Copyright 2000 Federal News Service, Inc.
Federal News Service
February 9, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 4773 words
HEADLINE:
PREPARED TESTIMONY OF JACOB J. LEW DIRECTOR OFFICE OF MANAGEMENT AND BUDGET
BEFORE THE SENATE COMMITTEE ON BUDGET
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 down 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 lower interest 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 tar 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 spending down 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 nondefense 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 2011, 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 off $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 debt -
payments 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 inpatient
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.
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 programs 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 counternarcotics 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 the confidence 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 fight 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 10, 2000