[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




 

 
  PRELIMINARY ANALYSIS OF PRESIDENT CLINTON'S FISCAL YEAR 2001 BUDGET

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 16, 2000

                               __________

                            Serial No. 106-8


                               


           Printed for the use of the Committee on the Budget

                                  ------

                       U.S. GOVERNMENT PRINTING OFFICE
62-608cc                       WASHINGTON : 2000



                        COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia,            JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey                 Leadership Designee
NICK SMITH, Michigan                 LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa                     BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan             DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California     KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire       JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee              EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire        DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania           EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan            GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas                BOB CLEMENT, Tennessee
JIM RYUN, Kansas                     JAMES P. MORAN, Virginia
MAC COLLINS, Georgia                 DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee                 KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky             JOSEPH M. HOEFFEL III, 
GARY MILLER, California                  Pennsylvania
PAUL RYAN, Wisconsin                 TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania

                           Professional Staff

                    Wayne T. Struble, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel



                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 16, 2000................     1
Chart: Federal Reserve Board Chairman Alan Greenspan's quote on 
  surpluses......................................................     3
Chart: Inflated baselines........................................     4
Statement of Dan L. Crippen, Director, Congressional Budget 
  Office.........................................................     6
    Chart 1: CBO Baseline Projections of the Surplus.............     8
    Chart 2: Indebtedness to the Public Under the CBO Baseline...     9
    Chart 3: Changes in CBO Projections of the Total Surplus 
      Since July Under the Capped Baseline.......................    10
    Chart 4: Economic Assumptions................................    11
    Chart 5: Increases in Workers and Social Security 
      Beneficiaries..............................................    12
    Chart 6: GDP Fraction........................................    13
Prepared statement of Dr. Crippen................................    13
Written response to information requested by Mr. Minge concerning 
  States' tax actions during times of surplus....................    41



  PRELIMINARY ANALYSIS OF PRESIDENT CLINTON'S FISCAL YEAR 2001 BUDGET

                              ----------                              


                      WEDNESDAY, FEBRUARY 16, 2000

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:25 a.m. in room 
210, Cannon House Office Building, Hon. John R. Kasich 
(chairman of the committee) presiding.
    Members present: Representatives Kasich, Chambliss, Franks, 
Smith, Hoekstra, Gutknecht, Sununu, Ryun of Kansas, Wamp, 
Green, Fletcher, Miller, Ryan of Wisconsin, Toomey, Spratt, 
Rivers, Thompson, Bentsen, Davis, Markey, Clement, Moran, 
Hooley, Lucas, and Holt.
    Chairman Kasich. 10:25 a.m. The hearing will come to order 
and--I don't know what that cartoon is--it is not mine. Is that 
yours?
    Mr. Crippen. It is.
    Chairman Kasich. It says, I found out about Santa and the 
tooth fairy, and now I am beginning to wonder about the budget 
surplus. Frank and Ernest. That is pretty good. It will not 
take the place, though, of Charles Schulz, as I think everybody 
will admit. What an absolutely amazing development that on the 
very last day of the publishing of Charles Schulz's work, that 
the man passed, and everybody I know thought what a great--how 
great he was for children and for adults probably more than 
children.
    Dan, we are glad to have you here this morning. I am glad 
that you are working hard. First of all, I think you have taken 
your share of criticism, and I think--and I don't--I am not 
happy about it because I think you are professional, and I know 
that you had in the United States Senate a very unfortunate 
meeting over there 6 months ago--I was thinking about it this 
morning as I was getting ready--where some of the elected 
officials take delight in pounding on people who are not 
elected like a punching bag. I didn't like what they did over 
there, and I think things are settling out a little bit. And 
when we had your predecessor, we never attempted to ever 
manipulate or maneuver her any more than we do it with you.
    And in our conversations, you have been clear with me, and 
we don't have that many conversations, but you always make it 
clear that, John, I have a job to do, and I don't want you to 
do anything but your job. And I think you are doing great, and 
I think you are very smart, and I think you have a very good 
staff, and I am glad that you are upgrading all of your 
activities there.
    I think it is important we go back and look at all the 
models and try to be as accurate. I think that is what you want 
to do.
    Obviously we are all very, very pleased with the state of 
the economy. We talked about last week when we had Jack Lew in. 
In fact, last night I was talking to a friend of mine who lives 
in the Silicon Valley, and he was saying, I think this boom is 
going to last at least another 10 years, and I kind of chuckled 
because this is not a 10-year deal. This is not snow on the 
ground and then it gets warm and it all melts.
    To me we are really in a new period of revolution, idea 
revolution, just like the industrial revolution, and when you 
take the development of the high tech, whether it is 
biotechnology or whether it is the Internet, and you see the 
various industries now that are starting to grow off of these 
main industries, that represents really the greatest evidence 
that we are now in a period of significantly increased 
productivity, although I have got to tell you I was a little 
concerned last week when the President made a statement saying 
that don't anticipate these productivity increases like we have 
been having them. And I don't like to hear that. That is not 
designed to be pejorative toward the President. It is just that 
we better keep these productivity increases up, because if you 
do not continue to grow at the same rate, and you get stagnant 
there, then you lose your revenues.
    One of my concerns is if the stock market does go negative, 
and I am not--I believe it is possible that it will go to 
20,000 over time, that is my personal view--but if it doesn't 
grow and we have slumps, people sell less stock, I think we are 
going to find over time that capital gains collections were a 
very significant part of the surpluses. Then you could find 
yourself in a position of not having the surpluses that you 
want.
    But I am not here to be negative because I can't quite see 
much on the horizon that should sink this economy in the short 
and intermediate run, I mean, even including things like oil. I 
do have concerns, though, about a little bit more of the 
longer-term impact on the economy. I put education first and 
foremost. I just really believe that we are educating--failing 
to educate too many of our young people today, and with people 
not having the tools--having the brains, but not having the 
tools, we begin over time to lose that battle of ideas and 
development. And I just think the education system needs total 
revamping, and I think that poses a significant threat to the 
long-term economic growth of our economy.
    Secondly, I believe that regulations are a huge part of 
what government does. Now, we are having a running debate in 
this country today, and it is a bipartisan debate, everybody 
talking about what a low percentage of GDP we are spending. I 
remember in my own district we had a big company out there. 
They made a lot of money, and, boy, when times were good, they 
built their infrastructure, and when times went bad, they had 
to fire people to bring the right people in to chop the 
infrastructure. With government, once--you know, the reason we 
are doing so well on GDP right now is because the economy is 
growing so strong. But if we lock things in place that lead to 
higher levels of infrastructure for government, then when times 
are bad, the word around here is, oh, well, we can't make any 
changes now because the economy is bad. To me, this is the time 
that you get the reform agenda going again.
    In addition to that, I am very concerned about the total 
inability of Congress to come to grips with the entitlement 
problems. Now, your report reflects, I think, about 10 years. 
About 2 or 3 years after that, we fall off a cliff, and I 
really wish that you had talked about the inability of Congress 
to address the acute problems of Medicare and--which are 
devastatingly acute, and the devastating, less acute problems 
of Social Security and what it can mean to the long-term impact 
on our economy.
    And I think it is also very important we maintain fiscal 
discipline, the ability to have fiscal discipline. And I can 
remember back in 1994 visiting with Alan Greenspan and him 
telling me both privately and then coming and saying publicly 
that if the Congress can show that they have a commitment to 
smaller government, then we can have a stronger economy.
    I have got just two little deals here I would like to put 
up. One that I just--I don't know why we didn't see this 
earlier. It is a quote from Alan Greenspan where the Chairman 
says in his confirmation hearing, ``My first priority would be 
to allow as much of the surplus to flow through into a 
reduction of debt to the public. If that proves politically 
infeasible, I would opt for cutting taxes. And under no 
conditions do I see any room in the longer-term outlook for 
major changes in expenditures.''



