Copyright 2000 Federal News Service, Inc.
Federal News Service
February 8, 2000, Tuesday
SECTION: PREPARED TESTIMONY
LENGTH: 4726 words
HEADLINE:
PREPARED STATEMENT OF LAWRENCE H. SUMMERS TREASURY SECRETARY
BEFORE THE SENATE FINANCE COMMITTEE
BODY:
Mr. Chairman, Senator Moynihan, Members
of the Committee, it is a pleasure to speak with you today about the President's
FY 2001 budget. Let me start by thanking this Committee for your hard work in
helping bring about the enviable position in which we now find ourselves.
At the outset of this Administration, the President established a
three-pronged economic strategy based on strong fiscal discipline, investing in
people, and engaging in the international economy. Partly as a consequence of
that strategy we have achieved the first back-to- back unified budget surpluses
in more than 40 years.
It is no coincidence that this month the US
economy also achieved the longest expansion on record. This historic
accomplishment is a tribute to the hard work and entrepreneurial qualities of
our workers, businesses and farmers. But without the budget agreements of 1993
and 1997 between the President and Congress, the economic expansion would not
have been as impressive or as enduring. Last year's surplus of
$124 billion was the largest in our history. Even using
conservative assumptions, the budget will move still further into the black this
year. By the end of September, we expect that Federal debt held by the public
will be $2.4 trillion less than was projected for that date in
1992. This represents scarce national savings that have been freed up for
private sector investment in the productive economy: in American businesses,
workers and homes.
In 1992, the Federal budget posted a record deficit
of $290 billion - almost 5 percent of our gross domestic
product. Since then we have achieved not only a unified budget surplus -
comprising both the operating budget and the Social Security budget - but also a
small surplus in our on-budget account. In other words, for the first time since
1960 all of last year's Social Security surplus was used to improve the
government's balance sheet.This dramatic improvement in our fiscal situation
reflects some hard choices. Federal spending has fallen below 19 percent of GDP,
a sharp drop from the 22 percent level that prevailed when the Administration
came into office. And we have reduced the Federal civilian payroll by more than
one-sixth in that period, a reduction of 377,000 full-time equivalent employees.
As a result of this discipline, we are now in a position to eliminate
the debt held by the public by 2013, on a net basis. Paying down the remaining
$3.6 trillion of Federal debt will help to intensify the
remarkably positive interaction that we have witnessed between the budget and
the economy over the last several years, whereby what was once a vicious cycle
of more debt, higher interest rates, a weaker economy and still more debt has
been replaced with a virtuous circle of declining debt, lower interest rates,
and a stronger economy, in turn producing still less debt, further downward
pressure on interest rates, and stronger growth.
As a result,
unemployment is at its lowest rate in 30 years, more than 20 million new jobs
have been created, productivity growth has increased even this far into the
expansion, home ownership rates are at an all-time high, and real wages are
rising across the board including for those at the bottom of the income ladder.
At the same time, our fiscal position also provides us with a rare
opportunity to focus on crucial national priorities. Let me set out the five
basic objectives of this budget before discussing each item in turn.
--
Reducing Federal debt to safeguard our economic expansion.
-- Meeting
the needs of an aging society by laying the foundations for the secure
retirement of the baby boom generation.
-- Providing new incentives
through the tax system to strengthen our communities and encourage people to
work and save more.
-- Pursuing well targeted initiatives that invest in
health, education and other national priorities.
-- Redoubling our
commitment to opening markets and sustaining American leadership in order to
bolster international economic opportunities for America and strengthen our
national security in an uncertain world.OVERVIEW OF THE FY2001 BUDGET
I.
Safeguarding Our Economy by Reducing Federal Debt
-- For decades,
Treasury's discussions with its Borrowing Advisory Committee centered on how we
could finance growing budget deficits and whether the market would have the
capacity to absorb the huge volumes of government debt that we needed to sell.
In this new era of rising projected budget surpluses, our discussions now focus
on how we can maintain liquidity in the market while reducing the volume of debt
outstanding.
According to OMB and Treasury projections, this challenge
will become even more apparent in the years ahead. Until now, debt reduction has
been accomplished solely by retiring Treasury securities when they fall due. But
from now on, we will have another tool available to help us manage the process
of reducing the debt held by the public - namely, the ability to buy debt back
from the public that has not yet matured. Using this tool, we can both reduce
debt and bolster liquidity in our key "benchmark" issues. In the April to June
quarter of this year, we expect that Treasury's net borrowing will result in a
record pay down of $152 billion worth of bonds. This puts us on
track to pay down more debt this year than in 1998 and 1999 combined.
