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FROM THE OFFICE OF PUBLIC AFFAIRS February 3, 1999RR-2926 Mr. Chairman, members of this Committee, I appreciate the opportunity to discuss with you the President's FY 2000 Budget, the first budget of the 21st century. As a result of the fiscal policy of the last six years, the economy it helped produce, and the ongoing interaction between the two, the nation has moved from an era of large annual budget deficits to an era of budget surpluses for many years into the future. And this gives us an historic opportunity to meet challenges that will affect our economic and social well-being for decades to come, including the economic and fiscal pressures created by the retirement of the baby boom generation. And meeting those challenges is exactly what the President's budget does. The core of this budget is fiscal discipline, and thereby increased national savings, in order to promote economic growth and retirement security in the years ahead. Before I discuss how this budget will meet these challenges, let me review what has taken place in the last six years. In 1992, the deficit reached a record of $290 billion, the Federal debt had quadrupled during the preceding twelve years and both the deficit and debt were projected to rise substantially. The President responded with a three-pronged economic strategy of fiscal discipline, equipping people for the future and open markets at home and abroad. This strategy contributed greatly to moving us from deficits to surpluses, and to what many consider to be the best economic conditions in recent memory -- the longest peacetime economic expansion in our history, a very high rate of job creation, the lowest unemployment in decades, and real increases in income across all income strata. It seems to me that focusing on the economic conditions of recent years, and on the strategy that contributed so much to them, provides very useful guidance as we face policy issues going forward. Let me also stress that tax burdens on working families are at record lows for recent decades. For a family of four with a median income, the federal income and payroll tax burden is at its lowest level in 21 years, in part because of the child tax credit enacted in the 1997 balanced budget plan. For a family of four with half the median income, the income and payroll tax burden is at its lowest level in 31 years, in part because of the 1993 expansion of the Earned Income Tax Credit for fifteen million families as well as the 1997 enactment of the child tax credit. And for a family of four with double the median income, the federal income tax burden is at its lowest level since 1973. While overall tax revenues have risen as a percentage of GDP, that is primarily because affluent individuals have had large increases in incomes, in part from bonuses based on high stock prices and increased realizations of capital gains, and in part because of increased corporate earnings. Against that backdrop, the President's new budget proposes that in order to generate jobs, raise standards of living and promote retirement security most effectively, we must save the great preponderance of projected budget surpluses, not consume them for tax cuts and spending programs. Specifically, the budget proposes that 62 percent of the surpluses be allocated for Social Security, and 15 percent of the surpluses be allocated for Medicare. These resources will then be used predominantly to pay down publicly held debt of the federal government, and in part to purchase equities, both of which will in effect preserve and invest rather than consume and eliminate the increase in national savings that comes from the surplus. In addition, national savings is increased by allocating 12 percent of the surpluses for creating new Universal Savings Accounts. Finally, the budget insists that none of the surpluses be used at all until we have put Social Security on sound financial footing for the long-term. Let me focus on debt reduction for a moment. When President Clinton was elected, publicly held debt equaled 50 percent of GDP. Under the President's plan, 80 percent of the surpluses allocated to Social Security and all of the surpluses allocated to Medicare will reduce debt held by the public. As a result, by 2014, publicly held debt will decline to about 7 percent of GDP. This reduction in debt will have three effects. First, the government will not have to refinance federal debt and thereby will consume less of national savings, thus making capital more readily available to the private sector. That, in turn, will reduce interest rates and increase confidence in the economy, increasing economic growth, job creation and standards of living. Second, debt service costs will decline dramatically. When the President came into office debt service costs of the federal government in 2014 were projected to constitute 27 percent of the federal budget. Under the President's proposal, and because of the progress we have made to date, we estimate the debt service costs will be 2 percent of the federal budget in 2014. Third, the decrease in debt means the federal government will have a greatly improved capacity to access external capital should the need arise. In addition to reducing publicly held debt, the President's budget strengthens Social Security and Medicare. With regard to Social Security, the President has proposed two measures that -- taken together -- will extend the life of the Trust Fund to 2055. The first measure is the purchase of Treasury "special" non-marketable securities, which are in effect a first claim against the general revenues of the federal government to meet the already existing Social Security commitments. The second proposal is, that of the 62 percent of the surpluses that will be transferred to the Social Security Trust Fund, about one fifth would be invested in private-sector equities. I have had concerns about investment in equities by the Trust Fund. Let me make two observations about this particular proposal. First, it would result in roughly 15 percent of the Trust Fund being invested in equities. Given that equities do have risks, that seems to me to be a prudent balance between receiving the potentially greater return from equities and keeping the investment small enough so that the Trust Fund is not exposed to danger. Second, we are proposing to have two levels of protection to make sure that there is no political