Copyright 2000 Federal News Service, Inc.
Federal News Service
February 8, 2000, Tuesday
SECTION: PREPARED TESTIMONY
LENGTH: 4775 words
HEADLINE:
PREPARED STATEMENT OF JACOB J. LEW DIRECTOR OFFICE OF MANAGEMENT AND BUDGET
BEFORE THE HOUSE BUDGET COMMITTEE
BODY:
We must Maintain Sound Fiscal Policy in
an Era of Surplus
For three years now, we - the Administration and the
Congress - have faced a new challenge: maintaining a sound fiscal policy in an
era of surplus. Having fought our way back from large and expanding deficits
that threatened our economy, we now continue the fiscal discipline that has
brought us the strongest economy in memory.
Budget surpluses and debt
reduction are no longer just projections. We ran a $69 billion
surplus in fiscal year 1998, and did not spend it. We ran a
$124 billion surplus in 1999, and did not spend it. Eight short
months from now, we will have an even larger surplus in fiscal year 2000. From
1998 through the end of 2000, we will pay off $297 billion
worth of publicly held debt. It should be clear by now that we can run surpluses
and pay down our public debt - if we create the right processes and policies to
maintain that fiscal discipline. We must now continue a fiscal policy that is
working. Our new challenge boils clown to relying on realistic assumptions and
baselines, setting priorities, and making choices to maintain a balanced
program. It requires addressing our existing commitments before we make new
ones.
The President's budget relies on realistic assumptions and
reflects balanced priorities.
Economic Performance Reflects Fiscal
Policy
It is useful to begin by reviewing the state of our economy,
because it shows how much is at stake. Though the private sector is the engine
for economic progress, fiscal policy can encourage or discourage growth.
Our fiscal discipline has helped achieve a rapid growth of business
investment, because the Federal government has stopped draining the Nation's
pool of capital. This has helped to accommodate lowerinterest rates, and has
reduced fears of inflation. Businesses have better access to capital and are
better able to invest and innovate.
Under this Administration, we have
enjoyed the best sustained growth of business investment since the 1960s. We
have seven consecutive years of double-digit inflation-adjusted growth of
business equipment investment - which is unprecedented.
Economic
progress has reached almost every facet of our economic life, raising living
standards for most Americans.
-- The economy has created 20.8 million
jobs since 1993, nearly all of them in the private sector- most of them
full-time and in high-paying industries.
-- The unemployment rate is the
lowest it has been in 30 years; for African Americans and Hispanics,
unemployment is lower than at any time in the quarter-century for which
statistics have been kept. A record percentage of adults are employed.
-- Work has begun to pay more, reversing a two-decade trend of declining
real wages and boosting household incomes throughout the economy. Cumulatively,
since the beginning of the Clinton Administration, real wages have increased by
6.6 percent.
-- After two decades of decline and stagnation, Americans
at the lower end of the income scale- those in the poorest 20 percent of
households - have seen a rise in their real incomes. From 1993 to 1998, their
incomes have risen by nearly $900 per household in 1998
dollars, a 10 percent increase. The median family's income has grown by 12
percent.
-- In the past seven years, 7.2 million people have left the
welfare rolls, a 51 percent decline. Welfare recipients now account for the
lowest percentage of the U.S. population since 1967. Meanwhile, 1.5 million
people who were on welfare in 1997 are now working, and every State has met the
overall work requirements mandated by the 1996 welfare reform law.
--
From 1993 to 1998, the number of poor people in America declined by 4.8 million,
and the number of poor children by 2.1 million. The poverty rate has declined
sharply from 15.1 percent to 12.7 percent, the lowest it has been in over two
decades.
-- Crime rates are at the lowest level in over 25 years.
-- A record number of Americans now own their own homes, which was made
possible by lower real interest rates and larger real incomes. The number of
households that are homeowners increased by more than eight million since the
President took office.The President helped to set off this virtuous economic
cycle with his 1993 economic plan.
We Have Made Enormous, Unprecedented
Fiscal Progress
In 1998 and 1999, we had the first consecutive balanced
budgets since 1957. We expect a larger surplus in 2000, and we propose a still-
larger surplus in 2001. The 1999 surplus was the largest as a percentage of the
economy since 1951. And the proposed 2001 surplus would be the ninth consecutive
year of fiscal improvement -- the first time ever.
