are up to about $6.6 trillion in terms of the
accumulated deficits over the next--well, excuse me, $5.2
trillion. I am going to use the lowest number, $5.2 trillion,
lowest number for spending. That is scary.
One of the things that has come out that has yet to emerge
in these hearings is the reaction on the part of the
international community, the fact that we are borrowing all of
this money and we are putting the rest of the world in a
difficult situation. Because we are going to be taking about
half a trillion dollars a year out of the money that would
otherwise be available for capital investment.
In fact, there was an article in the Wall Street Journal
that quoted people in the International Monetary Fund, the
leadership in the International Monetary Fund. The head, of
course, of the fund is a Republican, Ken Rogoff, but he is very
critical of U.S. economic policy. He delivered a sharp rebuke
to the Bush administration's fiscal policy saying that the tax
cuts were poorly timed and probably unnecessary. If enacted in
full, they would significantly worsen the fiscal position not
just of the United States but throughout the world. It is going
to have an adverse effect upon developing countries, and it is
going to create a gaping trade deficit. So he sees our budget
spending from black into red, open-ended security costs and
exchange rate, that is going to worsen the fiscal situation for
other countries.
You know, it is not the Democrats that are registering some
of the most serious concerns. It is the other people that are
watching our fiscal situation.
Mr. Shays. The gentleman's time has expired.
Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Dr. Holtz-Eakin, except for the fact that everybody in this
room I think agrees that we have an untenable deficit and it
appears to be getting worse, I am not sure there is a whole lot
else we agree on.
My concern isn't just with the deficit, though. My concern
is with the amount of money that we are spending. If we could
go to chart No. 2 again, please. If I am reading this
correctly, in constant 1996 dollars, we have had a spending
explosion per capita since 1996, where we have gone from 4,911
to 6,111 on a per capita basis.
Now we hear a lot about mortgaging our children's future,
but whether we pay for it with cash or whether we pay for it
with a credit card, ultimately somebody is going to have to pay
for all this spending.
So my first question is--and please forgive me; I am new
around here as a freshman--but has Federal spending ever
dropped from one year to the next in recent memory?
Mr. Holtz-Eakin. In terms of nominal dollars, I would have
to check. I don't know the answer. My suspicion is it has not
dropped recently in total dollars. As a fraction of GDP, as you
know, spending has both risen and fallen as a fraction of GDP.
Mr. Hensarling. So GDP can increase and decrease, family
income may increase and decrease, but in nominal dollars it
appears that the Federal budget continues to grow, and at least
if this chart is accurate, and I assume it is, it has been
growing at an alarming rate since 1996.
Earlier you mentioned about the damaging impact on the
economy deficit spending can have, but how about total spending
by the Federal Government? I mean, if I am reading these
reports correct, discretionary spending has grown on an average
of 7.7 percent for 5 years, and I think that you are assuming,
if I am reading your report correctly, mandatory will grow by
5.2 percent over the course of your budget. So assuming for the
moment that was all paid for by cash and it comes out of the
pockets of the American family, what are the impacts on family
income in GDP growth if these spending trends continue? Do you
have an opinion on that matter?
Mr. Holtz-Eakin. Well, I think that those questions all
fall in a common theme, and that theme is that should the
Federal Government choose to have a program and to spend some
money those resources will have to come from the private sector
in some way. So the spending measures, the burden of the
decision to go ahead and provide a program, which is presumably
done on the basis of the merits, but the cost is what is given
up in the private sector, it will, as you point out, be
financed one way or the other.
It will be financed either by taxes or by borrowing; and
the real issue becomes then, for the particular taxes that one
might choose to finance that, what would be given up in the
private sector? Will it be consumption spending at that point
in time or will it be some saving which will provide for future
accumulation of capital and labor skills?
And when one borrows, again, what is given up in the
private sector? Are you giving up current consumption, higher
interest rates? Do people forego buying something on their
credit cards or does it crowd out capital investment for the
future? In comparing the two ways of financing a given level of
spending, that is really what you are trying to decide, which
one will have the biggest impact on both the present and the
future.
Mr. Hensarling. We are asking you to engage in a number of
10-year projections, which I am somewhat dubious about our
ability to look into a crystal ball and particularly predict
economic growth. It does seem like we have a fairly good
indication of our ability to predict growth of government, but
some on the other side of the aisle consistently point to
economic growth tax relief as being the significant
contributing factor to deficits. But since we just passed a 10-
year budget, if I am doing the numbers right, we passed $350
billion of economic growth tax relief versus a $28.3 trillion
worth of spending. If I am doing the math right, the economic
growth tax relief, assuming it has zero impact on the economy,
is 1.2 percent of $28.3 trillion. Wouldn't that suggest that if
you wanted to do something about the deficit maybe you would
look at the spending side, which appears to be 99 percent of
the equation?
Mr. Holtz-Eakin. Well, I am not sure where you are doing
your math, but I will stipulate that it is correct. We can talk
about it later.
Going forward, the issue is really one can choose to
address the deficit per se on either the receipts or the outlay
side. That is a decision to either change the scope of
government activities on the spending side or change the way
you finance existing government spending on the revenue side,
and you have both of those options going forward.
Mr. Shays. Thank the gentleman.
Let me just, for the benefit of the members--the list I
have, there are no other Republican speakers except for me at
the moment, and so what I have is I have Mr. Edwards next
followed by Mr. Scott, followed by Mrs. Capps, followed by Mr.
