Copyright 2001 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
September 5, 2001, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2980 words
COMMITTEE:
HOUSE BUDGET
HEADLINE: ECONOMIC AND
BUDGET OUTLOOK
TESTIMONY-BY: MITCHELL E. DANIELS, JR.,
DIRECTOR
AFFILIATION: OFFICE OF MANAGEMENT AND BUDGET
BODY: Testimony of Mitchell E. Daniels, Jr.
Director Office of Management and Budget
Before the House Budget
Committee
September 5, 2001
SUMMARY
Despite a nearly
stagnant economy, the government's finances are remarkably sound. The budget's
enormous surpluses have allowed us to deliver significant tax relief to working
Americans, providing badly needed fiscal stimulus to counteract the year-long
slowdown in the economy. Even while weathering the slowdown and taking action on
tax relief, we continue to take in huge surplus revenues, and to use the extra
receipts to steadily reduce the nation's outstanding debt.
The current
estimate for the 2001 surplus is $
158 billion, the second
highest in history. This is lower than the $
281 billion surplus
estimated in the April Budget. The lower surplus is due largely to the year-long
economic slowdown and the decision to incorporate immediate fiscal stimulus, in
the Economic Growth and Tax Relief Reconciliation Act. The 2002 surplus
projection is $
173 billion, compared to April's
$
231 billion estimate. Over -the 10 years from 2002 to 2011,
the surplus totals $
3,113 billion, down from the
$
3,433 billion estimated in April.
Both this year and
next year, the overall budget surpluses are equal to the surpluses generated by
Social Security payroll taxes (and interest earnings). The President and
Congress are both committed to preserving the Social Security surplus for debt
reduction. As a result, the additional surplus available for new spending or
further tax relief in the next few years is limited. In order to fully reserve
the Social Security surplus for debt reduction, any further initiatives beyond
those included in this review will also have to be accompanied by offsets in
other areas.
Chart 1. Second Largest Surplus in History Despite an
Economic Slowdown
found on hard copy
Tax Relief for Working
Americans
From the Administration's first day in office, President Bush
worked to deliver on his campaign promise of meaningful tax relief. This
package, which was originally crafted to ensure long- term economic growth and
to return excess surplus funds to taxpayers, became even more urgent as the
extent of the economic slowdown became apparent. Congress moved with exceptional
speed in response to the President's plan. On June 7, 2001 the President signed
the Economic Growth and Tax Relief Reconciliation Act of 2001.
This
historic measure of tax relief reduces the bottom marginal tax rate from 15
percent to 10 percent, delivering savings to every income taxpayer, and reduces
the top rate to a maximum of 35 percent. It also doubles the child tax credit
from $
500 to $
1,000, enhances incentives for
investment in education, eliminates the marriage penalty, phases out the death
tax, and encourages retirement saving.
Of immediate importance, the tax
measure includes a rebate provision that puts $
38 billion in
savings from the new 10 percent bracket quickly and directly back in the
taxpayers' hands. The rebate checks, which taxpayers are receiving in the months
of July, August, and September, could not have come at a better time to
invigorate today's shaky economy. Economic growth has slowed steadily for over a
year to a point that it has nearly stopped. The rebate checks will help prevent
further deterioration by supporting consumer spending.
Reserving the
Social Security Surplus for Debt Reduction
A strong bipartisan consensus
has arisen in this country, and in the Congress, to preserve very large
surpluses as a threshold condition of public finance. Both parties and both the
Legislative and Executive Branches, in this Administration and the previous one,
have concurred in maintaining a surplus at least the size of the Social Security
surplus.
Some would set the minimum surplus level even higher, using as
a target the artificial overage in the Medicare Part A trust fund. This is a
relatively modest difference, amounting to a question of whether the minimum
surplus should be more like 8.0 percent or 9.5 percent of total receipts. It is
also a difference that is completely irrelevant either to the level of future
Medicare benefits or to the Health of the trust fund financing those benefits,
which will be exactly the same size regardless of the level of the overall
budget surplus. (For further discussion, see the Medicare section of this
document.)
There are several reasons that the Social Security surplus
makes a good surplus target. First, unlike Medicare, which costs much more than
it takes in, Social Security is in true surplus for the moment. Second, the
Administration and a majority of Americans hope for reform that converts a
portion of Social Security receipts from mere IOUs to real assets, owned by the
worker who paid those taxes. At that point, the notion of a Social Security
"lockbox" will take on real, literal meaning.
The final reason for
choosing this surplus target is that it permits the Treasury to achieve-with
some room to spare-the maximum amount of debt retirement possible. Over the next
10 years, Social Security will take in excess funds of $
2.5
trillion, whereas maximum debt retireable without incurring unjustifiable
premium expenses is between $
2.0 trillion and
$
2.2 trillion. This year, the Treasury will eliminate well over
$
100 billion of existing debt, marking the fourth year in a row
of such reductions. Further such reductions are scheduled for each succeeding
year. This is an important accomplishment for which both political parties, both
branches of government, and both the current and prior administrations deserve
credit.