After 12 years of
spiraling debt threatening to expand beyond control, we are now paying off the
debt. By 2013, the United States will be effectively debt-free- for the first
time since 1835, when Andrew Jackson was President. By the end of this year, the
Treasury expects to have reduced our debt held by the public by about
$300 billion from where it was three years ago. Under the
President's fiscal policy, debt held by the public by the end of 2004 will
decline to the lowest ratio of our GDP since 1974 completely undoing the debt
buildup of the 1980s. And by the end of 2007, the public debt will fall to its
lowest share of the GDP since before the United States entered World War I.
How We Achieved this Unprecedented Economic and Fiscal Progress
When President Clinton took office seven years ago, the budget deficit
was $290 billion, the largest in the Nation's history. Between
1980 and 1992, publicly held debt quadrupled, from about $700
billion to $3 trillion. It also doubled as a share of GDP, from
about 25 percent to about 50 percent.
Both CBO and OMB projected that
these adverse trends would accelerate without changes in fiscal policy. OMB
forecast the 1998 deficit, in the absence of policy change, at
$390 billion; by 2003, we expected the deficit to be
$639 billion. Nothing indicated that the vicious cycle would
abate.
Reversing these adverse trends required tough policy choices,
which the Administration and the Congress took in 1993 and 1997.
The
President's initial economic plan cut spending and increased revenues in equal
amounts. From 1994 through 1998, deficit reduction more than doubled prior
estimates - instead of the projected cumulative $505 billion,
deficits fell by $1.2 trillion.
This Administration has
controlled Federal spending well beyond the record of its predecessors.
-- In 1999, spending declined to its smallest share of the GDP since
1966.
-- As a percentage of GDP, spending in every year for which
President Clinton submitted a budget has been lower than in any year of the two
preceding Administrations.In 2001, our policy would further reduce spending to
18.3 percent of GDP. And thanks to the strong economy, receipts have grown
beyond expectations, even though income tax rates on typical households are the
lowest since the 1970s.
-- A typical family of four with the median
family income will pay a lower share of its income in income and payroll taxes
this year than at any other time in a quarter century. Its income tax payment
considered alone will be the lowest share of income since 1966.
-- A
family with income at one-half of the median level will pay the lowest share of
its income in income and payroll taxes since 1965. It will receive money back
from the Federal government because of the earned income tax credit.
--
Even a family at twice the median income level will pay less in income tax as a
percentage of income than at any time since 1973.
The historic
bipartisan Balanced Budget Agreement of 1997 has reinforced expectations of
Federal fiscal responsibility. This has had a positive impact on interest rates
and has helped spur economic growth.
In the last seven years, we have
enjoyed extraordinary economic performance in part due to sound fiscal policy.
To continue our strong economic performance, we must continue along the path of
fiscal discipline and prudent investments.
We Need a Realistic Baseline,
with Adequate Resources for a Strong Defense and Critical Investments in the
Future
Since 1993, discretionary spending has declined in
inflation-adjusted dollars. The Federal government must continue to accomplish
the missions assigned to it in a growing economy with a growing population. We
often take for granted the need to maintain critical functions like air safety,
law enforcement, the administration of Social Security and Medicare, and
national security-- both defense and diplomacy. We need realistic budget
projections to provide funding for these essential functions that the Nation has
a right to expect its government to perform well.
Realistic projections
also needed to accommodate investments in education, families, protecting the
environment, research and development and national security--all necessary to
assure a better future. CBO served the policy process well this year by
illustrating three potential discretionary baselines--only one of which I
believe is realistic.
A discretionary budget baseline that would retain
the 1997 spending caps is not realistic. Congress appropriated above those caps
by tens of billions of dollars in both 1999 and 2000. To bring spendingdown to
the caps in 2001 would require an unachievable one-year reduction from 2000
program levels of almost $70 billion of budget authority - 11
percent.
Likewise, a discretionary budget freeze over ten years is
unrealistic. The Congress increased discretionary budget authority by 7.0
percent in 1999, and 3.5 percent in 2000. A nominal freeze in 2001 would require
a budget authority reduction from 2000 program levels of 3 percent. Extending
such a freeze for ten years would require program level cuts of 23 percent by
2010 - assuming that defense would be frozen along with non-defense. Such
reductions should not, and I believe would not happen.
If defense
spending increases within the overall freeze, the implications for all other
spending would be even more severe. Within an overall freeze, appropriating the
President's 2001 defense request would turn a hard freeze into a 9 percent cut
from 2000 levels for all non-defense programs. Any addition to the President's
defense request would make the effect on non-defense programs even worse. This
is just not realistic.
In contrast, a baseline that maintains the
program levels enacted by the Congress last year would provide a sound basis to
plan for the future. It would allow for continued investments in key program
areas and for the maintenance of vital government functions.