    People have always said, well, Greenspan is not for cutting 
taxes. I don't think that is a correct and proper analysis of 
where he is, not that I think we ought to be spending all of 
our time discussing where Alan Greenspan is, but the fact is 
that he does matter, and that is his position.
    Now, if you would stick this other chart up, because we 
have been talking about the need for inflation increases in 
discretionary, not even talking about what we are going to do 
with prescription drugs or any other entitlements programs, 
particularly the problems of Medicare as it relates to 
reimbursement. But if you look at that chart, it is a little 
confusing, but if you go to 1991, the red line represents how 
much spending we would have had had we just grown at the rate 
of inflation. The blue line is what we actually did, and as you 
can see, in 1993 we started to bring spending down 
fundamentally, the results of cuts in defense.



    Then we got down to 1995. Well, look, 1994, 1995, 1996, the 
glory years, the height of the Republican empire so to speak, 
you know, the glory days of Greece and Republicans when we were 
cutting spending and limiting government. You can see what 
happened to that blue line.
    And then it is interesting, isn't it, when you look at 
1998, and 1999 and 2000, you know, it is kind of off to the 
races again because we have surpluses, and when you have 
surpluses, you spend, because all politicians are fundamentally 
tarred with the same stick. So what you see there, though, is 
the gap between that blue line and that inflation-adjusted 
spending. You have got $419 billion more in spending than you 
would have had had we restrained discretionary spending, and, 
frankly, it is twice as much, it is twice as much as where we 
started in 1991.
    So thank goodness we did not go on autopilot and we 
restrained spending over this decade, and there is credit that 
goes to both parties on that. There are. Then there is blame 
that goes to both parties as we kind of escalate our spending 
again.
    I worry that the growth in government brings about more 
regulations, more bureaucrats, more red tape. And it is 
interesting. If you talk to people who live in the Silicon 
Valley, there is a raging debate there as to whether they ought 
to even engage politicians in Washington. Some of the more--I 
don't want to say radical--some of the more aggressive ones 
argue that any time you sit down with a politician, you end up 
with a compromise that does you in, and they don't come here 
anymore. They don't want to be here. They don't want to deal 
with us because they think the result is more regulation and 
less progress for them.
    I just think that we have got lots of good things going. I 
wish we would be doing more things with entitlement also, and I 
am going to be talking about that even when I am gone from 
here. And I hope we don't get carried away with spending and 
just get loose around here and build a big infrastructure that 
we can't control. And I hope at some point we are going to 
actually confront education in this country, and open this 
system up and reform it, and not have a government monopoly in 
education in this country, and improve things. So just some 
observations.
    I am glad you are here, Mr. Crippen. I will look forward to 
Mr. Spratt's comments and then to your testimony.
    Mr. Spratt. Dr. Crippen, welcome. I like your cartoon. I 
think it honestly sets a good theme for this particular hearing 
because we have reidentified these projections as if they were 
ready to be disposed of, and we have yet to earn them. The 
economy has yet to produce them, as well as the budget.
    There are a couple of variables that I think would be 
useful for you to help us focus on. One the Chairman has just 
touched upon, and that is what is the right level for 
discretionary spending. You can't make normative judgments 
about that, but you can look back over the past and look at the 
present and tell us what some of the risks are if we understate 
discretionary spending.
    We have focused for the most part in this discussion on 
discretionary spending. That is the one variable that you 
manipulate in deriving three different projections. Yesterday 
the American Federation of Hospitals was in my office, and they 
were showing me their projection of Medicare over the next 
several years, emphasizing the fact that in order to attain 
these surpluses as you projected them, we have got to keep 
Medicare growing below the cost growth level that was projected 
in the BBA for several years to come at historically low growth 
rates, and it is questionable whether or not that can be 
attained as well.
    So there are lots of iffy assumptions underlying these 
projections. It won't be easy to attain, and they are certainly 
not automatic assumptions by any means. They will require a lot 
of discipline on the part of Congress, and cut some things that 
some of us really aren't advocating right now.
    Yesterday we had a meeting of the procurement subcommittee, 
of the Armed Services Committee, and the Chairman of that 
subcommittee, Mr. Hunter, who is a Republican and a good friend 
of mine, said quite earnestly and honestly, we have asked each 
of the chiefs of staffs of the four services what they need 
over and above what has been provided in the President's 
defense budget, which is an increase of $12.2 billion over last 
year. As I pointed out to him, it is also an increase of $24.4 
billion over what we provided for defense in the balanced 
budget agreement in 1997 for the year 2001. The chiefs told us 
they need another $15.5 billion for procurement alone. If you 
add that to the $24.4 billion, you are $40 billion above what 
was provided for defense in 2001 in the BBA. How can we return 
to the caps if we are going to make that kind of provision for 
defense, and then if we don't return to the caps, what is the 
proper level to send?
    I think you have done a good job in laying out the choices 
for us in the economic projection you have provided us, and I 
look forward to your testimony to explain those choices and 
explain the surplus today. Thank you very much for coming.
    Chairman Kasich. If I could just--one other comment. I 
think John raises a very good issue about this whole issue of 
reimbursement. The question to me on health care is whether we 
keep pumping money into a model that is clearly not working 
very well. In our hearings tomorrow, we are going to be talking 
about Medicare and how hard it is to try to control the 
spending on it. We clearly have problems in our hospitals, with 
our physicians. Do we put more in the old model, or do we 
figure out a way in which we create a new model?
    This year I think we will do--John would like to do some 
hearings on Medicare. I don't know that it will be done before 
we mark up the budget because we are on a fast track, but 
whatever we mark up is clearly going to be subject to changes, 
and it is a really great issue and an important issue because 
there is real people that pay a price. I just talked to a nurse 
the other day, pediatric nurse, and she has got seven patients, 
a number of them, seven patients they need to take care of 
because the--there is just not enough money there.
    These are vexing problems, and it is going to be 
interesting to see how we deal with it this year and really how 
we deal with it long term.
    Mr. Crippen, you are recognized.

  STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. Crippen. Thank you, Mr. Chairman. Before I begin, I 
want to thank you for your gracious opening comments. I hope 
that I will ultimately deserve them, but I want to assure you 
that my colleagues--both those who are here and those who are 
back across the freeway working--deserve them much more than I 
do. They are a hard-working, professional crew. I am just 
representing them here today.
    I don't know if any of you ever take time out to look at 
the comics. Of course, I know a lot of you only read the New 
York Times, so you don't have a chance. But I do look at the 
comics, and I brought this one today, as Congressman Spratt 
said, because I thought it had some relevance to our debate 
over competing versions of our baseline.
    Before I discuss the baseline, however, let me report 
briefly on our upcoming analysis of the President's budget. 
Like you, we have had the budget a little more than a week. It 
will take us another 2 to 3 weeks to finish our analysis and 
another week or so after that to produce a report. Obviously, 
if it is the desire of the committee, I will be happy to return 
next month to discuss that analysis with you. For today, 
however, I am prepared to speak only about our baseline report. 
Indeed, we have no analysis yet of the President's budget on 
which I can report.
    But I can report on our assessment of the budget and 
economic outlook, which has substantially improved since last 
July. First, we project that there will be an on-budget surplus 
this year and every year for the next 10 years. During the 
coming decade, under current policies, we believe the line 
between Social Security and the rest of the budget will not be 
crossed. The off-budget Social Security surpluses will 
accumulate over $2 trillion over the next 10 years (see Chart 
1). Thus, if there are no on-budget deficits, debt held by the 
public will be reduced by at least that amount.
    As I will explain in a moment, the on-budget surpluses 
range from a little more than $800 billion to just under $2 
trillion. If those surpluses were dedicated to paying down the 
national debt, it would be possible to retire all debt held by 
the public that was available for repurchase in the next 10 
years.
    Differences in the estimates of the on-budget surplus are 
attributable to three variations in our baseline, variations 
based on, as Congressman Spratt said, differing assumptions 
about the future path of discretionary spending. The first 
variation assumes strict compliance with CBO's estimates of the 
spending caps that are in place for 2000. The second variation 
assumes that discretionary resources are held to the level 
provided in the 2000 appropriations. The third variation 
presents the implications of inflating appropriations for 2000 
to approximate the resources it would take to continue the same 
spending over 10 years.
    Mr. Chairman, each of these formulations is flawed, and the 
flaws are more apparent now than ever before. Discretionary 
spending, as the name implies, is not cast in stone, although 
we sometimes treat it as such. And a baseline is, among other 
things, an attempt to extrapolate current policy into the 
future so that the impact of changes in policy can be measured. 
But the policy for discretionary appropriations is established 
one year at a time.
    The capped variation, reflecting the agreement reached in 
1997 between the Congress and the President, has by our 
reckoning been breached by ever-increasing amounts in the past 
2 years. Adherence to the cap for 2001 would require an 
absolute reduction in spending of approximately $25 billion.
    The freeze variation may provide a good approximation of 
current discretionary policy from one year to the next, but 
adherence to it would require unprecedented restraint over the 
10 years considered in this outlook.
    To assume adjustments for inflation, as our third variation 
does, makes appropriations appear to be mandatory, not 
discretionary, implying that the same level of real (inflation-
adjusted) resources must be provided each year, regardless of 
the merits of existing programs and the needs of the future.