The update of the budget outlook in this Mid-Session Review
foresees continued large surpluses above the size of the Social Security surplus
for all years in the budget horizon. The President is determined to preserve
surpluses at this level, and to continue using these funds for the steady
reduction of outstanding publicly held debt.
SUMMARY
Chart 2.
Social Security Surpluses Alone Exceed Maximum Retireable Debt found on hard
copy
Changes in the Economic and Budget Outlook Since April
Since the President submitted his budget in April, the extent of the
economic slowdown has become more evident. In retrospect, its length and depth
are clear: the stock market began to fall in March, 2000; manufacturing
employment in August, 2000; and GDP growth in the third quarter of 2000.
Overall, the economy has grown at only a 1.3 percent rate since the second
quarter of last year, including an estimated 0.7 percent annual growth rate in
the most recently completed quarter. As discussed in a subsequent section of
this review, the Administration-and other forecasters- believe that recent
interest rate cuts by the Federal Reserve, coupled with the fiscal stimulus from
the Economic Growth and Tax Relief Reconciliation Act, will spur the economy
back to solid, sustainable growth by next year.
Table 1. CHANGE IN
BUDGET POLICY SURPLUSES (In billions of dollars) found on hard copy
Economic weakness, coupled with the tax rebate action that is designed
to counteract that weakness, results in a lower surplus outlook this year and
next year. In the current year, economic revisions and technical factors reduce
the surplus $
46 billion from the April estimate, a difference
of about two percent of receipts. Tax rebates and related provisions account for
$
40 billion, a legislated shift in timing of corporation income
tax receipts reduces the surplus another $
28 billion, and
supplemental spending for meeting national defense and other needs uses
$
5 billion. This combination of factors and a technical
adjustment described below still leaves a very small on- budget surplus for
2001.
In 2002, economic and technical revisions are slightly smaller
than in 2001. The effect of the tax relief provisions stays level at about
$
40 billion, while the shift of corporate receipts is
recaptured. The net result is a small on-budget surplus.
One factor
artificially reducing the 2001 on-budget surplus from the April estimate is an
upward revision to the Social Security trust fund due to reestimates of payroll
taxes paid in previous years. As explained in the accompanying box, this
practice has the effect of inflating the current Social Security surplus by
adding credits during 2001 for taxes actually paid and collected in 2000, 1999,
and earlier years. This reduces the apparent 2001 on-budget surplus by
$
6 billion. Correcting this distortion by assigning the extra
revenues to their appropriate year makes clear that there is a small on-budget
surplus in 2001. OMB will review with the Department of the Treasury the
possibility of prospective changes to record the adjustments in the correct
years.
Over the full 10-year budget horizon, the surplus outlook is
relatively unchanged from April. The unified surplus total for 2002 through 2011
is now estimated at $
3,113 billion, down from the
$
3,433 billion estimated in the April Budget. The largest
factor in the reduction is incorporating the outyear implications of the
Administration's $
18.4 billion defense amendment for 2002. This
is the first installment, totaling $
209 billion, of investment
in restoring our national defense capabilities after years of neglect. The tax
bill, because it was scaled back during Congressional consideration, increases
the surplus slightly relative to the April Budget (which assumed the President's
proposals), while the 10-year economic and technical adjustments reduce the
surplus by $
46 billion.
This update to the President's
budget increases the resources set aside for Medicare modernization, and an
integrated prescription drug benefit, to $
190 billion over the
period 2004 to 2011. This new estimate is consistent with the Framework to
Strengthen Medicare that the President announced on July 12th and is
$
37 billion more than was allocated in total to additional
Medicare spending in the April Budget submission over 10 years.
The
President's April Budget proposed a program to help low income seniors and those
with particularly high prescription drug costs get immediate assistance while
Congress considered comprehensive reform. However, with the President's support,
a consensus is now building in Congress which focuses on comprehensive Medicare
modernization. The President's Framework to Strengthen Medicare and his budget
reflect this emerging agreement, setting aside substantial resources to meet
this objective which could be implemented as soon as 2004. The Administration is
committed to continuing to work with the Congress on enacting legislation to
strengthen Medicare consistent with the President's framework.
Although
the Administration is committed to enacting comprehensive Medicare legislation
soon, the President believes we must help seniors get the prescription drugs
they need at an affordable price now. That is why the Administration has begun
the voluntary
Medicare Prescription Drug Discount Card program.
This program will allow seniors access to the same kinds of drug discounts that
other Americans with good private health insurance currently receive. The
President believes that seniors, who face the heaviest burden for prescription
drug costs, should not also have to pay the highest retail prices for drugs. The
discount card is not a substitute for prescription drug coverage in a reformed
Medicare system, but it will bring important relief to seniors who need it
beginning next year.