A budget
based on unrealistic assumptions is unlikely to stop necessary spending. What
ultimately would suffer are fiscal discipline and the commitment to protect the
Social Security surplus. If the surplus is exaggerated to make room for either
tax cuts or spending increases, when discretionary spending cuts do not
materialize, the non-Social Security surplus disappears. This means that both
fiscal discipline and the Social Security surplus would be jeopardized.
Moreover, any perception that fiscal discipline in Washington is on the decline
would undermine our unprecedented economic progress.
Our projection of
the non-Social Security surplus of $746 billion over ten years
provides substantial resources for a balanced program, in the context of
realistic assumptions. The President's budget continues the fiscal discipline
that since 1993 has fostered this era of prosperity and surplus. It uses
conservative economic assumptions and a realistic baseline for discretionary
spending. To stay on our successful budget track, we urge the Congress to
consider this approach, and the President's specific policy choices as well.
The President's Budget Framework Relies on a Balanced Approach
The President's budget relies on a balanced approach, which maintains
fiscal discipline, eliminates the national debt, extends the solvency of Social
Security and Medicare, provides a tax cut and funds essential investments for
our future.
-- The President's budget projects a total surplus of
$2.9 trillion over the next ten years. Of that,
$2.2 trillion is the surplus from Social Security, which is put
in a Social Security solvency lock box and used to retire the Nation's publicly
held debt. Beginning in 201 I, interest savings because of the Social Security
surplus will be transferred from the on-budget surplus to the trust fund, to
extend Social Security solvency to 2054. These interest savings are substantial.
In 1993, we projected that in 2010 interest would consume 23 cents out of every
Federal dollar. Today we project that only three cents out of every dollar will
go to interest. These savings permit the extension of Social Security solvency.
-- The remaining on-budget surplus is $746 billion.
-- Overall, $432 billion is allocated to Medicare: (1)
$299 billion is contributed to the Medicare trust fund to
extend its solvency for ten years, to 2025; (2) $98 million is
used for Medicare prescription drug policy along with several other health
initiatives (including allowing uninsured older workers to buy into Medicare);
and (3) $35 billion is reserved to augment the President's
proposal for prescription drug coverage under Medicare, to provide for
catastrophic costs to the elderly. Pending enactment of that policy, this sum,
too, retires debt. (This debt reduction, combined with the Social Security
surplus, allows the President to make the Nation effectively debt-free by 2013.)
-- Another $91 billion of the surplus is allocated to
the President's initiative to expand health-care coverage under the existing
State Children's Health Insurance Program (SCHIP) and extend coverage to the
uninsured parents of those children.
-- The President's proposed tax
cuts -to help low-income working families with children, to reduce the marriage
penalty and the burden of the Alternative Minimum Tax (AMT), to encourage saving
for retirement, to make higher education more affordable, to aid in school
construction and renovation, to help those with long-term health care needs and
to extend health insurance coverage, to promote philanthropy, and encourage
energy efficiency and protect the environment- use $256 billion
of the surplus. (The tax cuts alone total $351 billion, but
they are partially offset by proposals to limit the benefits of corporate tax
shelter transactions, and end other unwarranted tax benefits.)
-- The
balance of the President's framework policies yields a small net savings. These
policies include the President's proposals to restore the farm safety net, the
net interest cost of all of these initiatives, and the budget savings that
result from the President's tobacco policy.
A balanced approach requires
that each element be properly sized.
If a tax cut grows within the
bounds of a realistic surplus projection, it precludes strengthening Medicare
and extending health care coverage through the Children's Health Insurance
Program (CHIP).
The following discussion explains the various elements
of the President's framework in more detail.
The President's Budget
Eliminates the Debt
The President's plan will eliminate the publicly
held national debt by 2013. That would be the first time our nation has been
debt-free since 1835 - when Andrew Jackson was President. The President's
successful policy of fiscal discipline and deficit reduction has already allowed
us to pay offs 150 billion in debt, increasing to about $300
billion by the end of the current fiscal year. If we maintain our fiscal
discipline, and eliminate the public debt, we can devote the savings from debt
reduction to Social Security. Last year, the government paid
$230 billion in interest costs to finance the national
debtpayments that, under the President's plan, will become unnecessary.
The President's Budget Strengthens Social Security.
The
President's commitment to Social Security has resulted in general acceptance of
the need to protect the Social Security surplus. Now, we must meet the next
challenge by strengthening Social Security for the future. The President's
framework transfers part of the on-budget surplus - $100
billion in 2011, rising to $211 billion in 2020 through 2050-to
Social Security, to extend its solvency to 2050 (2054 with the President's
proposed investment in equities). The President's plan to pay down and eliminate
the national debt results in savings in interest costs, which fully justify
these transfers for the solvency of Social Security.