                                Chart 1


    Both the freeze and inflated baseline of variations include 
spending that is not likely to be repeated, although the 
mechanics of constructing those variations inherently assume 
that it will be. For example, funds for the 2000 census as well 
as all other funds appropriated for emergency purposes, 
including one-time items such as funding for the Wye River 
Accords, are assumed to be repeated in 2001, 2002, and every 
year thereafter.
    In addition, the inflated variation implicitly assumes no 
increases in government productivity and no improvements in 
providing government services, despite the obvious improvements 
in private-sector productivity that have been reported.
    The second chart shows that total surpluses would exceed 
total debt held by the public in 2009 or 2010, under both the 
capped and freeze alternatives (see Chart 2). With the inflated 
alternative, total surpluses would exceed total debt soon after 
the end of the decade.
    A word of caution here. The tables in the testimony show 
debt held by the public to be positive in those last years. 
That is because even though sufficient surpluses would be 
generated to retire all debt, there is an irreducible minimum 
debt over this 10-year period because of outstanding long-term 
bonds and, we assume, the continuation of the savings bond 
program. To determine the Nation's true net debtor position, 
the amounts in the ``excess cash'' line must be subtracted from 
debt held by the public. For our purposes, we assume that the 
excess cash generated under this outlook would be invested in a 
way that produced a return equal to that on short-term, risk-
free instruments.
    To summarize, if these projections are in the ballpark and 
the underlying mandatory policies are not changed, the Federal 
Government should be able to save an amount roughly equal to or 
greater than the amount of debt held by the public over the 
next decade.

                                Chart 2


    Our next chart summarizes what has changed since July (see 
Chart 3). We compare the capped alternative with the July 
baseline because the July estimates also assumed adherence to 
the cap, allowing us to make strict comparisons between the 
two.

                                Chart 3


    Regarding legislative changes since July, spending 
increases and revenue reductions obviously reduce the 
surpluses, but the effects of economic and technical changes in 
our forecast are eight times greater than the effects of 
legislation. The economy, specifically productivity, continues 
to grow at a rate well above previous trends. We now assume 
that growth in real gross domestic product (GDP) will average 
0.4 percentage points more than we assumed in July. Half of 
that increase is due to productivity.
    In the 20 years prior to 1996, productivity grew at an 
average rate of 1.6 percent. In the past 4 years, productivity 
has grown at an average rate of 2.6 percent, a full percentage 
point higher. We assume that about 60 percent of that increase 
will prove to be permanent, for an average productivity growth 
of 2.2 percent over the 2001-2010 period.
    Tax revenues remain higher relative to GDP than past 
experience would suggest. Over time, we assume that collections 
will decline relative to GDP and for some, categories will 
revert to past patterns, with personal income taxes remaining 
somewhat higher than historical levels and corporate taxes 
slightly lower.
    Finally, the slowdown in Medicare spending--last year's 
spending actually declined by close to 1 percent--has lowered 
the base. Some of the dampening effect of reforms under the 
Balanced Budget Act of 1997 (BBA) and enhanced enforcement of 
antifraud measures will continue to restrain Medicare growth in 
the future--to the tune of about $140 billion less in costs 
over the 10 years than we had earlier estimated.
    Thus, the story continues to be one of strong economic 
performance and growth in revenues that is greater than 
previously forecast, coupled with a small reduction in expected 
spending for Medicare.
    As with any 10-year forecast, there is a great deal of 
uncertainty to any particular path. We generate specific 
numbers, but no one should be sanguine about the apparent 
precision they imply. Many of the numbers presented here are 
the result of accumulating many estimates, which are themselves 
uncertain. This year, the uncertainty is probably greater than 
usual, encompassing uncertainty about the long-run trend in 
productivity and future spending and tax policies.
    Indeed, most other economic forecasters do not venture to 
project as far forward as 10 years. The next chart compares our 
economic forecasts for this year, next year, and the next 5 
years (see Chart 4). Looking at the 5-year averages in the far 
right-hand column, you can see that we are at the bottom of the 
range of forecasts, and we are obviously quite close to our 
brethren at the Office of Management and Budget (OMB).
    We don't pretend to know much, Mr. Chairman, about economic 
performance in the last half of our forecast other than that we 
know growth in the economy will be limited to the increase in 
the workforce and in productivity, a combination that we assume 
for the terms of this projection will amount to growth of 2.9 
percent in a steady state toward the end of the decade.
    It is once again obvious that small changes over a long 
period make a big difference, a lesson I hope we can carry over 
to the reform of programs for the too-soon-to-be-elderly people 
like me. The apparent good news in this forecast is tempered by 
what lies just over the 10-year horizon--namely, my generation, 
the baby boomers.

                                Chart 4


    Between this year and 2030, the number of retirees will 
grow by 80 percent, although the number of workers will 
increase by only 10 percent. The portion of the economy that 
will be transferred from the younger working population--that 
is, from our children--to us will almost double, rising from 
just over 7 percent to just under 14 percent of GDP. To try and 
put that in perspective, Mr. Chairman, if the characteristics 
of 2030----

                                Chart 5


    Chairman Kasich. Give us those numbers a little slower. 
Those are--that is not in your testimony here, is it?
    Mr. Crippen. Probably not. From this year to 2030, the 
number of retirees will grow by approximately 80 percent, yet 
the number of workers will only grow by about 10 percent (see 
Chart 5).
    From our estimates, we assume that the portion of the 
economy that will be dedicated to support retirees will grow 
from 7 percent of GDP to 14 percent of GDP. I'll try and put 
that in perspective in relation to today's terms and today's 
debates. If the characteristics of 2030 applied to the budget 
you are working on for 2001--that is to say, if Social 
Security, Medicare, and Medicaid consumed an amount equal to 14 
percent of GDP--you would have about $400 billion to spend on 
everything else next year instead of the roughly $1 trillion 
you will have to fund the rest of the government. Put another 
way, you would have to raise taxes by $600 billion for next 
year alone in order to have the same relative spending for 
everything other than the programs for the elderly.
    As the economic outlook improves, even in the short run, so 
does the outlook, of course, for those programs. I would like 
to note that the 14 percent of GDP we project for programs for 
the elderly in 2030 is down over 1 full percentage point from 
last July, primarily because increased economic growth, albeit 
small, makes a big difference over the long haul.
    Think of it this way. The calculation of the share of GDP 
is a fraction with two moving parts (see Chart 6). The relative 
amount of resources transferred from the productive working 
population to retirees can be diminished by reducing the 
obligations or benefits--the numerator of the fraction--or by 
growing the economy--the fraction's denominator.