Emanuel, followed by Mr. Lewis and then Ms. Baldwin. So we will
go with you, Mr. Edwards.
Mr. Edwards. Thank you.
Mr. Chairman, the Republican leadership in the House cannot
have it both ways. It cannot pass budget resolutions year after
year on a totally partisan basis and then deny responsibility
for the consequences of those budgets. It seems to me that if
you want to preach personal responsibility, you must first
practice it. I believe the startling deficit numbers should be
a wake-up call for the free lunch bunch, those who have
preached the failed philosophy that we can have trillion dollar
tax cuts, massive increases in defense spending and still
balance the budget.
This jobs growth and balanced budget dream and promise has
turned into a looming economic nightmare. As a result of the
free lunch fiscal policies, we now have the largest deficit in
American history--let me repeat--the largest deficit in
American history combined with the largest loss of jobs since
Herbert Hoover.
What do massive deficits mean to average Americans? Well,
as a result of these deficits, businesses and family farms will
be taxed because of higher interest rates on their loans to run
their businesses, thus slowing economic growth. In the short
run, it will mean more--it will be more expensive for working
Americans to build a business, to buy a home, to buy a car or
to pay off credit card debts.
In the next decade these deficits will mean Social Security
and Medicare benefits will be put at risk as millions of baby
boomers start to retire, and in the long run our children and
grandchildren will face massive tax increases to pay for the
four to five hundred billion dollar annual interest charges on
our huge national debt.
Let's look at the consequences already this year. As a
member of the House Appropriations Committee, I have witnessed
this. The bill has come due this year for an irresponsible
fiscal policy implemented by the Republican majority in
Congress.
First, military construction funds to improve homes,
schools and Medicare clinics for the families of our military
servicemen and women serving in Iraq are being cut this year by
$1.5 billion, or 14 percent.
Veterans who were promised by Republicans in the House in
the budget resolution just a few months ago they get a $1.8
billion increase over the President's request in VA health care
spending woke up in August and saw that the leadership in the
House had taken away every dime of that promised $1.8 billion
increase for veterans' health care. As a result, veterans'
health care, according to the Veterans' Administration, will be
$1.9 billion less than that necessary to meet 2004 anticipated
health care needs of veterans already enrolled in the VA health
care system.
So, as a result of all this deficit policy, we are cutting
health care benefits to veterans during a time of war. What a
terrible message to send to the 20,000 soldiers from my
district at Fort Hood that are now in Iraq.
The administration even continues to support cutting
military impact aid education for military children's education
programs by $173 million. So cut the kids's education funding
while Mom and Dad get on the airplane to fly to fight in Iraq.
Unfortunately and unfairly, Mr. Chairman, the people hurt
by the Republican's failed economic policies are those who can
least afford it, working parents who have lost their jobs,
small businesses and families who have to borrow money to build
a business or buy a farm. It hurts seniors who depend on
Medicare and Social Security, and it hurts servicemen and women
and veterans who have already made tremendous sacrifices on
behalf of our Nation.
Mr. Chairman, this is an awfully high price for millions of
Americans to have to pay for failed economic policies that
former President George Bush once called ``voodoo economics.''
To add insult to injury, Americans learned in the 1980s that
the promise of massive tax cuts, huge defense increases and
balanced budgets is a false promise that leads to huge national
deficits. At least David Stockman, the architect of the Reagan
tax cut of 1981, had the integrity to admit two decades ago
that these numbers were a false promise, but to repeat those
false promises 20 years later at the expense of seniors,
veterans and children is inexcusable.
The Republican party once took pride of being the party of
fiscal responsibility. Now today it must take responsibility
for massive deficits, millions of lost jobs and cuts to
programs important to veterans and seniors and children.
Despite all of that, Mr. Chairman, I will work on a
bipartisan basis with my Republican colleagues to address these
challenges, but I will not vote to cut veterans' benefits and
children's programs and education programs to pay for a repeal
of a dividend tax cut or a regressive tax system that leads to
lost jobs and a massive deficit.
Mr. Shays. I thank the gentleman.
Mr. Scott, you are next, and my apologies. Mr. Kind, I made
him my idol, Mr. Lewis, by mistake; and he----
Mr. Kind. I am still your idol, Mr. Chairman.
Mr. Shays. But you are not Mr. Lewis.
Mr. Scott.
Mr. Scott. Thank you.
Can we get the Social Security chart up? I don't have that.
Well, could you get chart No. 11? OK, this is the Social
Security chart.
Mr. Holtz-Eakin, does that accurately depict the Social
Security cash flow for the next 30 or 40 years?
Mr. Holtz-Eakin. It looks to be right.
Mr. Scott. It shows that right now we are enjoying between
Social Security and Medicare about a $150 billion surplus?
Mr. Holtz-Eakin. Well, we can certainly check in the
numbers, but----
Mr. Scott. Looks about right.
Out of that, the $400 billion deficit that we expect this
year, is that before or after we raid the Social Security and
Medicare trust funds for about $150 billion?
Mr. Holtz-Eakin. The $400 billion deficit consists of $162
billion in an off-budget surplus and a $562 billion on-budget
deficit.
Mr. Scott. Which means we raided the Medicare and Social
Security trust funds for $162 billion?
Mr. Holtz-Eakin. Yes, $162 [billion].
Mr. Scott. So that if we don't count that, because we are
going to have to--we are going to need that later on, the on-
budget deficit is $562 billion this year?