As
I have explained, under the President's proposals we will eliminate the debt
held by the public by 2013 on a net basis. This will generate substantial
further gains for the American economy. Reducing Federal debt functions like a
tax cut in two respects. First, it removes the burden of interest and principal
payments from the American taxpayer. Second, it maintains downward pressure on
interest rates, and thereby helps reduce payments on home mortgages, car loans
and other forms of consumer credit. We estimate that a 1 percentage point
reduction in interest rates results in roughly a $250 billion
reduction in mortgage interest expense over a decade.
Debt reduction
also creates fiscal space, widening the range of choices available to us, and
giving us greater capacity to respond to unforeseen problems. Today, the Federal
Government is spending more than $200 billion a year on
interest payments that would be eliminated under Our proposals. The President
proposes that resources not paid in interest be used to help ease the burden of
the Social Security and Medicare costs that will arise once the baby-boom
generation begins to retire.
II. Meeting the Needs of an Aging Society
As we create more fiscal space through continued fiscal discipline, we
face a fundamental choice about how best to utilize that space. In this context,
it is a vital objective of this budget to improve our ability to shoulder this
country's obligations to its seniors.
Let me focus on two central
elements: strengthening Social Security and modernizing Medicare.
1.
Extending the solvency of Social Security to 2050 and beyond
It is a
central tenet of our strategy that we will use all of the surpluses from Social
Security to improve the government's net financial position. Compared to an
alternative scenario, in which we merely balance the unified budget, the
President's framework generates an increasing amount of savings on interest that
would otherwise be paid to holders of the debt. Beginning in 2011, we propose to
transfer these interest savings into ' the Social Security trust funds. These
transfers would extend the solvency of the trust funds until 2050.
At
the core of the President's proposal is a high level of fiscal discipline. In
the Administration's framework, every dollar added to the trust funds is
"backed" by a dollar's worth of pay down of the debt held by the public, and
hence a dollar's worth of contribution to national savings. These are serious
steps, and constitute important preparation for the retirement of the baby boom
generation.
In line with private sector practice, we also propose to
invest a sensible and measured proportion of the trust funds in the equity
market with the safeguard that such investment be limited t,, 15 percent of the
value of the trust funds. This would further extend the solvency of the trust
funds to 2054.
2. Modernizing Medicare
Since Medicare was
launched 35 years ago, accessible and affordable health care has dramatically
improved the lives of Americans over the age of 65. But there is now a very
broad consensus that it is time to reform Medicare to meet the challenges of the
new century.
By extending competition
The President put forward
a detailed Medicare reform proposal last year, and he remains committed to
enacting comprehensive reform in this Congress. A key element of this proposal
is the move to full price and quality competition between traditional fee-for
service Medicare and managed-care plans.
By letting consumers realize
most of the cost savings from choosing more efficient health plans, genuine
competition will give all health plans a strong incentive to deliver the most
value for money. At the same time, our proposal would ensure that seniors who
move to lower- cost plans do so out of choice and not because of financial
coercion. We look forward to working with the Members of this Committee to
achieve these important objectives.
By providing coverage for
prescription drugs
A second central element of Medicare reform is a
voluntary prescription drug benefit that is affordable to all Medicare
beneficiaries. Drag treatment has become an increasingly important part of
modern health care, and no one would design a Medicare program today that
excluded prescription drug coverage. Yet, roughly 3 out of 5 Medicare
beneficiaries do not have dependable drug coverage today, and a majority of the
uninsured have incomes greater than 150 percent of poverty. The Administration's
proposal would provide a 50 percent subsidy for all seniors who choose to
purchase the new Medicare drug benefit, with additional subsidies for
lower-income seniors. The budget also includes a reserve fund of
$35 billion for 2006 through 2010 to be used to design
protections for beneficiaries with extremely high drug spending.
And by
extending the solvency of Medicare
A third aspect of responsible
Medicare reform is the addition of new resources into the Hospital Trust Fund.
In the coming decades we expect to see a doubling in the number of Medicare
beneficiaries, and continued advances in the ability of modem medicine to
improve the length and quality of seniors' lives. We cannot meet the rising
future demands on Medicare through our structural reforms alone. But by enacting
the combination of reforms and transfers in the President's budget, the
projected solvency of the Medicare program could be extended to 2025.