                                Chart 6


    Can we grow our way out of this problem? Probably not, and 
certainly not if we define the problem as keeping the relative 
share of the economy transferred to the elderly constant. What 
is likely is that my generation when retired will consume more 
than 7 percent of GDP because the economy will not grow that 
quickly. Nevertheless, the larger the economy, the easier it 
will certainly be to support those retirees.
    Again, in terms of the budget you are about to write, the 1 
percent improvement in the 2030 forecast translates into 
roughly $100 billion today. That is, the higher growth in this 
forecast is the equivalent of $100 billion in spending cuts or 
tax increases that would otherwise be necessary to fund 
government as we know it.
    Ultimately, Mr. Chairman, it is not the size of the 
balances in a trust fund that will limit our ability to pay for 
these long-term obligations but the size of the economy. How 
much of the funding are we going to push off to succeeding 
generations? How much of what our children produce are we going 
to demand that they give us? Thank you, Mr. Chairman.
    [The prepared statement of Dr. Crippen follows:]

 Prepared Statement of Dan L. Crippen, Director, Congressional Budget 
                                 Office

    Mr. Chairman, Congressman Spratt, and Members of the Committee, I 
am pleased to be with you this morning to discuss the budget and 
economic outlook for fiscal years 2001 to 2010.
    Total Federal revenues exceeded spending by $124 billion in fiscal 
year 1999, producing a surplus in the total budget for the second 
consecutive year. The Congressional Budget Office (CBO) estimates that 
without legislative changes, that surplus will rise to $176 billion in 
2000 (see Summary Table 1). If current policies remain in place, the 
surplus will continue to increase after 2000, CBO projects; however, 
the size of that increase depends on the amount of discretionary 
spending that is assumed.

                                               SUMMARY TABLE 1.--THE BUDGET OUTLOOK UNDER CURRENT POLICIES
                                                        [By fiscal year, in billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Actual                                                                                 Total
                                                           1999    2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010  2001-2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discretionary Spending Grows at the Rate of Inflation
 After 2000:
    On-Budget Surplus...................................       1     23     11     26     31     37     43     86    115    131    162    195       838
    Off-Budget Surplus..................................     124    153    166    182    195    209    225    239    254    268    281    295     2,314
                                                         -----------------------------------------------------------------------------------------------
      Total Surplus.....................................     124    176    177    209    227    246    268    325    368    399    444    489     3,152
                                                         ===============================================================================================
Discretionary Spending Is Frozen at the Level Enacted
 for 2000:
    On-Budget Surplus...................................       1     23     22     50     76    102    129    194    245    288    346    407     1,858
    Off-Budget Surplus..................................     124    153    166    182    196    209    226    240    255    269    282    296     2,320
                                                         -----------------------------------------------------------------------------------------------
      Total Surplus.....................................     124    176    188    232    271    312    355    434    500    556    628    703     4,179
                                                         ===============================================================================================
Discretionary Spending Equals CBO's Estimates of the
 Caps Through 2002 and Grows at the Rate of Inflation
 Thereafter:
    On-Budget Surplus...................................       1     23     69    112    126    136    151    199    231    258    298    339     1,918
    Off-Budget Surplus..................................     124    153    166    182    195    209    225    239    254    268    281    295     2,314
                                                         -----------------------------------------------------------------------------------------------
      Total Surplus.....................................     124    176    235    294    321    345    376    438    485    526    579    633     4,232
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.

    CBO's baseline projections are intended to provide the Congress 
with estimates of the spending and revenues that will occur if current 
laws affecting the budget remain unchanged. In the case of mandatory 
spending and revenues, which are generally governed by permanent laws, 
the projections incorporate the effects of anticipated changes in the 
economy, demographics, and other relevant factors.
    In the case of discretionary spending, however, which is controlled 
by annual appropriation acts, no consensus exists about how to define 
current policy as it applies to future years. Is it best represented by 
the statutory caps on discretionary budget authority and outlays, which 
were most recently specified in the Balanced Budget Act of 1997? Or 
does section 257(c)(1) of the Balanced Budget and Emergency Deficit 
Control Act of 1985 better depict current policy by specifying that 
baselines should be adjusted for inflation? Or is current policy for 
discretionary spending simply the amount that was provided in 
appropriations for the current year?
    Without any definitive answer to those questions, CBO presents 
three variants of its baseline in this report. Each one reflects a 
different assumption about discretionary spending.
     The ``inflated'' variation assumes that budget authority 
for discretionary programs grows at the rate of inflation each year 
after 2000.
     The ``freeze'' variation pegs discretionary budget 
authority to the level enacted for the current year, plus amounts 
already enacted for 2001.
     The ``capped'' variation assumes that discretionary 
spending equals CBO's estimates of the statutory caps through 2002 and 
grows at the rate of inflation thereafter.
    The Congress has used each of those spending paths as a benchmark 
in some past budget deliberations. Each alternative has limitations, 
however. As they currently stand, the caps may not be a realistic 
reference point given recent action on discretionary spending. The 
inflated baseline, for its part, implicitly earmarks future resources 
to maintain the real (inflation-adjusted) level of discretionary 
spending even though there is no explicit statutory basis for such 
earmarking. And the freeze baseline ignores the effects of pay raises 
and inflation--costs that could erode the amount of services or 
programs that the government can deliver. In addition, both the 
inflated and freeze baselines mechanically repeat funding for programs 
(such as the decennial census) whose needs are known to be 
significantly greater or less in future years.
    Most of the components of CBO's baseline budget projections--
revenues, mandatory spending, and offsetting receipts--are the same no 
matter which assumption about discretionary spending is used. Net 
interest costs, however, depend on the amount of projected debt 
outstanding, which in turn reflects the choice of paths for 
discretionary outlays. Likewise, projections of the surplus will vary 
depending on assumptions about the discretionary portion of the budget 
and the resulting effects on interest costs.
    Regardless of the variant, the budgetary picture is a bright one. 
Between 2001 and 2010, accumulated surpluses are projected to total 
$3.2 trillion under the inflated baseline and $4.2 trillion under the 
freeze or capped baseline. On-budget surpluses (which exclude the 
spending and revenues of Social Security and the Postal Service) total 
more than $800 billion under the inflated baseline and $1.9 trillion 
under the other two baselines.
    Those surpluses are much larger than the ones that CBO projected 
last July in ``The Economic and Budget Outlook: An Update.'' Comparing 
capped baselines (which CBO used in that report), the cumulative 
surplus for the 2000-2009 period is now $879 billion higher, despite 
legislation enacted since July that reduces that surplus by a total of 
$127 billion between 2000 and 2009. The effects of new legislation are 
more than offset by changes in economic and other factors that increase 
revenues by $651 billion over that period and reduce spending by $355 
billion.
    Most of the improvement in the budgetary picture results from CBO's 
updated economic outlook. Real economic growth is forecast to average 
about 3 percent a year over the next 2 years, with only a slight rise 
in the underlying rate of inflation. For the longer term, CBO projects 
that real growth will average 2.7 percent a year from 2002 through 
2010, taking into account the possibility of booms and recessions 
during that period.

                           The Budget Outlook

    The total budget surplus of $176 billion that CBO is projecting for 
this year results from a $153 billion surplus in off-budget accounts--
mainly the Social Security trust funds, whose inflows and outflows are 
accounted for separately from those of the rest of the government--and 
a $23 billion surplus in on-budget accounts. That on-budget surplus 
would be the largest ever in nominal dollars. Measured as a percentage 
of gross domestic product (GDP), it would be the largest since 1951.
    Assuming that current policies do not change, CBO projects growing 
surpluses over the next decade. The total budget surplus would reach 
between 3 percent and 5 percent of GDP by 2010 depending on the path of 
discretionary spending (see Summary Tables 2, 3, and 4). The on-budget 
surplus would range between 1 percent and 3 percent of GDP.