Mr. Holtz-Eakin. The on-budget estimate is $562 billion in
fiscal year 2003.
Mr. Scott. And next year?
Mr. Holtz-Eakin. It would be $644 [billion].
Mr. Scott. A $644 billion deficit.
Now, on----
Mr. Emanuel. Would the gentleman yield for one quick
question?
Mr. Scott. I will yield.
Mr. Emanuel. Mr. Director, if that is correct, the $640
[billion]--what did you say? $644 billion? What percentage of
that is the GDP?
Mr. Holtz-Eakin. I don't----
Mr. Emanuel. Would 5.8 be close?
Mr. Holtz-Eakin. It is somewhere in that vicinity.
Mr. Emanuel. So it would be equal to the largest deficit
ever run as a percentage of GDP, which has always been used by
the chairman as a correction to us that we are not running the
largest deficit.
Mr. Scott, I don't mean to take your time because I know
you have got 5 minutes, but for the record in fact we are
running equal to the largest deficit as we did in 1983, because
in 1983 we didn't have a Social Security surplus as we do now,
and if you didn't use Social Security surplus to do your math,
we would be running at a deficit equal at the largest point in
history to GDP--as a percentage of GDP.
Mr. Holtz-Eakin. With all due respect, I don't think the
numbers are comparable, because it is the unified surplus that
represents the net drain on credit markets and has the economic
impact.
Mr. Scott. Reclaiming my time, you are talking about a
deficit next year of $644 billion if you----
Mr. Holtz-Eakin. That is our projection.
Mr. Scott. OK. On page 4, table 1-2 of your report, how
much do you project coming in in revenues from the individual
income tax?
Mr. Holtz-Eakin. In fiscal year 2004, $765 billion.
Mr. Scott. And you are running a on-budget deficit of $644
[billion]?
Mr. Holtz-Eakin. Your projection is $644 [billion].
Mr. Scott. Now, does that include the $60 billion that was
just requested for the Iraq supplemental?
Mr. Holtz-Eakin. It would include the inflated value of the
fiscal year 2003 supplemental which had $60 billion for
activities in Iraq and Defense Department.
Mr. Scott. We just want the numbers to be in perspective,
because we are getting $765 billion from the individual income
tax, and we are $644 billion in deficit, just to give an order
of magnitude.
Now the chairman put up a chart that showed that we could
actually get back in--if we didn't mess up the budget any worse
than we are doing now, that we could be in surplus in about 8
to 10 years. Did that chart assume that we are going to let all
of the tax cuts expire as they are scheduled to expire?
Mr. Holtz-Eakin. The baseline projection that I presented,
the sunset----
Mr. Scott. Can we get chart No. 9 and then chart No. 10?
Mr. Shays. Let me just say to the gentleman, his time is
running short here, but let's go through these, and then we----
Mr. Scott. OK. Chart No. 9 and chart No. 10, if you will
just put them up real quickly. That is what--if we don't make
it any worse, we actually go up into surplus, although you are
still raiding Social Security, but if we adopt in chart No. 10
the Republican proposals, it is getting worse, you are at 4-,
5-, $600 billion a year. Does that suggest that it would be
dangerous to adopt the Republican proposals?
Mr. Holtz-Eakin. I am not exactly sure that is the--to make
the tax cuts permanent, AMT, Medicare prescription drug, are
those the proposals?
Mr. Scott. Right.
Mr. Holtz-Eakin. And discretionary spending?
Mr. Scott. Right.
Mr. Holtz-Eakin. I think the message--if it is the blue
line--we were looking at a unified deficit of roughly 7 percent
of GDP, the lower boundary of the charts I presented. I can
compare numbers later. To run sustained deficits of that size
will have consequences for the accumulation of capital----
Mr. Scott. When we run out of the Social Security surplus,
will we be able to pay Social Security if we adopt those
policies?
Mr. Holtz-Eakin. The projections that we present are
unified and thus reflect all cash flows into the Treasury for
both mandatory and--from all receipts and then outflows for
both mandatory and discretionary spending.
Mr. Shays. The gentleman's time has expired. He has been
going on about 6 plus minutes, and I feel that Mr. Moran may
want a second on this.
Are you gentlemen coming back? Because I will be coming
back? We have a vote, unfortunately. So we will go to our vote
and come right back, and then we can do a second round if there
is that pleasure.
[Recess.]
Mr. Shays. We will call this hearing to order and say to
you, Mr. Director, you have a very difficult task and we in
Congress have a difficult task. The numbers don't look good,
and in many ways nobody likes these deficits, and many of us
got elected to eliminate these deficits. And here then again--
so the question is, you know, what do we do about it?
I tend to come on the side of the equation that says when
you have annual growth at 7 percent each year in spending or
close to it when you look at mandatory and nonmandatory, it
stares you in the face. If revenues don't grow at 7 percent a
year even if you didn't have a tax cut, you have got a problem.
I would like to know, without tax relief, the economy would
have been worse. Is that true or false?
Mr. Holtz-Eakin. Again, it is a difficult question, because
we don't know what the other policy would have done in terms of
monetary policy. What I think there is a broad consensus about
is that over the past several years the tax cuts have supported
the household sector, particularly personal consumption and
housing expenditure.
Mr. Shays. But it has been said that the 2001 recession was
much milder than it would have been without the tax cuts that
year, and you agree, but it just depends to what level.
In a similar vain, would the current unemployment situation
be worse if not for the tax cuts? If so, do you have an
estimate of how much worse?