The President's
Budget Strengthens Medicare
The President's framework extends the
solvency of Medicare until 2025, with transfers of part of the on-budget surplus
- $299 billion from 2001 to 2010, and further transfers in the
next five years.
The framework also modernizes Medicare with a needed
prescription drug benefit. This plan ensures that seniors get the drugs they
need, as prescription drugs are now more central to medical treatment than they
were when Medicare was established thirty-five years ago. Prescription drugs can
save money by obviating the need for more-expensive subsequent in-patient
treatment. Most elderly lack comprehensive and reliable prescription drug
coverage. The budget expands access to preventive benefits, and improves
Medicare management.
The President's Budget Expands Health-Care Coverage
The President's budget framework addresses other health-care needs as
well. For example, the budget expands the successful health insurance program
(State Children's Health Insurance Program) for low-income children, and extends
it to their working parents. Established with bipartisan support as part of the
1997 Balanced Budget Act, SCHIP has already enrolled two million children of
working low-income parents.
The President's Budget Addresses Needs in
Farm Country
The budget also provides a comprehensive farm aid package
of $11 billion over the next two years,until the next farm bill
is enacted. The President's package includes income assistance that responds to
falling crop prices; a major farm conservation program; and targeted assistance
to certain segments of the farm and rural communities.
The President's
Budget Has Fair Middle-Class Tax Cuts
The President's plan proposes
$350 billion for tax cuts ($250 billion in net
tax cuts) for America's working families.
-- It reduces the marriage
penalty for two-earner couples, by increasing the standard deduction and
introducing an exclusion for part of the earnings of a second working spouse.
-- It expands the Earned Income Tax Credit, to help America's hard-
working low income families, especially larger families which are more likely to
be poor than families with only one or two children.
-- It helps
families finance higher education, child care and long- term care, as well as
expanding health insurance options for those facing unique barriers to coverage.
-- The President's plan also establishes Retirement Savings Accounts, to
give 76 million Americans the opportunity to build wealth and save for their
retirement.
The Budget Continues the President's Policy of Investment
Education, in our competitive global economy, has become the dividing
line between those who are able to move ahead and those who lag behind. Over the
last seven years, we have worked hard to ensure that every boy and girl is
prepared to learn, that our schools focus on high standards and achievement,
that anyone who wants to go to college can get the financial help to attend, and
that those who need another chance at education or to improve or learn new
skills can do so. The budget builds on the sustained commitment to make college
more affordable by increasing the tax credit than funds higher education and
increasing Pell Grants and other college scholarships from the current record
levels. It reduces class size by recruiting and preparing thousands more
teachers and building thousands more new classrooms, as well as providing for
urgent and essential repairs.
The budget expands access to after-school
learning opportunities to help children, especially in the poorest communities.
It recruits teachers in high-poverty areas and encourages school districts to
pay teachers more through peer review. It ends social promotion by expanding
after school learning hours to help students to earn advancement. The budget
funds monetary awards to the highest- performing schools that serve low-income
students, and helps States to identify and change the least successful schools.
It invests in programs targeted to Hispanic students. It narrows the digital
divide through technology centers in low income areas.The budget promotes early
learning by significantly increasing 21st Century Learning Community Centers. It
makes child care more affordable by expanding tax credits for middle-income
families, and establishes a tax credit for businesses to establish child care.
It assists parents who attend college to meet their child care needs, as well as
parents who choose to stay at home to raise a young child, and makes the Child
and Dependent Care Tax Credit refundable. The budget proposes an expansion of
the Early Learning Fund and builds on the expansion of the successful Head Start
program to help meet the goal of serving one million children by 2002. It
increases funding for the Child Care and Development Block Grant for poor and
near-poor children.
Supporting families. The budget promotes responsible
fatherhood by enforcing child support, and aiding the employment and training of
low-income parents. The budget allows low-income working families, who need
transportation to work, to own a modest vehicle and retain food stamp
eligibility. And it provides health care to legal immigrant children, and
restores Supplemental Security Income benefits to legal immigrants with
disabilities and to legal immigrants in families with eligible children.
Extending prosperity to all of America. The New Markets Initiative
provides tax credit and loan guarantee incentives to stimulate billions in new
private investment in distressed rural and urban areas. It builds a network of
private investment institutions to funnel credit, equity, and technical
assistance into businesses in America's untapped markets, to target small
businesses and help them to grow. The budget increases the number of Empowerment
Zones and Enterprise Communities, which provide tax incentives and direct
spending to encourage private investment, and provides more capital to the
Community Development Financial Institutions program. The budget also includes
significant funding increases for Native American communities, for enforcement
of the Nation's civil rights laws, and for the partnership we have begun with
the District of Columbia.