            SUMMARY TABLE 2.--CBO BASELINE BUDGET PROJECTIONS, ASSUMING THAT DISCRETIONARY SPENDING GROWS AT THE RATE OF INFLATION AFTER 2000
                                                                    [By fiscal year]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               Actual
                                                1999     2000     2001     2002     2003     2004     2005     2006     2007     2008     2009     2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 IN BILLIONS OF DOLLARS
Revenues:
    Individual income.......................      879      945      986    1,026    1,068    1,112    1,162    1,217    1,275    1,339    1,407    1,480
    Corporate income........................      185      189      189      187      190      194      200      208      216      225      233      242
    Social insurance........................      612      653      684      714      742      770      808      842      878      913      954      998
    Other...................................      151      158      158      169      177      187      192      198      202      210      218      226
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................    1,827    1,945    2,016    2,096    2,177    2,263    2,361    2,465    2,572    2,686    2,813    2,946
        On-budget...........................    1,383    1,465    1,515    1,571    1,630    1,693    1,764    1,843    1,923    2,010    2,106    2,208
        Off-budget..........................      444      480      502      525      547      570      597      623      649      676      707      738
Outlays:
    Discretionary spending..................      575      603      635      650      669      684      702      716      730      750      768      786
    Mandatory spending......................      977    1,020    1,071    1,119    1,182    1,249    1,329    1,385    1,460    1,550    1,643    1,744
    Offsetting receipts.....................      -78      -79      -85      -91      -94      -93      -98     -103     -108     -113     -119     -125
    Net interest............................      230      224      218      209      194      177      160      142      122      101       80       68
    Proceeds from investing excess cash.....     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.       -3      -16
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................    1,703    1,769    1,839    1,888    1,950    2,017    2,093    2,140    2,204    2,287    2,369    2,457
        On-budget...........................    1,382    1,442    1,504    1,545    1,598    1,656    1,721    1,756    1,808    1,879    1,944    2,014
        Off-budget..........................      321      327      336      343      352      361      372      384      396      409      425      443
Surplus                                           124      176      177      209      227      246      268      325      368      399      444      489
    On-budget...............................        1       23       11       26       31       37       43       86      115      131      162      195
    Off-budget..............................      124      153      166      182      195      209      225      239      254      268      281      295
Debt Held by the Public.....................    3,633    3,455    3,292    3,097    2,884    2,651    2,394    2,080    1,721    1,330    1,016      941
                                                                 AS A PERCENTAGE OF GDP
Revenues:
    Individual income.......................      9.6      9.9      9.8      9.8      9.7      9.7      9.7      9.8      9.8      9.9      9.9     10.0
    Corporate income........................      2.0      2.0      1.9      1.8      1.7      1.7      1.7      1.7      1.7      1.7      1.6      1.6
    Social insurance........................      6.7      6.8      6.8      6.8      6.8      6.7      6.8      6.8      6.8      6.7      6.7      6.7
    Other...................................      1.7      1.6      1.6      1.6      1.6      1.6      1.6      1.6      1.6      1.5      1.5      1.5
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................     20.0     20.3     20.1     20.0     19.9     19.8     19.8     19.8     19.8     19.8     19.8     19.8
        On-budget...........................     15.2     15.3     15.1     15.0     14.9     14.8     14.8     14.8     14.8     14.8     14.8     14.9
        Off-budget..........................      4.9      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0
Outlays:
    Discretionary spending..................      6.3      6.3      6.3      6.2      6.1      6.0      5.9      5.7      5.6      5.5      5.4      5.3
    Mandatory spending......................     10.7     10.6     10.7     10.7     10.8     10.9     11.1     11.1     11.2     11.4     11.6     11.7
    Offsetting receipts.....................     -0.9     -0.8     -0.8     -0.9     -0.9     -0.8     -0.8     -0.8     -0.8     -0.8     -0.8     -0.8
    Net interest............................      2.5      2.3      2.2      2.0      1.8      1.6      1.3      1.1      0.9      0.7      0.6      0.5
    Proceeds from investing excess cash.....     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.        *     -0.1
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................     18.7     18.5     18.3     18.0     17.8     17.7     17.6     17.2     16.9     16.8     16.7     16.5
        On-budget...........................     15.2     15.1     15.0     14.7     14.6     14.5     14.4     14.1     13.9     13.8     13.7     13.6
        Off-budget..........................      3.5      3.4      3.3      3.3      3.2      3.2      3.1      3.1      3.0      3.0      3.0      3.0
Surplus.....................................      1.4      1.8      1.8      2.0      2.1      2.2      2.2      2.6      2.8      2.9      3.1      3.3
    On-budget...............................        *      0.2      0.1      0.3      0.3      0.3      0.4      0.7      0.9      1.0      1.1      1.3
    Off-budget..............................      1.4      1.6      1.7      1.7      1.8      1.8      1.9      1.9      2.0      2.0      2.0      2.0
Debt Held by the Public.....................     39.9     36.1     32.8     29.5     26.3     23.2     20.1     16.7     13.2      9.8      7.2      6.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTE: n.a. = not applicable; * = less than 0.05 percent of GDP.


             SUMMARY TABLE 3.--CBO BASELINE BUDGET PROJECTIONS, ASSUMING THAT DISCRETIONARY SPENDING IS FROZEN AT THE LEVEL ENACTED FOR 2000
                                                                    [By fiscal year]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               Actual
                                                1999     2000     2001     2002     2003     2004     2005     2006     2007     2008     2009     2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 IN BILLIONS OF DOLLARS
Revenues:
    Individual income.......................      879      945      986    1,026    1,068    1,112    1,162    1,217    1,275    1,339    1,407    1,480
    Corporate income........................      185      189      189      187      190      194      200      208      216      225      233      242
    Social insurance........................      612      653      684      714      742      770      808      842      878      913      954      998
    Other...................................      151      158      158      169      177      187      192      198      202      210      218      226
    Total...................................    1,827    1,945    2,016    2,096    2,177    2,263    2,361    2,465    2,572    2,686    2,813    2,946
    On-budget...............................    1,383    1,465    1,515    1,571    1,630    1,693    1,764    1,843    1,923    2,010    2,106    2,208
    Off-budget..............................      444      480      502      525      547      570      597      623      649      676      707      738
Outlays:
    Discretionary spending..................      575      603      624      628      627      624      625      623      620      622      621      621
    Mandatory spending......................      977    1,020    1,071    1,119    1,182    1,249    1,329    1,385    1,460    1,550    1,643    1,744
    Offsetting receipts.....................      -78      -79      -85      -91      -94      -93      -98     -103     -108     -113     -119     -125
    Net interest............................      230      224      218      208      191      171      150      127      101       81       72       68
    Proceeds from investing excess cash.....     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.       -9      -33      -65
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................    1,703    1,769    1,829    1,864    1,905    1,951    2,006    2,032    2,073    2,130    2,185    2,244
        On-budget...........................    1,382    1,442    1,493    1,521    1,554    1,590    1,635    1,649    1,678    1,722    1,761    1,801
        Off-budget..........................      321      327      336      342      352      361      372      383      395      408      424      442
Surplus.....................................      124      176      188      232      271      312      355      434      500      556      628      703
    On-budget...............................        1       23       22       50       76      102      129      194      245      288      346      407
    Off-budget..............................      124      153      166      182      196      209      226      240      255      269      282      296
Debt Held by the Public.....................    3,633    3,455    3,281    3,062    2,805    2,506    2,162    1,739    1,249    1,078    1,016      941
                                                                 AS A PERCENTAGE OF GDP
Revenues:
    Individual income.......................      9.6      9.9      9.8      9.8      9.7      9.7      9.7      9.8      9.8      9.9      9.9     10.0
    Corporate income........................      2.0      2.0      1.9      1.8      1.7      1.7      1.7      1.7      1.7      1.7      1.6      1.6
    Social insurance........................      6.7      6.8      6.8      6.8      6.8      6.7      6.8      6.8      6.8      6.7      6.7      6.7
    Other...................................      1.7      1.6      1.6      1.6      1.6      1.6      1.6      1.6      1.6      1.5      1.5      1.5
    Total...................................     20.0     20.3     20.1     20.0     19.9     19.8     19.8     19.8     19.8     19.8     19.8     19.8
    On-budget...............................     15.2     15.3     15.1     15.0     14.9     14.8     14.8     14.8     14.8     14.8     14.8     14.9
    Off-budget..............................      4.9      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0
Outlays:
    Discretionary spending..................      6.3      6.3      6.2      6.0      5.7      5.5      5.2      5.0      4.8      4.6      4.4      4.2
    Mandatory spending......................     10.7     10.6     10.7     10.7     10.8     10.9     11.1     11.1     11.2     11.4     11.6     11.7
    Offsetting receipts.....................     -0.9     -0.8     -0.8     -0.9     -0.9     -0.8     -0.8     -0.8     -0.8     -0.8     -0.8     -0.8
    Net interest............................      2.5      2.3      2.2      2.0      1.7      1.5      1.3      1.0      0.8      0.6      0.5      0.5
    Proceeds from investing excess cash.....     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     -0.1     -0.2     -0.4
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................     18.7     18.5     18.2     17.8     17.4     17.1     16.8     16.3     15.9     15.7     15.4     15.1
        On-budget...........................     15.2     15.1     14.9     14.5     14.2     13.9     13.7     13.2     12.9     12.7     12.4     12.1
        Off-budget..........................      3.5      3.4      3.3      3.3      3.2      3.2      3.1      3.1      3.0      3.0      3.0      3.0
Surplus.....................................      1.4      1.8      1.9      2.2      2.5      2.7      3.0      3.5      3.8      4.1      4.4      4.7
    On-budget...............................        *      0.2      0.2      0.5      0.7      0.9      1.1      1.6      1.9      2.1      2.4      2.7
    Off-budget..............................      1.4      1.6      1.7      1.7      1.8      1.8      1.9      1.9      2.0      2.0      2.0      2.0
Debt Held by the Public.....................     39.9     36.1     32.7     29.2     25.6     21.9     18.1     14.0      9.6      7.9      7.2      6.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTE: n.a. = not applicable; * = less than 0.05 percent of GDP.