Mr. Holtz-Eakin. I don't have an estimate for exactly the
same reason, but cyclical unemployment would be the mirror
image of the degree to which the economy is operating below its
potential.
Mr. Shays. In what ways would the tax cuts of 2001 and 2002
contribute to the economic improvements we have begun to see?
And you do agree that the economy is improving, correct?
Mr. Holtz-Eakin. We do see, as our forecast indicates, an
economy that will improve over 2003, 2004. Embedded in that
improvement is a rise in business investment. In part that is a
result of the partial expensing and section 179 investment
incentives that were in the 2003 and earlier tax measures. That
supportive business investment, we expect to have a modest
impact in 2003, but more substantial, as much as a 5-percent
increase in business investment, in 2004.
The household sector has continued actually to be
relatively resilient to the downturn, but we expect that the
fiscal policies in place going forward will support its ability
to rebuild its wealth through some saving as well as
maintaining a healthy rate of consumption expenditure, and
those two pieces are the key to sustained economic growth.
Mr. Shays. Do you have any way of evaluating what the
impact would be first if the tax cuts were repealed or if they
were allowed to be discontinued as they are not renewed? Do you
have any way to evaluate the impact of that?
Mr. Holtz-Eakin. Well, as our report discusses in the
chapter on the economic outlook, in our baseline projection we
try to incorporate to the best of our ability the impacts of
the sunset of the tax cuts toward the end of the budget window
on the potential GDP of the economy. The net effect is a modest
negative in which under the current fiscal policies, while they
have some beneficial incentive effects through lower marginal
tax rates, the accumulated deficits tend to crowd out capital
accumulation enough that productivity growth is lower, other
things equal. It is that net effect that we can quantify.
Breaking apart the different pieces is not really very
tractable.
Mr. Shays. So the bottom line, we are seeing some
significant deficits.
We have some real question marks about what we need to
spend in Iraq. Has the administration presented any document to
you as to what they think we need to spend on the military side
and then what they think we need to spend on the rebuilding
side?
Mr. Holtz-Eakin. No, they have not.
Mr. Shays. Have you requested that information?
Mr. Holtz-Eakin. No. We typically respond to requests from
Congress and----
Mr. Shays. Well, I am certainly going to make that request
through you all to have that done. There is no doubt in my mind
that when we look at all the things--and I voted for the tax
cut. I believe that we were right in doing that, but I think
that I would be irresponsible if I don't just put everything
into play as to what our future needs are going to be.
With that, I think that, Mrs. Capps, you have the floor. Is
that correct? Yeah. You have the floor.
Mrs. Capps. Thank you, Mr. Chairman; and thank you, Mr.
Holtz-Eakin, for your patience with our back-and-forth schedule
today.
To continue the discussion on the effects of the tax cut on
the deficit, particularly comments that have been made today
and other times that the tax cuts did not cause these deficits,
but to turn to page 15 of the budget outlook and quote you--or
whoever put it together under your supervision at least--and
this is a quote: ``Laws enacted in the past 5 months are
responsible for nearly two-thirds of the increase in the
projected 2003 deficit and for an even larger share, roughly 70
percent, of the increase in the projected 10-year deficit, and
one of the most * * *''--this is, I think, significant--``* * *
one of the most significant of those laws from a budgetary
perspective is the jobs and growth tax relief bill which is
estimated to increase the deficit by $62 billion this year and
by $288 billion over the 2004-13 period.''
Then you do have a table 1-8 to substantiate that.
I will ask you for a comment in a minute, but I'd like to
be clear and proceed from that point about what is and is not
included in the budget projections before us. These issues have
been raised but not with an opportunity I think for you to
respond.
CBO is projecting a $480 billion deficit for the next year
and a whopping $1.4 trillion deficit to be racked up over the
next 10 years. But this understates the case--and this point is
being made by several of my colleagues, but I want to talk
about two or three of the issues which CBO's figures don't
include, like a number of likely expenditures that Congress is
poised to make. CBO by law has to assume only what is in the
law when it figures the baseline budget, is that correct? But
for us to get a realistic budget, I think we need to anticipate
some sure markers as well.
For example, today as we are here, my colleagues on the
Energy and Commerce Committee are having a hearing on the
blackout and the chairman wants to finish the conference report
on the energy bill by the end of this month. I think we are
going to be voting on conferees today. The energy bill has some
$20 billion of subsidies to the energy industry in it, and
these new costs to the Federal budget and the taxpayer are not
included in your projection. If this bill becomes law by
September 30, we would have to add these costs to our deficit
projections, is that correct?
Mr. Holtz-Eakin. That would be correct.
Mrs. Capps. Then another topic that is of great interest to
the Energy and Commerce Committee is the Medicare prescription
drug coverage which could also be completed in the next couple
of months. Hopefully, we will be coming back from the
conference and voting on some kind of package, but it is
supposed to cost at least $400 billion over the next 10 years
and probably more if we include payments to rural providers
that Senator Grassley and others, including me, are very
concerned about. So, again, that $400 billion is not included
in the projections, but we would have to increase our deficit
projections if that becomes law, is that correct?
Mr. Holtz-Eakin. That is correct.
Mrs. Capps. If it becomes law, but it is quite--I mean, it
is everybody's interest that it would become law.
Again, not to rub this in, but your projections are
assuming that the tax cuts will expire, because that is the way
the bills were written. But it has been said over and over
again by the White House and others that the tax cuts are going
to be made permanent, and then that of course would change
these potential costs as well, am I correct?