III. Using Tax Cuts to Strengthen Our Communities
The
President's budget creates room for prudent and targeted tax cuts totaling
$250 billion on a net basis over the next decade and
$350 billion' on a gross basis. These tax initiatives would
advance a broad range of national priorities, including: reducing poverty and
stimulating the creation of small businesses in our deprived communities;
strengthening incentives to work and to save; and making it easier for families
to care for chronically ill relatives. The proposals would also close unfair tax
loopholes and eliminate tax shelters.
Let me highlight briefly some of
the most important tax cut proposals in the President's budget.
Retirement Savings Almost one in five elderly Americans has no income
other than Social Security; two-thirds rely on Social Security for half or more
of their income. Half of all working Americans have no pension coverage at all
through their current job. It is very clear that steps need to be taken to help
Americans take greater responsibility for their own financial security in
retirement, and new incentives should be targeted to moderate and lower-income
working families.The President proposes to address this situation by creating a
new, broad-based savings account, Retirement Savings Accounts. These accounts
would give 76 million lower and middle-income Americans the opportunity to build
wealth and save for their retirement.
Under our plan, individuals could
choose whether to participate, on a strictly voluntary basis, either through a
retirement plan sponsored by their employer, or through a special stand-alone
account at a financial institution. The employer or the financial institution
would match each individual's contribution and then recover the cost of the
match from the Federal government in the form of a tax credit.
Individuals could contribute up to $1,000 per year.
Low-income individuals would qualify for a two-for-one match on the first
$100 contributed, and a dollar-for-dollar match on additional
contributions. Higher income participants could qualify for a 20 percent match,
in addition to the tax incentives that apply to pension or IRA contributions. A
person who participated in this savings program for his or her entire career
could accumulate well over two hundred thousand dollars for his or her
retirement.
In addition, the President proposes to make small employers
eligible for new tax credits to help them set up or improve their retirement
plans. Related proposals include measures to increase pension security and
portability, and to improve disclosure to workers. Overall, the cost of these
initiatives to expand retirement savings would total $77
billion over ten years.
Helping Working Families
The Earned
Income Tax Credit has proved one of the most effective means of rewarding work
and lifting people out of poverty. In 1998 alone, the EITC raised the income of
4.3 million working people above the poverty level. But many families still
remain in poverty. The President proposes to help more families work their way
out of poverty by increasing the Earned Income Tax Credit for the larger
families that are most apt to be poor and relieving the marriage penalty under
the EITC. The increases in the EITC would total $24 billion
over the next ten years.
Under the budget plan we would also reduce the
marriage tax penalty, strengthen work incentives, and cut taxes for the 70
percent of families who claim the standard deduction. To address the marriage
penalty in a targeted way, the President proposes to make the standard deduction
for two-earner married couples twice the standard deduction for singles. In
2005, when it is fully phased in, this proposal would raise the standard
deduction for two-earner married couples by $2,150. Starting in
2005, the proposal would also simplify and reduce taxes for middle income
taxpayers by increasing the standard deduction for single-earner married couples
by $500 and for singles by $250. The proposal
would make the child and dependent care tax credit refundable and raise the
maximum credit rate to 50 percent.
Revitalizing our Communities
By expanding the New Markets tax credit the budget would help spur
$15 billion in new investment for businesses in inner cities
and poor rural' areas. The budget also proposes to extend and expand incentives
for businesses to invest in empowerment zones.
Health
Last year
the President proposed a tax credit that compensated families for the cost of
looking after chronically ill relatives. But at $1,000, the
credit was insufficient compensation for the rising burden that these families
face. The President's FY2001 proposal triples the credit to
$3,000. We also propose to provide tax credits for workers
between jobs who purchase COBRA coverage from their old employers.
Education
The budget proposes to save taxpayers
$30 billion over ten years through the College Opportunity Tax
Cut. When fully phased in, this new tax incentive would give families the option
o l taking a tax deduction or claiming a 28 percent credit for up to
$10,000 of higher education costs. This would provide up to
$2,800 in tax relief to millions of families who are now
struggling to afford the costs of post-secondary education. We also put forward
a tax credit to help state and local governments build and renovate their
schools.
Tax Simplification and Fairness
Although the
Alternative Minimum Tax was originally intended to ensure that high-income
taxpayers could not use tax breaks to avoid income tax altogether, we recognize
that it is increasingly eating into the take-home pay of middle-income
taxpayers, especially those with large families. We propose to redress this
problem by allowing taxpayers to deduct all of their exemptions for dependents
against AMT. By 2010 when it is fully phased-in, this change would halve the
number of taxpayers affected by the AMT.