  SUMMARY TABLE 4.--CBO BASELINE BUDGET PROJECTIONS, ASSUMING THAT DISCRETIONARY SPENDING EQUALS CBO'S ESTIMATES OF THE STATUTORY CAPS THROUGH 2002 AND
                                                        GROWS AT THE RATE OF INFLATION THEREAFTER
                                                                    [By fiscal year]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               Actual
                                                1999     2000     2001     2002     2003     2004     2005     2006     2007     2008     2009     2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 IN BILLIONS OF DOLLARS
Revenues:
    Individual income.......................      879      945      986    1,026    1,068    1,112    1,162    1,217    1,275    1,339    1,407    1,480
    Corporate income........................      185      189      189      187      190      194      200      208      216      225      233      242
    Social insurance........................      612      653      684      714      742      770      808      842      878      913      954      998
    Other...................................      151      158      158      169      177      187      192      198      202      210      218      226
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................    1,827    1,945    2,016    2,096    2,177    2,263    2,361    2,465    2,572    2,686    2,813    2,946
        On-budget...........................    1,383    1,465    1,515    1,571    1,630    1,693    1,764    1,843    1,923    2,010    2,106    2,208
        Off-budget..........................      444      480      502      525      547      570      597      623      649      676      707      738
Outlays:
    Discretionary spending..................      575      603      578      571      585      600      615      630      646      662      679      696
    Mandatory spending......................      977    1,020    1,071    1,119    1,182    1,249    1,329    1,385    1,460    1,550    1,643    1,744
    Offsetting receipts.....................      -78      -79      -85      -91      -94      -93      -98     -103     -108     -113     -119     -125
    Net interest............................      230      224      217      204      183      162      139      115       92       77       72       68
    Proceeds from investing excess cash.....     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.       -2      -16      -41      -70
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................    1,703    1,769    1,781    1,802    1,856    1,918    1,985    2,027    2,087    2,161    2,234    2,313
        On-budget...........................    1,382    1,442    1,446    1,460    1,504    1,557    1,613    1,644    1,692    1,752    1,809    1,870
        Off-budget..........................      321      327      336      343      352      361      372      384      396      409      425      443
Surplus.....................................      124      176      235      294      321      345      376      438      485      526      579      633
    On-budget...............................        1       23       69      112      126      136      151      199      231      258      298      339
    Off-budget..............................      124      153      166      182      195      209      225      239      254      268      281      295
Debt Held by the Public.....................    3,633    3,455    3,234    2,954    2,647    2,314    1,949    1,522    1,142    1,078    1,016      941
                                                                 AS A PERCENTAGE OF GDP
Revenues:
    Individual income.......................      9.6      9.9      9.8      9.8      9.7      9.7      9.7      9.8      9.8      9.9      9.9     10.0
    Corporate income........................      2.0      2.0      1.9      1.8      1.7      1.7      1.7      1.7      1.7      1.7      1.6      1.6
    Social insurance........................      6.7      6.8      6.8      6.8      6.8      6.7      6.8      6.8      6.8      6.7      6.7      6.7
    Other...................................      1.7      1.6      1.6      1.6      1.6      1.6      1.6      1.6      1.6      1.5      1.5      1.5
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................     20.0     20.3     20.1     20.0     19.9     19.8     19.8     19.8     19.8     19.8     19.8     19.8
        On-budget...........................     15.2     15.3     15.1     15.0     14.9     14.8     14.8     14.8     14.8     14.8     14.8     14.9
        Off-budget..........................      4.9      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0      5.0
Outlays:
    Discretionary spending..................      6.3      6.3      5.8      5.4      5.3      5.3      5.2      5.1      5.0      4.9      4.8      4.7
    Mandatory spending......................     10.7     10.6     10.7     10.7     10.8     10.9     11.1     11.1     11.2     11.4     11.6     11.7
    Offsetting receipts.....................     -0.9     -0.8     -0.8     -0.9     -0.9     -0.8     -0.8     -0.8     -0.8     -0.8     -0.8     -0.8
    Net interest............................      2.5      2.3      2.2      1.9      1.7      1.4      1.2      0.9      0.7      0.6      0.5      0.5
    Proceeds from investing excess cash.....     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.     n.a.        *     -0.1     -0.3     -0.5
                                             -----------------------------------------------------------------------------------------------------------
      Total.................................     18.7     18.5     17.7     17.2     16.9     16.8     16.6     16.3     16.0     15.9     15.7     15.6
        On-budget...........................     15.2     15.1     14.4     13.9     13.7     13.6     13.5     13.2     13.0     12.9     12.7     12.6
        Off-budget..........................      3.5      3.4      3.3      3.3      3.2      3.2      3.1      3.1      3.0      3.0      3.0      3.0
Surplus.....................................      1.4      1.8      2.3      2.8      2.9      3.0      3.2      3.5      3.7      3.9      4.1      4.3
    On-budget...............................        *      0.2      0.7      1.1      1.1      1.2      1.3      1.6      1.8      1.9      2.1      2.3
    Off-budget..............................      1.4      1.6      1.7      1.7      1.8      1.8      1.9      1.9      2.0      2.0      2.0      2.0
Debt Held by the Public.....................     39.9     36.1     32.2     28.1     24.2     20.3     16.3     12.2      8.8      7.9      7.2      6.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTE: n.a. = not applicable; * = less than 0.05 percent of GDP.

                           changes since july
    CBO's current budget outlook is considerably more positive than the 
one described in its July 1999 report. Since then, CBO estimates, the 
Congress and the President have enacted legislation that increases 
projected spending over the 2000-2009 period by about $109 billion and 
reduces projected revenues by $18 billion, compared with the levels in 
CBO's July baseline (see Summary Table 5). The majority of that 
legislative action occurred at the end of the session, when the 
Congress and the President enacted the District of Columbia 
appropriation act and nine other acts enacted by reference--four 
regular appropriation acts (for the Departments of Commerce, Justice, 
and State; for foreign operations; for the Department of the Interior; 
and for the Departments of Labor, Health and Human Services, and 
Education), a miscellaneous appropriation act, and four additional 
acts. The effects of that legislation, however, have been more than 
offset by changes in CBO's estimates of future revenues and outlays 
that have added to projected surpluses.

                         SUMMARY TABLE 5.--CHANGES IN CBO PROJECTIONS OF THE SURPLUS SINCE JULY 1999, UNDER THE CAPPED BASELINE
                                                        [By fiscal year, in billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                 Total
                                                       2000     2001     2002     2003     2004     2005     2006     2007     2008     2009   2000-2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
July Baseline Total Surplus \1\....................      161      193      246      247      266      286      334      364      385      413      n.a.
Changes:
    Legislative:
        Revenues...................................        3       -6       -8       -2       -2       -1       -1        *        *        *       -18
        Outlays \2\................................      -33      -11       -9       -8       -7       -7       -8       -8       -9       -9      -109
                                                    ----------------------------------------------------------------------------------------------------
          Subtotal.................................      -30      -17      -18      -10       -9       -8       -8       -9       -9      -10      -127
    Economic:
        Revenues...................................       23       41       52       54       53       53       54       56       60       65       510
        Outlays \2\................................        2       -1       -3        1        8       13       19       24       30       36       130
                                                    ----------------------------------------------------------------------------------------------------
          Subtotal.................................       25       40       49       55       61       66       74       80       89      101       640
    Technical:
        Revenues...................................       14       12        8        9       13       14       15       16       18       22       141
        Outlays \2\................................        6        7        8       20       14       19       23       34       43       51       225
                                                    ----------------------------------------------------------------------------------------------------
          Subtotal.................................       20       19       16       28       27       33       38       50       61       74       366
                                                    ----------------------------------------------------------------------------------------------------
            Total Changes..........................       15       42       47       73       79       90      104      121      141      166       879
January Baseline Total Surplus.....................      176      235      294      321      345      376      438      485      526      579      n.a.
Memorandum:
    Total Change in Revenues.......................       40       46       51       60       64       66       69       71       77       88       634
    Total Change in Outlays \2\....................      -25       -4       -4       13       15       24       35       50       64       78       245
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
NOTE: n.a. = not applicable; * = less than $500 million.
\1\ Assumes that discretionary spending equals CBO's estimates of the statutory caps through 2002 and grows at the rate of inflation thereafter.
\2\ Increases in outlays are shown with a negative sign because they reduce surpluses.