Mr. Holtz-Eakin. Yes.
Mrs. Capps. These changes would add $1.5 trillion in our
deficit over time.
Just a couple of others. What about any fixes to the AMT?
Mr. Holtz-Eakin. They are not in our baseline.
Mrs. Capps. And they are not in the baseline but this is
going to begin to affect millions of middle-class taxpayers the
next few years, and the President has indicated that he very
much wants to fix this, and I think he has substantial support
for doing that. That might cost, say, $400 billion in projected
additional deficits, maybe closer to $700 billion if the Bush
tax cuts don't expire.
Well, this is something of concern to me, and I think it
needs to be stated. Then is it correct that you will be coming
back if these laws are enacted, if they are, with an additional
set of deficit figures?
Mr. Holtz-Eakin. In a typical course of events, anything
that is passed between now and our January projection of the
economic budget outlook would be incorporated in our baseline
in January.
Mrs. Capps. Finally, we have not included in my discussion
any potential increases in defense spending or the mandatory
costs of the extra debt service, am I correct?
Mr. Holtz-Eakin. That is right.
Mrs. Capps. Thank you very much Mr. Chairman.
Mr. Shays. Thank the gentlelady.
Mr. Baird is next, but he is not here, so I think we go to
Ms. Baldwin.
Ms. Baldwin. Thank you, Mr. Chairman, and thank you, Mr.
Holtz-Eakin.
As I read comments from some of my colleagues in the news,
it appears that some of our former deficit hawks are becoming
deficit doves these days, and I remain deeply concerned about
our economic crisis, as I see it right now.
Your August CBO baseline projection showed that just shy of
$1.4 trillion will be added to our national debt by the end of
a decade's time, and I think we all know that this number will
actually be much higher.
If we could have slide No. 3 up there, that would be
helpful.
Because of course by law your baseline projections don't
include some of the things that have been outlined by previous
members through their questioning but things that we feel are
relatively confident are going to happen. I think we can all
assume that these numbers are going to end up being much
higher, and I am concerned about these deficits for many, many
reasons, including their impact on Social Security, their
impact on the next generations who come through, the impact on
vital security, both national and homeland security issues,
health issues, education priorities, and also the impact on the
budget of average families in the United States. Right now an
average family of four is paying, as I understand it, in excess
of $2,000 a year just to service the interest on national debt
without these additions.
If we look at these additions, we are talking about
doubling that over the course of a decade. Our staff puts the
figure just over I think $4,500 a year, and for a Congress that
is so concerned about providing tax relief, putting money in
the pockets of these families, these numbers just have to make
you wonder.
Now the projections that you have shared with us assume
that we can grow out of these budget deficits. Barring any
drastic increases in domestic spending--and of course the chart
indicates that, you know, we must assume some that aren't in
this baseline--you have assumed rapid economic growth in the
year 2004 and thereafter, 3.8 percent real economic growth for
the year 2004, 3.5 percent for the year 2005 and at least 3
percent growth through 2008.
At that point, growth slows a bit in large part because of
the retirement of the baby boom generation gradually from the
labor force.
In addition, when you look at all of the things that just
are not currently assumed in the August CBO baseline but we
assume will happen, when those costs are factored in, the House
Budget Committee Democratic staff project that our debt will
outrun the economy indefinitely.
So I guess in terms of questions of you, sort of how big
does a deficit have to be to hurt the economy? And the
companion issue is, what sort of economic growth do we have to
assume to grow our way out of this once these pretty clear
items are added to your baseline after Congress acts?
Mr. Holtz-Eakin. With regard to the first question, I would
emphasize that there is no clear one-to-one relationship
between Federal Government deficits and economic performance.
We ran deficits that averaged about a little over 2 percent of
GDP in the 1970s. We also ran deficits that averaged 2 percent
over GDP in the 1990s, and economic performance differed
greatly. Deficits are both the results of deliberate policy
decisions but also the result of economic performance and as an
outcome they reflect a great many factors. So I think
emphasizing a clean relationship between what is the right
deficit to get the right economic performance is not a good way
to think about it.
With respect to the question of what would economic growth
have to be in order to, for example, stabilize the debt-to-GDP
ratio under this set of policies, that is something that we
could certainly investigate. I would hesitate to do that
calculation in my head, but I do think that, in terms of
framing the question, if there was a particular set of policies
that was enacted going forward, one would want to identify the
impact on the debt-to-GDP ratio and whether that did in fact
stabilize at some point in time. If it did, then the economy
would be capable of supporting not just the debt but the
payments on that debt without any sort of tendency to explode
in an ever-increased need for borrowing. I would be happy to
work with you on that.
Mr. Shays. Mr. Baird, you have the floor. We might be able
to do both you and Mr. Cooper, and we are happy to come back to
take advantage of you if you want to come back after the vote.
Mr. Baird. I thank the chairman.
I appreciate the report you have produced, and I have a
couple of brief questions about it. Many of us in this body
have pledged to put Social Security and Medicare in a lockbox.
That includes the President of the United States as well as the
chairman of this committee and most Members probably. At the
same time, many people have called for a balanced budget
amendment to the Constitution. If we put Social Security and
Medicare in a lockbox and did not include it in the unified
budget calculus, at what point would we be adhering to a
balanced budget?
Mr. Holtz-Eakin. I guess I would have to understand a
little better what lockbox means.