influence in the investment process. Money managers would be from the private sector and there would be no investment function performed by government officials. A mechanism would be devised in concert with Congress to provide apolitical oversight and apolitical selection of these managers. In addition, the President is also proposing that a bipartisan process be created to recommend the "tough choices" necessary to extend the life of the Trust Fund beyond 2055 -- to 2075. However, within the framework of these "tough choices," the President is committed to reducing the high rate of poverty for elderly widows -- and to eliminating the earnings test for working seniors. With regard to Medicare, we extend the life of the Trust Fund to 2020 by purchasing Treasury "special" non-marketable securities, as under current law. In addition, the President proposes that a bipartisan process be used to enact reforms, but only after the Medicare Commission submits its report in March, and that coverage of the cost of prescription drugs should be part of any package recommended by this bipartisan process. Now let me focus on our proposal for the new Universal Savings Accounts. These accounts would receive 12 percent of the surplus, be separate from Social Security, and would provide incentives for workers to save for retirement. The government would provide a refundable tax credit of an equal amount for each account and also a match for each additional dollar voluntarily saved, with larger matches going to low income workers. The exact details of the program would be worked out by the Administration and Congress. Finally, the remaining eleven percent of the surpluses would not be saved, but would be allocated for defense spending to protect our national security and for critical domestic discretionary investment priorities. This eleven percent supplements other discretionary expenditures in the budget that are within the limits imposed by the discretionary spending caps. Let me now highlight some of the key investments and priorities in the discretionary and mandatory sides of the President's budget. Leaving aside measures in the budget that are paid for out of the surplus after Social Security has been addressed, all new tax cuts and mandatory spending are fully paid for and the budget complies with the discretionary caps. In his State of the Union Address, the President made clear that our key investments for the future and our critical priorities were concerned with providing important programs and tax credits for education, working families, communities, and fostering a strong economy and a strong America in the world. Within these broad areas, I would like to focus on just a few specific initiatives. First, for education, the budget proposes to help states and school districts build and renovate schools through $3.75 billion of tax credits over five years. The budget also proposes to extend and expand the tax deduction for employer-provided educational assistance. Second, for working families, the budget proposes a long-term care initiative that includes a new $1,000 tax credit to help compensate families for the cost of caring for an ailing relative. The budget also includes a new $1000 tax credit to assist workers with disabilities. And the budget helps with child care costs in three ways: through greater tax relief for working families and for those parents who stay at home, through subsidies to help families pay for child care, and through dramatic increases in funding for after-school programs. Third, for communities, the budget provides for a "New Markets Investments Initiative" that could spur $15 billion in new capital investment in businesses in underserved inner cities and rural areas through tax credits and loan guarantees. It also includes an increase in the low- income housing tax credit. Finally, the budget calls for a new 21st century policing initiative that would help communities add between 30,000 and 50,000 more law enforcement officers, give law enforcement officials access to the latest crime-fighting technologies, make the Brady law permanent, and permanently ban violent juveniles from buying guns. Fourth, to help foster a strong economy, the budget proposes to facilitate "Y2K" amelioration activities through the Council on Year 2000 conversion and extend the Research and Experimentation tax credit. Finally, the budget asks for resources to strengthen America's leadership in the world. The Congress contributed to global financial stability last year by providing the full amount of resources for the International Monetary Fund. I would like to strongly encourage the Congress to approve the request in this budget to meet all of our financial obligations to the United Nations. We are also asking for resources to promote trade with Africa. Before I close, let me mention one other important element of this year's budget. Our budget contains several proposals aimed at curbing corporate tax shelters. Tax shelters not only erode the corporate tax base, they also breed disrespect for the tax system both by people who participate in the corporate tax shelter market and by others who perceive corporate tax shelter users as paying less than their fair share of tax. Our budget proposals address these issues by increasing disincentives for entering into abusive transactions and by attacking specific corporate tax shelter transactions of which we are aware. The Treasury Department will continue to study additional remedies for the corporate tax shelter problem and to work with the members of Congress and their staffs to address this issue. Mr. Chairman, restoring fiscal discipline to our country has contributed enormously to the
strong economic conditions of the last six years. Because of what has been accomplished, we
now have a unique opportunity to further our economic and social well-being for the years and
decades ahead. The President has proposed that the surpluses be used predominantly to increase
national savings and improve the fiscal condition of the federal government, while at the same
time, strengthening Social Security and Medicare. The effect of all this should be to increase
jobs, raise standards of living and improve the economic security of future retirees and workers.
I look forward to working with the members of this Committee as we face these critical
challenges. Thank you very much.
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