    Most of the improvement in the budget outlook since July results 
from the continuing strength of the economy, which CBO estimates will 
produce higher revenues. The current revenue projections are more than 
$500 billion higher over the 10-year period because of changes in CBO's 
economic forecast. Most of that increase stems from higher projected 
levels of wage and salary income, which boost receipts from individual 
income and social insurance taxes.
    CBO projects that interest rates will be approximately 1 percentage 
point higher in 2001 and 2002 than previously forecast and at least 0.3 
percentage points higher after that. Such changes boost anticipated 
interest costs (in the capped baseline) by $56 billion through 2009. At 
the same time, higher revenue projections and other factors lower the 
projected costs of servicing the Federal debt by as much as $31 billion 
a year by 2009 and by a total of $138 billion over the 10-year period.
    Changes in factors other than legislation and the economic outlook 
(so-called technical changes) increase the surplus under the capped 
baseline by $366 billion over 10 years. Technical changes to revenue 
projections account for $141 billion of that difference--mostly the 
result of an increase in projected realizations of capital gains in the 
near term and other effects on social insurance taxes and individual 
income taxes in later years. Technical changes to outlay projections 
(other than for debt service) represent a similar amount--nearly all of 
it resulting from changes to CBO's estimates of Medicare spending. 
Continued emphasis on improving compliance with program rules and a 
larger-than-anticipated drop in the use of home health care services 
have slowed the growth of Medicare spending, prompting CBO to adjust 
its estimates downward.
               revenue projections for 2000 through 2010
    CBO estimates that total Federal revenues will exceed $1.9 trillion 
in fiscal year 2000 if current policies remain unchanged--marking the 
eighth consecutive year in which the growth of revenues has outstripped 
the growth of gross domestic product. Revenues are expected to grow 
more slowly than GDP through 2004 and then at about the same rate as 
GDP through 2010. In that year, revenues are projected to be $2.9 
trillion, or about 19.8 percent of GDP.
    Although revenues will continue to grow, CBO expects the rate of 
growth to slow from the rapid pace of the past few years. From 1994 to 
1998, revenues rose at an average rate of 8.3 percent a year, much 
faster than GDP. Consequently, revenues as a percentage of GDP 
increased from 18.1 percent in 1994 to 19.9 percent in 1998. Although 
revenue growth slowed to 6.1 percent in 1999, it still exceeded GDP 
growth and boosted the ratio of receipts to GDP to a postwar high of 20 
percent.
    In CBO's forecast, receipts will increase slightly faster this year 
(6.4 percent) than in 1999. They will also grow faster than GDP, 
pushing the ratio of revenues to GDP to 20.3 percent, which is expected 
to become the postwar peak. Beginning next year, however, CBO expects 
receipts to grow by roughly 4 percent a year through 2004. That rate is 
projected to rise to about 4.5 percent a year between 2005 and 2010. 
Although GDP will grow faster than receipts during that period, on 
average, the ratio of receipts to GDP will stay close to its peak, 
remaining at 19.8 percent.
    Individual income tax receipts--bolstered primarily by higher 
realizations of capital gains, growth in real incomes, and especially 
rapid growth in income among high-income taxpayers--fueled the rapid 
rise in revenues of the past few years. Those receipts are also an 
important contributor to the slower growth of revenues projected for 
the next few years. Higher realizations of capital gains stemmed 
largely from the sharp rise in stock prices. Effective tax rates rose 
because an increasing number of taxpayers fell into the high-income 
category and were therefore taxed at higher marginal rates. 
Furthermore, those taxpayers experienced higher-than-average growth in 
income. None of those sources of rapid growth in revenues are expected 
to persist indefinitely. As they play smaller roles in boosting 
receipts, revenue growth is projected to slow.
                outlay projections for 2000 through 2010
    CBO expects Federal spending to total $1.8 trillion in fiscal year 
2000. Under current policies, that figure is projected to rise to 
between $2.2 trillion and $2.5 trillion by 2010, depending on the path 
assumed for discretionary spending.
    Federal spending as a percentage of the economy declines from its 
current level under all three of CBO's alternatives for discretionary 
spending. Last year, federal outlays totaled just under 19 percent of 
GDP. In 2000, they will drop further, to about 18.5 percent. Over the 
next decade, CBO estimates, outlays will continue to fall slowly, 
reaching between 15.1 percent and 16.5 percent of GDP in 2010, 
depending on which assumptions are used.
    Within the overall picture, the mix of Federal spending has changed 
significantly over time. Today, the government spends more on 
entitlement programs and less on discretionary programs as a share of 
GDP than it did in the past. Spending for entitlements and other 
mandatory programs (including offsetting receipts) rose from 4.9 
percent of GDP in 1962 to 9.9 percent in 1999, while discretionary 
spending declined from 12.7 percent of GDP to 6.3 percent.
    That trend continues in CBO's baseline projections. By 2010, 
mandatory spending (including offsetting receipts) is expected to reach 
10.9 percent of GDP, as discretionary spending falls to between 4.2 
percent and 5.3 percent. The growth of mandatory spending--at a 
projected rate of 5.6 percent a year--will be fueled by the two major 
health care programs, Medicare and Medicaid, which are projected to 
grow at average annual rates of 6.9 percent and 8.6 percent, 
respectively. Those growth rates are faster than the ones experienced 
in the past 3 years but slower than those of the early 1990's.
    Discretionary spending is projected to increase at various rates 
from 2000 to 2010: the inflated baseline shows growth averaging 2.7 
percent a year; the freeze baseline, 0.3 percent; and the capped 
baseline, 1.4 percent. Although total discretionary spending was 
virtually unchanged between 1991 and 1996, nondefense discretionary 
spending grew by 4.7 percent annually, while defense spending dropped 
by 3.6 percent annually. Over the following 3 years, nondefense 
spending increased by 3.8 percent, on average, and defense spending by 
1.2 percent, leading to an average increase of 2.5 percent a year for 
total discretionary spending.
    As a whole, Federal outlays (other than net interest outlays) are 
projected to rise by between 3.5 percent and 4.5 percent a year during 
the next decade (depending on which variation of the baseline is used). 
By comparison, total noninterest outlays grew at an annual rate of 3.4 
percent over the 1991-1999 period.
    Under each of the alternatives for discretionary spending, the 
Treasury would have enough cash on hand sometime between 2007 and 2009 
to retire all of the federal debt held by the public. However, because 
some outstanding debt will not be available for repurchase, the 
Treasury would not be able to devote all such funds to that purpose. 
CBO's baseline simply assumes that the Treasury would invest all of its 
excess cash at an interest rate equal to the average rate projected for 
Treasury bills and notes and would receive dividend or interest 
earnings from those investments.

                          The Economic Outlook

    In 1999, the U.S. economy continued to expand far beyond 
expectations--yet without any meaningful acceleration in the underlying 
rate of inflation. Most analysts expect the economy's growth to remain 
strong but to slow at least moderately from the 4.3 percent annual rate 
of the past 3 years.
                           changes since july
    CBO's current economic outlook is more optimistic about the 
prospects for real growth than the one reported last July. Compared 
with the July projections, growth of real GDP and labor productivity is 
significantly higher, inflation as measured by the consumer price index 
(CPI) is unchanged, and interest rates are slightly higher (see Summary 
Table 6). Private-sector assessments of the economy's recent behavior 
reach the same conclusion--that the sustainable trends in the growth of 
labor productivity and real GDP are higher than previously thought 
possible.