From an economic point of view, the administration of the
on budget and off budget surplus is an intergovernmental----
Mr. Baird. Let's suppose we----
Well, we all voted for it. Maybe somebody in this body
understood it, but let me guess that what we meant was that we
shouldn't be borrowing from it and including it in a unified
budget. In other words, we should report the--let me say it
differently then. At what point will the on-budget numbers be
in balance?
Mr. Holtz-Eakin. Well, I can take a look at the table. I am
not sure what the answer to that is, but I guess I could--in
the baseline projection, the on-budget deficit is $104 billion
in 2013, so at the end of this window it is not yet----
Mr. Baird. In other words, if we honored our commitments to
put Social Security and Medicare in a lockbox and if those who
have called for a balanced budget amendment adhered to their
own rhetoric, we don't need that rhetoric until at least 2013
and possibly well beyond?
Mr. Holtz-Eakin. Yeah. I think that--I guess so that I can
understand the question--not to be difficult--but you can think
of the balanced budget excluding the Social Security surplus,
the off-budget surplus as a fiscal target, and the degree to
which you legislate a fiscal target will be similar in spirit
to the Hollings and----
Mr. Baird. Folks have called for a constitutional amendment
to require it, and they have said that the only exemption would
be in a time of national disaster. So presumably either a
national disaster continues till 2013 or we are not consistent
with our own rhetoric, at least those who have said they
support a balanced budget amendment and Social Security and
Medicare in a lockbox.
Let me point out an interesting thing. You, I think, fairly
and accurately observe that the--you put the context of the
deficit in relation to the Federal GDP. I did some looking, and
my guess is that it is--and it is an estimate, but as a
percentage of California's domestic product, the California
deficit today is about 2.8 percent. How does that compare to
the deficit as a percent of GDP in the United States?
Mr. Holtz-Eakin. Fiscal year 2003 would be 3.7 percent in
our estimates.
Mr. Baird. So the Federal budget deficit is higher as a
percent of GDP at the Federal level than is California's
deficit as a percent of California's overall economy, and yet
the State of California is seeking to recall their governor
over the deficit.
Mr. Shays. Would the gentleman yield?
Does that include, though, debt service, in other words,
the money that they legally can borrow? I don't think it does.
I think it just includes their deficits, not their debt
service.
Mr. Baird. I don't know the answer to that, Mr. Chairman. I
would be interested in that.
Mr. Holtz-Eakin. More generally, clean comparisons between
State-level accounts and Federal accounts are not easy. State-
level accounting often includes capital accounts in addition to
the general fund and a variety of other things.
Mr. Baird. That is helpful to know. And ours doesn't.
I am sure it has already been addressed, but the chairman
at the start talked about whether or not someone would be bold
or foolhardy enough to raise taxes, and yet--do we have chart
No. 1 of--maybe somebody has already addressed this in my
absence. I was over at the floor. Do we have chart 1 from the
chairman's own charts? Can we call that up? The chart where he
basically saw that the tax cuts--the impact of the tax cuts on
the budget had minimal----
That is it. Thank you very much.
I regret the chairman is not here, but it would seem to me
that if indeed the tax cuts become such a small portion of
impact at 2006, then the chairman himself must be advocating
for a repeal of the tax cuts or, in other words, a sunset,
which I think he tried to imply that if you support a sunset of
the tax cuts then you have actually supported a tax increase.
Can you get to that number, as reflected on his chart,
without sunsetting the tax cuts? In other words, if you extend
the tax cuts, can that red line get so small as that?
Mr. Holtz-Eakin. If I understand the chart, it is what has
happened since the March baseline provided by CBO, which is the
top; and indeed legislation since March has largely had near-
term impacts on the tax line, which is I think the part at the
bottom. Then there were legislative impacts on the outlay side
in the supplemental, and the rest would be the economic. So
that is what has changed since our March baseline.
Mr. Baird. Maybe I didn't----
Mr. Holtz-Eakin. And our March baseline included the
sunset, as does the----
Mr. Baird. So this chart includes a sunset?
Mr. Holtz-Eakin. Both.
Mr. Baird. Implying then that----
Mr. Holtz-Eakin. The top line and the bottom line both have
a sunset----
Mr. Baird. I understand that.
Mr. Shays. Let's see if we can get Mr. Cooper in before,
unless he wants to come back after, because I know others will
come. But do you want to do yours now or when we get back, Mr.
Cooper?
Mr. Cooper. I will try to be brief, Mr. Chairman.
This is a grim day for the country, because we are
basically facing the largest absolute deficits in our Nation's
history and also the worst job performance. As I understand it,
we have lost some 2.7 million jobs in the last 2 or 3 years.
What advice would you have for this Congress? What do we need
to be doing to promote job growth in this country? We have
bills that we passed that are called growth bills, but they
don't seem to be working. This is the worst job performance
since Herbert Hoover was President. What can we be doing to put
more people in America back to work?
Mr. Holtz-Eakin. Well, as you know, the CBO is not in the
position of providing policy advice and particular
recommendations. I will point out that in our baseline
projections we anticipate that the resumption of economic
growth will, with the typical fashion, carry with it increases
in payroll employment, something to be on the order of 150,000
or so a month, but that the unemployment rate doesn't come down
as fast as one might expect because people come into the labor
force.
The question then is whether policies would be desirable to
make more quickly the return to full employment or to let that
pace be satisfactory. Our baseline projection shows a return to
potential GDP and full employment over the next several years,
and it is an issue of timing--instead of do we have it or not.