Corporate Shelters and Tax
Havens The proliferation of corporate tax shelters presents a growing and
unacceptable level of abusive tax avoidance that reduces government receipts and
consequently raises the tax burden on compliant taxpayers. Corporate tax
shelters breed disrespect for the tax system - both by those who participate in
the tax shelter market and by those who perceive unfairness. A perception that
well-advised corporations can and do avoid their legal tax liabilities by
engaging in these tax- engineered transactions may cause a "race to the bottom."
The President's FY 2001 Budget again contains a comprehensive approach
to addressing this problem. This approach is intended to change the dynamics on
both the supply and demand side of this "market," making it a less attractive
one for all participants - "merchants" of abusive tax shelters, their customers,
and those who facilitate these tax- engineered transactions. The main elements
of the legislation include: requirements aimed at substantially improving the
disclosure of corporate tax shelter activities; provisions to raise the penalty
where there is substantial understatement of tax owed; and the codification of
the economic substance doctrine. Enactment of corporate tax shelter legislation,
combined with the efforts of the restructured IRS, will go a long way towards
deterring abusive transactions before they occur, and uncover and stop these
transactions when they do take place.
Another area that raises similar
concerns is the growing use of tax havens. These jurisdictions, through strict
bank secrecy and other means, facilitate tax avoidance and evasion. Curbing this
harmful tax competition should help businesses to compete on a level playing
field and encourage investment growth and jobs. Our budget includes several
provisions intended to reduce the attractiveness of tax havens and to increase
access to information about activities in tax havens.
Other Provisions
There are a number of other important proposals that I would like to
mention. These include: incentives to increase philanthropic donations; tax
credits aimed at bridging the "digital divide" by encouraging investment in
technology in deprived communities, and measures to help reduce pollution and
emissions of greenhouse gases.
IV. Investing in Health, Education and
Other National Priorities
The spending proposals in the President's
budget are based on two fundamental principles.
The first principle is
that we use realistic projections of the level of spending needed to maintain
core government functions. To meet this requirement, we begin with a "current
services" baseline under which discretionary spending is held constant on an
inflation adjusted basis.
Our budget policy would maintain defense
spending at this baseline and reduce nondefense discretionary spending slightly
below it, meaning that existing domestic programs would need to be trimmed by
more than enough to finance new initiatives. In 1999, non-defense discretionary
spending was a smaller share of GDP than at any point in at least 40 year. s;
under our policy, it would represent a yet smaller share over the coming decade.
Moreover, total outlays as a proportion of GDP would decline in 2001 and they
would continue to decline on this basis for the rest of the decade.
The
second fundamental principle of the President's spending proposals is to focus
on critical national priorities, including health care, education, law
enforcement, and technology. By focusing our initiatives in these and other key
areas, we can meet people's needs in a fiscally disciplined way.
Let me
briefly summarize our proposals in these four areas.
Health Care
The President has proposed a bold initiative to reverse the disturbing
increase in the number of Americans without health insurance. Through the
combination of targeted spending proposals and tax incentives, we can expand
health coverage to millions of uninsured Americans.
A central part of
this initiative is an expansion of the State Children's Health Insurance
Program, known as S-CHIP, which was introduced two years ago with broad
bipartisan support. In the FY2001 budget we would build on the success of this
program by extending it to cover the parents of eligible children, most of whom
are uninsured.
Another important element of this initiative is providing
a Medicare buy-in option for people close to the Medicare eligibility age. This
year, to make this option more affordable, our budget includes a tax credit to
offset some of the premium.
Education
Education is another key
priority in the President's budget, as has been true since the beginning of this
Administration. For next year we are proposing an additional $1
billion for the Head Start program and almost $150 million for
Early Head Start, which would put us within reach of serving one million
children by 2002. We are also proposing sufficient funding to take us almost
halfway to the President's goal of hiring 100,000 new teachers in order to
reduce class sizes.
Law Enforcement
Turning to law enforcement,
the budget includes significant new resources to enforce our nation's gun laws.
Last Friday we released a report from the Bureau of Alcohol, Tobacco and
Firearms showing that 1 percent of gun dealers account for well over half of all
crime guns traced last year. The information from gun tracing will help us
target our enforcement efforts, but we also need more agents and inspectors at
the ATF and more prosecutors - and our budget will provide them.