Of the current 10-year total surplus,
$
2,538 billion is from the Social Security trust fund, down
slightly from $
2,583 billion in April. As noted above, the
Administration is devoting as much of this amount as possible to the reduction
of publicly held debt. After reserving the Social Security surplus, the
remaining 10- year surplus is $
575 billion, down from
$
850 billion in April, with most of this difference attributed
to the $
198 billion increase in spending on national defense
and the additional commitment to Medicare.
The Best Course Forward
The government's finances are extremely sound. Only persistent,
long-term economic weakness can threaten this position. Hence, promoting a
return to vigorous growth must be our common objective. The best course forward
is clear: first, we must contain spending over the coming year.
Last
year's appropriations, agreed to 8 months ago by the last Congress and the last
President, contained the largest one year spending increase in history, about
$
50 billion over 2000. Obviously, a smaller surge in spending
last year would have ensured a larger surplus today. The spending growth rates
of 1999 through 2001 cannot be repeated if we are to preserve the on- budget
surpluses that we have all worked so hard to create. Congress must limit this
year's appropriations to the level of the 2002 Budget Resolution, including the
defense amendment recently proposed by the President.
Second, Congress
and the President must work together to continue restraining total spending in
the next few years. Businesses, states, cities, and families do not hesitate to
limit their spending when revenues diminish. The fifty state governments
recently reported that collectively they are lowering spending growth from 8
percent last year to a more sustainable 3-1/2 percent in 2002. Spending in the
federal domestic agencies exploded during the last three years, including growth
of 45 percent at the Department of Health and Human Services and 27 percent at
Department of Transportation. These departments can benefit from a period of
digestion without great growth beyond these expanded levels.
The
Administration is prepared where necessary to extend the principle of restraint
to its own high priority initiatives. The Administration continues to propose
several tax initiatives from the April Budget, with the effective dates delayed
two years until January 1, 2004. In addition, the Administration proposes to
fund other initiatives that can not be delayed within the additional
discretionary resources provided in the budget resolution, and will work with
Congress to revise these proposals as necessary to ensure their enactment.
Chart 3. Average Annual Percentage Growth by Agency Discretionary
Program Level, 1998-2002 found on hard copy
There are a number of other
items that may place demands on the budget. Consistent with the requirements of
the Budget Enforcement Act, action on these or other items with additional costs
to the budget must be accompanied by provisions to offset the costs to ensure
that no automatic reductions are triggered. Alternatively additional
requirements could be funded within the discretionary levels agreed to in the
Congressional Budget Resolution including the defense amendment recently
proposed by the President. Living within these constraints will ensure that the
Social Security surplus is protected and can be fully reserved for debt
reduction. Examples of these further requirements include:
- Farm bill.
The costs of the farm bill now moving through Congress, which restructures farm
programs through the next several years, will have to be offset where necessary
to maintain on-budget surplus.
Tax prouisions. Several long-standing tax
credits and other provisions expire at the end of 2001. The Administration
supports the extension of these provisions in a fiscally responsible manner and
looks forward to working with Congress to achieve that goal. These expiring
provisions include Archer Medical Savings Accounts, the work opportunity tax
credit, the welfare-to-work tax credit, provisions dealing with the minimum tax
for individuals, and the treatment of active financial services income of
foreign subsidiaries.
Response to natural disasters. A high level of
disaster related needs could require spending beyond the amounts assumed.
Railroad Retirement Investment Trust. The House-passed Railroad
Retirement and Survivors' Improvement Act (HR 1140) would authorize a new
federal trust fund to purchase stocks and bonds. The purchases could amount to
$
15 billion. Under long-standing budget scoring rules, these
purchases would be scored as outlays, the same as purchases of stocks, bonds,
and any other asset by all agencies within the federal government. However,
section 105 of the House-passed bill directs OMB and CBO not to score outlays
for these purchases.
Regardless of how the purchases are scored,
Treasury would have to pay for them in the same way-by using some of the budget
surplus that otherwise would be used to redeem debt held by the public. If all
of the purchases were made in 2002, they would exceed the non-Social Security
surplus by $
14 billion. Treasury would have to use
$
14 billion of the surplus generated by Social Security to
finance the remainder.
This Mid-Session Review presumes a policy of
fiscal restraint, but restraint does not mean paralysis. The President's
management initiatives and the on-going review of programs at all levels will
result in our ability to do more with the same or similar resources. In
government, as in any business or family, the burden of proof must be placed on
spending proponents to demonstrate the ongoing value received for whatever money
is being spent today. Any healthy organization constantly searches for ways to
redeploy money from less efficient to more efficient purposes, and it is past
time for the federal government to adopt this outlook. We expect that
improvements in managing resources that are already underway will pay greater
dividends than the exclusive focus on incremental new resources. Excellence is
defined by continuing to raise the bar of performance and achievement.
Table 2. CURRENT SURPLUS TOTALS (In billions of dollars) found on hard
copy
LOAD-DATE: September 6, 2001