Mr. Cooper. Economic growth according to technical measures
seems to be resuming. It was just revised upward for the second
quarter. We had 3.1 percent growth in our economy in the second
quarter of 2003, and yet the job performance doesn't seem to be
there. At least it is not pulling overall unemployment down
from the 6.2 percent level. So it suggests to me that maybe tax
cuts are not the right medicine. We need to do more than that,
and the other party has traditionally spurned direct government
spending programs, public works program and other things like
that where you can say with certainty that you are putting
people to work.
You don't have to rely on indirect effects to get people
employed; you know you are putting people to work, and yet this
administration has generally opposed efforts like that in favor
of more indirect approaches, tax cuts.
One of the reasons I appreciate you is you do seem to be
willing to tell truth to power. On your other report, on our
situation in Iraq you point out that our Army could be short-
staffed as soon as March of next year. But in this report that
you issued to this committee, on page 45 you point out that the
tax legislation that has been passed in the House of
Representatives and the Congress since 2001, quote, will
probably have a net negative effect on saving, investment, and
capital accumulation over the next 10 years.
That is a powerful condemnation of what this Congress and
the prior Congress has passed into law, to have a net negative
effect on savings investment and capital formation. Isn't that
largely the source of new jobs? You have to have new savings,
investment, and capital formation in order to create a
genuinely growing economy, don't you?
Mr. Holtz-Eakin. This particular comment is about the
potential GDP, the long-run growth. The near-term job creation
will be the return of the economy to full employment. So I
would distinguish between the cyclical component--about which I
think there is broad consensus that we have not seen a recovery
in the labor market yet and would anticipate to have at some
point--and then, the pace of long-term economic growth. And
with respect to capital accumulations, that probably shows up
more in wages per job than in the number of jobs over the long-
term.
Mr. Shays. Let me just interrupt the gentleman. We have 4
minutes left; we need to get back. I think the ranking member
is not coming back. I don't want to have the Director stay if
we are not coming back. So are you coming back? You two
gentleman are coming back? Then we will come back. OK. I am
sorry to hold you up, but that is your job, Right?
Mr. Holtz-Eakin. That is my job.
Mr. Shays. OK. Thanks. We are not adjourning. We are in
recess.
[Recess.]
Mr. Hensarling [presiding]. The committee will come to
order. And, Mr. Edwards, you are recognized.
Mr. Edwards. Mr. Chairman, thank you very much. Let me say,
first of all, in my 12 years in Congress I have never
questioned attendance at a committee hearing, because we all
are busy and have busy schedules, and I appreciate the chairman
coming back to oversee the continuation of this. But out of 24
Republican members of this committee, I am not sure if there
were more than 4 or 5 that actually showed up for this hearing,
and it just seems to me if one is going to be a proponent of
the tax cuts as part of the heart and soul of our Nation's
fiscal policy, then it would be certainly good to show up on
the day when we have to face the bill collector, and admit to
policies that have been a big part leading to the largest
deficit in American history. And I think, Mr. Chairman, it is
not that you and I might have differences over how we get out
of this mess, but by the total lack of interest today. This is
the first week after a 5-week break. We knew about this
hearing, and while members do have other things on their
schedules I would like to know how many of those things are
more important in terms of priorities than dealing with the
largest deficit in American history. And if I were an American
citizen watching this hearing, I guess that would concern me,
the lack of interest in this, and frankly even on the
Democratic side. While we had more members attending before all
of the votes, I would be the first to say I wish we had more
Democrats here.
Having said that, I do appreciate the chairman allowing us
to continue with a few questions on this vitally important
national issue. And perhaps maybe what we ought to do is hold
this hearing again at a time when members would find it in
their schedule the ability to deal with one of the most
pressing problems facing our country with this committee having
direct responsibility for that budget.
Dr. Holtz-Eakin, what I would like to ask you is this, and
you can tell me if these are ballpark numbers. But there has
been a discussion about what extent of the tax cut has been a
contributing factor to the deficit. According to a document put
out by the House Budget Committee Democratic staff, I show that
for 2004, if you count net interest costs, the 2001 tax cut
cost $121 billion in lost revenues; the 2002 tax cut cost $34.8
billion in lost revenues for fiscal year 2004; and then the
2003 tax cut is $153 billion. If I add that up, including extra
interest on the debt, which is a direct cost of deficit
spending partly caused by tax cuts, I am talking about,
according to the Budget Committee Democratic staff, $309
billion of the deficit in fiscal year 2004 as a direct result
of the tax cuts.
Do you have any numbers to suggest that those are not in
the ballpark?
Mr. Holtz-Eakin. Well, table 1-8 shows the impact of the
2003 tax cuts on our baseline projections, and we could
certainly go back and check.
Mr. Edwards. What numbers do you show?
Mr. Holtz-Eakin. Well, for 2004 the total revenue changes
are $135 billion. I think you said $150 [billion].
Mr. Edwards. We used $153 [billion]. I think we counted
some net interest on that. So let us just round it off to the
nearest $50 billion. For those who had suggested that the tax
cuts haven't really played a role in contributing to the
largest deficit in American history, the fact is that somewhere
between $250 [billion] and $300 billion of the 2004 projected
deficit will be a direct result of the 2001 tax cut as well as
the 2002 and 2003 tax cut, making the note, if I could, that
the 2002 tax cut and the 2003 tax cut were after September 11
of 2001 and the unexpected tragedy that our country faced.