At the
same time we are requesting funds that would pay for recruiting and training of
50,000 new police officers, and funds that would strengthen the National Money
Laundering Strategy. Money laundering is a growing international problem, and we
need this budget allocation to strengthen U.S. leadership in fighting this
problem.
Technology and the Environment
Another important
national priority must be investment in the science and technology that will
spur economic growth and improve people's lives in the 21st century. The
President's budget includes a nearly $3 billion increase in
crucial investments, including a $1 billion increase in funding
for biomedical research for the National Institutes of Health and a rise in
funding for the National Science Foundation that is double the previous largest
increase. These investments will enable Americans to continue to lead the world
in many areas of science and technology, including biomedical research,
nanotechnology, and clean energy.
The budget also contains
$42 billion for high-priority environmental and natural
resource programs, an increase of $4 billion over last year's
enacted level. This includes $1.4 billion in discretionary
funding for the Land's Legacy initiative to expand and protect our open spaces,
an additional $1.3 billion to support farm conservation, and an
additional $770 million to help combat global climate change.
V. American Leadership in the World
As we enter this new
century, it is crucial that we continue to learn the lessons of the last one by
working to build an ever-widening circle of more prosperous and more open
international economies. This enables us to enjoy the benefits of peace and the
spread of our core values. And we benefit more directly in the millions of
high-paying jobs that exports create and the competition and innovation that
openness to imports can promote. In short, globalization is not a zero sum game
but a "win-win proposition" for America and its trading partners.
Let me
outline several areas where we can strengthen this process while also enhancing
our national security.
China
One of the President's top
priorities this year is to seek Congressional approval for the agreement we
negotiated to bring China into the World Trade Organization, by passing
Permanent Normal Trading Relations with China as soon as possible. I firmly
believe that China's entry into the WTO, under the terms of the trade agreement
that we reached last November, is in our economic and national security
interest.
-- First, this is a good deal for American workers, farmers
and businesses since the concessions all run one way, in our favor.
--
Second, by integrating China into the rules-based world trading system, we will
help promote reform within China and reduce the security threat that an isolated
China can pose to America and the rest of the world. Mr. Chairman, we will need
your support to prevail, and look forward to working with you on this issue in
the weeks and months ahead. We also look forward to working with you to
implement the Caribbean Basin, African Trade, and Balkans Trade Initiatives.
Multilateral Development Banks
Obtaining adequate funding for
U.S. participation in the MDBs remains a Treasury priority. Every dollar we
contribute to the multilateral development banks leverages more than
$45 in official lending to countries where more than
three-quarters of the world's people live. These programs are the most effective
tools we have for investing in the markets of tomorrow. This budget's request
for $1.35 billion is $40 million less than we
requested last year, yet it would fully cover our annual obligations to the MDBs
as well as paying down some of our arrears to a global system that we were
instrumental in creating.
Highly Indebted Poor Countries Initiative
Let me thank the Members of this Committee for your efforts in the
FY2000 budget to provide broader, deeper and faster debt relief to the world's
poorest and most heavily indebted nations. As a result, progress has been made.
Writing off debts owed by countries that will never be able to repay them is
sound financial accounting. It is also a moral imperative at a time when a new
generation of African leaders is trying to open up their economies.
The
President is asking for an additional $210 million this year
and $600 million over the next three years to support
multilateral and bilateral debt relief for countries under the Highly Indebted
Poor Countries initiative. In doing so he is asking Congress to finish the
enormously important work we began last fall.
Vaccines
The
budget also contains requests that would help fulfill the President's Millennium
Initiative for vaccines. By allocating $50m to the Global
Alliance for Vaccines and Immunization, we could save many children's lives and
at the same time help protect the health of American citizens. The President has
also proposed a new tax credit that would help stimulate
development of vaccines for malaria, HIV- AIDS
and tuberculosis.
VI. Concluding Remarks.
I began my remarks
today by focusing on the link between fiscal discipline and the performance of
our economy over the last seven years. Having worked hard to help bring us to
the remarkable economic moment that we are now enjoying, the Members of this
Committee know well the value to our economy and our country of further paying
down the national debt held by the public. If we can act to reduce the debts we
bequeath to our children, while continuing to fund our obligations to seniors
and pursuing the vital purpose of making the economy work for all our people and
communities, then we can maximize the extraordinary opportunities with which we
are now presented. I look forward to working together with this Committee and
others in Congress to turn these high-class challenges into even higher-class
solutions. Thank you. I would now be happy to respond to any questions that you
might have.
END
LOAD-DATE: February 9, 2000