Fighting Crime. The budget adds funds to hire
500 new ATF agents and 1,000 State and local gun prosecutors. It funds smart gun
technology development. The budget also provides funds to prevent violence
against women, and to address the growing law enforcement crisis on Indian
lands. The budget strengthens border enforcement in the South and West. It
combats illegal drug use, particularly among young people, through treatment and
prevention, law enforcement, international assistance, and interdiction.
Research.
Research.
The budget introduces a Science and
Technology Initiative for high- priority long-term basic research, including
nanotechnology- the manipulation of matter at the atomic and molecular level,
offering the promise that medical science may one day be able to detect
cancerous tumors when they comprise only a few cells. The budget also increases
the Information Technology Initiative to invest in long-term research in
computing and communications. It will accelerate development of extremely fast
supercomputers to support civilian research, enabling scientists to develop
life-savings drugs, provide earlier tornado warnings, and design more
fuel-efficient, safer automobiles. The budget provides strong support for the
Nation's two largest funders of civilian basic research at universities: the
National Science Foundation and the National Institutes of Health.Environment.
The Nation does not have to choose between a strong economy and a clean
environment. The past seven years are proof that we can have both. The budget
establishes dedicated funding and increases resources for the historic
interagency Lands Legacy initiative to preserve the Nation's
natural and historic treasures. The budget also supports the Clean Energy
initiative, to reduce the threat of global warming, and Greening the Globe, to
save tropical and other forests around the world. It supports farm conservation
to upgrade water quality, the Clean Water Action plan to clean up polluted
waterways, climate-change technology to increase energy-efficiency, and
renewable energy to strengthen our economy while reducing greenhouse gases.
National security -- diplomacy and defense. Our Nation now has the
greatest opportunity in its history to advance American interests and values
while building a better and more peaceful world. However, doing so requires
leadership and engagement. This budget supports a democratic society and
stronger economy in Kosovo. It proposes increased funding to ensure the
continued protection of American embassies, consulates and other facilities, and
the valuable employees who work there. It supports significant increases in
funding for State Department pro,ams to address the threats posed by weapons of
mass destruction. In a fiscal year 2000 emergency supplemental, the budget
provides critical assistance to the Government of Colombia in its fight against
narcotics traffickers. It proposes funding to promote international family
planning, contain the global spread of AIDS, and promote debt forgiveness for
the world's poorest countries. The budget also increases programs that support
U.S.
manufacturing exports and continues our long-standing policy of
opening foreign markets.
This budget builds upon our major commitment
last year to maintain our military readiness. It provides additional resources
to ensure that the military services can recruit and retain quality personnel,
meet training standards, procure new equipment and spare parts, and maintain
equipment in top condition. In addition, this budget provides resources for the
Department of Defense and other agencies to combat emerging threats- including
terrorism, weapons of mass destruction, and cyber-crime against critical
infrastructure. It supports counter- narcotics efforts, including a 2000
supplemental to increase assistance to the Government of Colombia in their fight
against narco- traffickers. It also provides additional funding for contingency
operations in Kosovo.
The Budget Continues the President's Drive for
Better Management
This Administration set out to create a government
that works better, costs less and gets results Americans care about. We have
streamlined Government, cutting the civilian Federal work force by 377,000,
giving us the smallest work force in 39 years. While we have made real progress,
there is still much work to do. We have set a list of the highest priorities: 24
Priority Management Objectives are listed in this budget. It is a mark of our
success that in early 2000, we were able to remove last year's number one
objective from the list: Manage the Year 2000 (Y2K) Computer Problem. We will
continue to address other priorities, including modernizing student aid delivery
and completing the restructuring of the Internal Revenue Service. The steps we
have taken to change and improve the way government works have also changed the
way Americans view their government, increasing theconfidence and trust of the
American public.
We must Choose Now to Maintain Fiscal Discipline
The President has recognized the need to maintain the fiscal discipline
that has brought us not only unprecedented budgetary progress, but also the
strongest economy in memory.
Under the President's leadership, we have
maintained the surplus for the last three years. We can do it again. In the face
of the demographic pressures that will begin to burden the budget in less than a
decade, we must stay on this course- and create the right processes and policies
to maintain that fiscal discipline.
Again, the President has measured
the future in realistic terms, set his priorities, and made balanced choices. We
are proud of our budget, and we commend it to your consideration.
END
LOAD-DATE: February 9, 2000