Let me ask just a series of quick--perhaps you can answer
this yes or no--quick questions in terms of the numbers
projected for the largest deficit in American history. It does
not include the full cost for the $60 billion in today's
Washington Post the President is asking for as an addition to
the Iraqi war. Is that correct? It doesn't assume the full cost
of that $60 [billion] to $70 billion. Is that correct?
Mr. Holtz-Eakin. It does repeat the supplemental from 2003,
so that was about $60 [billion] for defense and it is deflated
above that. So that is in our baseline.
Mr. Edwards. Some of that might be included in that?
Mr. Holtz-Eakin. So to the extent that it covers that, it
does.
Mr. Edwards. With 9-percent increase in the number of
veterans enrolled in VA health care, what do you assume for
increased cost in VA spending between 2003 and 2004?
Mr. Holtz-Eakin. I don't know that number, but it is in the
report.
Mr. Edwards. I will continue on, Mr. Chairman.
Mr. Hensarling. The gentleman's time has expired. Mr.
Scott.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Director, can you give us an idea of the impact of 2001
and 2003 tax cuts on stimulating the economy?
Mr. Holtz-Eakin. Well, as I mentioned earlier, one could
derive estimates of the impact of the tax cuts on household
consumption and the degree to which that helped demand. One can
provide estimates of the impact of the partial expensing in
section 179 investment, expensing for small businesses on
business investment.
For the 2003 tax cut, our baseline includes some impacts on
business fixed investment and thus GDP, which are modest in
2003 and larger in 2004, perhaps contributing as much as a half
a percentage point of GDP to additional growth. If one were to
try to do a retrospective on the overall impact, it would be
difficult to do because the existence of those policies changes
the incentives of other policymakers, especially the Federal
Reserve.
So the net impact is very difficult to ascertain without
making some specific assumption with what the Feds would have
done in the absence of the tax cut.
Mr. Scott. Are you familiar with the Joint Committee on
Taxation models that came up with the conclusion that long-term
there would be a fewer jobs as a direct result of the 2003 tax
cut than if you hadn't passed it?
Mr. Holtz-Eakin. I am familiar broadly, not in intimate
detail, with the joint committee's efforts to do modeling
similar to what we do with the analysis of the President's
budget.
Mr. Scott. Could we get number 11, chart number No. 11?
Net interest on the national debt again goes from $322
[billion] to $647 billion in your report. Is that right?
Mr. Holtz-Eakin. I am sure----
Mr. Scott. That is $647 billion interest on the national
debt.
Mr. Holtz-Eakin. I will just take that.
Mr. Scott. 2013. That is on page 10.
Mr. Holtz-Eakin. Net interest in 2013.
Mr. Scott. No. Gross interest. Well, I assume you expect to
pay Social Security back with interest.
Mr. Holtz-Eakin. It has no net effect on the budget. That
is an intergovernmental transfer.
Mr. Scott. Well, and when the time comes--well, if you are
going to repeal Social Security, then you don't have to worry
about it; you can do net interest. If you are talking about
replacing the money in the fullness of time, then you need to
talk about gross interest.
Is that right?
Mr. Holtz-Eakin. But what we show in our baseline is the
overall impact on receipts, outlays, and borrowing from the
public that would allow you those gross interest payments that
are intergovernmental transfers.
Mr. Scott. The income tax generates $765 billion in income
tax. That is on page 8--excuse me. That is on page 4.
Mr. Holtz-Eakin. Yes.
Mr. Scott. In 2013, you have $1.9 trillion.
Mr. Holtz-Eakin. Yes.
Mr. Scott. That assumes all those tax cuts expired. Is that
right?
Mr. Holtz-Eakin. Yes.
Mr. Scott. And if we adopt the Republican proposals of
continuing extending those tax cuts, it wouldn't be anywhere
near that amount, would it?
Mr. Holtz-Eakin. In our baseline total receipts would rise
by 4 percent, a little more than 4 percentage points of GDP, of
which 2.3 percentage points are due to the sunsets and the
remaining 2 percentage points come from a variety of other
sources, rises in real income, the alternative minimum tax,
taxation of tax-deferred savings plans, and then some technical
factors.
Mr. Scott. Well, add these up. Because as we can tell from
the Social Security chart, in a few years we are not going to
have this gravy train Social Security generating $150 billion.
We are $644 billion on budget deficit next year. Where are we
going to get the money? If the income tax this year only
generates about $765 [billion], where are we going to get all
that extra money and then some to be able to come anywhere
close to balancing the budget unless we repeal Social Security?
Mr. Holtz-Eakin. It is a policy decision how one arranges
the various pieces of the government budget.
Mr. Scott. What kind of cuts would have to be made after
Social Security starts running the deficit to come anywhere
close to balancing the budget? Or are we just into a structural
deficit where we don't care about deficits?
Mr. Holtz-Eakin. If the question is about what happens
after 2018 when the cash flow in the Social Security trust fund
turns negative, our projections don't extend that far, and I am
not exactly sure what policy it is that you would like me to
look at.
Mr. Scott. Well, I think the policy is you have got to
repeal Social Security, or the numbers just don't add up.
Mr. Hensarling. Mr. Scott, your time has expired, and
members are advised there is approximately 8 minutes left in a
vote.
Dr. Holtz-Eakin, we appreciate your testimony and your
patience with us today, and the committee stands adjourned.
[Whereupon, at 1:30 p.m., the committee was adjourned.]
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