                                  SUMMARY TABLE 6.--COMPARISON OF CBO ECONOMIC PROJECTIONS FOR CALENDAR YEARS 2000-2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Forecast                                         Projected
                                            Estimated --------------------------------------------------------------------------------------------------
                                               1999      2000     2001     2002     2003     2004     2005     2006     2007     2008     2009     2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nominal GDP (Billions of dollars):
    January 2000..........................     9,235     9,692   10,154   10,610   11,069   11,544   12,054   12,589   13,148   13,734   14,362   15,024
    July 1999.............................     8,964     9,351    9,751   10,159   10,583   11,027   11,508   12,017   12,554   13,113   13,695     n.a.
Nominal GDP (Percentage change):
    January 2000..........................       5.4       5.0      4.8      4.5      4.3      4.3      4.4      4.4      4.4      4.5      4.6      4.6
    July 1999.............................       5.3       4.3      4.3      4.2      4.2      4.2      4.4      4.4      4.5      4.5      4.4     n.a.
Real GDP \1\ (Percentage change):
    January 2000..........................       3.9       3.3      3.1      2.8      2.6      2.6      2.7      2.7      2.7      2.7      2.9      2.9
    July 1999.............................       4.0       2.4      2.4      2.3      2.3      2.3      2.5      2.5      2.5      2.5      2.5     n.a.
GDP Price Index \2\ (Percentage change):
    January 2000..........................       1.4       1.6      1.6      1.7      1.7      1.7      1.7      1.7      1.7      1.7      1.7      1.7
    July 1999.............................       1.3       1.8      1.8      1.8      1.8      1.8      1.9      1.9      1.9      1.9      1.9     n.a.
Consumer Price Index \3\ (Percentage
 change):
    January 2000..........................       2.2       2.5      2.4      2.5      2.5      2.5      2.5      2.5      2.5      2.5      2.5      2.5
    July 1999.............................       2.2       2.5      2.5      2.5      2.5      2.5      2.5      2.5      2.5      2.5      2.5     n.a.
Unemployment Rate (Percent):
    January 2000..........................       4.2       4.1      4.2      4.4      4.7      4.8      5.0      5.0      5.1      5.2      5.2      5.2
    July 1999.............................       4.2       4.3      4.6      4.9      5.1      5.3      5.4      5.5      5.5      5.5      5.5     n.a.
Three-Month Treasury Bill Rate (Percent):
    January 2000..........................       4.6       5.4      5.6      5.3      4.9      4.8      4.8      4.8      4.8      4.8      4.8      4.8
    July 1999.............................       4.6       5.0      4.6      4.5      4.5      4.5      4.5      4.5      4.5      4.5      4.5     n.a.
Ten-Year Treasury Note Rate (Percent):
    January 2000..........................       5.6       6.3      6.4      6.1      5.8      5.7      5.7      5.7      5.7      5.7      5.7      5.7
    July 1999.............................       5.6       5.9      5.5      5.4      5.4      5.4      5.4      5.4      5.4      5.4      5.4     n.a.
Tax Bases (Billions of dollars):
    Corporate profits: \4\
        January 2000......................       840       829      833      829      839      860      885      919      954      991    1,028    1,060
        July 1999.........................       724       687      725      758      783      814      844      880      915      950      982     n.a.
    Wages and salaries
        January 2000......................     4,475     4,732    4,959    5,183    5,408    5,641    5,890    6,150    6,422    6,706    7,009    7,328
        July 1999.........................     4,410     4,632    4,810    4,995    5,207    5,431    5,670    5,922    6,187    6,463    6,751     n.a.
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor Statistics; Federal
  Reserve Board.
NOTES: Percentage changes are year over year. The projections for nominal GDP and the tax bases are not comparable because of definitional changes in
  the national income and product accounts (see Box 2-1 in The Budget and Economic Outlook: Fiscal Years 2001-2010).
n.a. = not applicable.   \1\ Based on chained 1996 dollars.   \2\ The GDP price index is virtually the same as the implicit GDP deflator.   \3\ The
  consumer price index for all urban consumers.   \4\ Corporate profits are book profits.

    In CBO's current projections, real GDP grows for the next 10 years 
at an average annual rate that is 0.4 percentage points higher than was 
projected in July. Several factors account for that increase: 0.2 
percentage points stem from a reassessment of how much of the recent 
surge in productivity will persist; slightly less than 0.1 percentage 
point results from a change in the projected growth of the labor force; 
and the rest reflects revisions in the measurement of real GDP.
    Compared with real GDP growth, the growth of nominal GDP and the 
categories of income that are important for predicting revenues 
(corporate profits and wages and salaries) did not change as much from 
the July projections. The reason is largely that CBO's current 
projection of the growth of the GDP price index is lower. Furthermore, 
revisions to the historical data--along with revised outlooks for 
depreciation, net investment income from abroad, and corporate debt-
service costs--have also reduced the projected growth of those income 
categories relative to the growth of GDP.
                      recent economic performance
    The economy has performed exceptionally well for several years, 
combining rapid growth and very low unemployment with declining 
inflation. Since 1996, the growth of real GDP has averaged better than 
4 percent, compared with an average of about 3 percent since 1973. 
Because of those 4 years of rapid growth, the unemployment rate has 
fallen to 4.1 percent, its lowest level since January 1970. CPI 
inflation, excluding food and energy prices, had been running at about 
3 percent per year earlier in the decade but was roughly 2 percent over 
the past year.
    Much of the recent good news can be attributed to a surge in 
productivity growth, which has allowed the economy to grow faster 
without raising the rate of inflation. Low import and (until recently) 
oil prices, plus a number of other favorable but probably transitory 
developments, have also helped suppress inflation. However, domestic 
demand grew even faster than productivity--boosting employment, 
tightening labor markets, and raising concerns that recent growth rates 
may not be sustainable without sparking a rise in inflation.
                     the forecast for 2000 and 2001
    The economy retains considerable forward momentum, but at some 
point, a slowdown from the recent blistering pace seems inevitable. If 
tight labor markets push up labor costs, the best news about price 
inflation may be in the past. Unless a faster rise in labor costs was 
offset by continued increases in productivity growth, consumer prices 
could move upward. Recovery in foreign economies could add to those 
inflationary pressures by boosting commodity prices and by 
strengthening foreign currencies relative to the dollar, which would 
raise import prices.
    The Federal Reserve has already responded to the threat of 
accelerating inflation by increasing the Federal funds rate by 0.75 
percentage points since June. Although those rate hikes may diminish 
the risk of inflation in the near term, financial markets seem 
convinced that further increases will occur this year.
    For the next 2 years, CBO forecasts real GDP growth of about 3 
percent, on average, and a slight rise in the underlying rate of 
inflation. That outlook would not cause the unemployment rate to change 
much in 2000 or 2001 from its current low level. The core CPI inflation 
rate (excluding food and energy prices) is expected to edge up slightly 
over the next 2 years from its recent pace of 2.1 percent.
    In CBO's forecast, short-term interest rates average 5.4 percent in 
2000 and 5.6 percent in 2001. The forecast assumes that the Federal 
Reserve will boost the federal funds rate by 0.5 percentage points 
during the first half of 2000 (in early January, financial markets 
expected at least that large an increase). Thus, the interest rate on 
three-month Treasury bills is forecast to reach 5.6 percent by midyear 
and remain there through 2001. The rate on 10-year Treasury notes is 
forecast to average 6.3 percent in 2000 and 6.4 percent in 2001.
                   projections for 2002 through 2010
    CBO projects that real GDP will grow at an average annual rate of 
2.8 percent during the 2000-2010 period. That growth compares with the 
slightly higher growth of 3.1 percent for potential output. Since the 
current estimated level of real GDP exceeds its potential level, actual 
GDP must grow at a slower pace than potential GDP to close the gap.
    CPI inflation averages 2.5 percent a year after 2001 in CBO's 
projections, and the unemployment rate averages 5.0 percent. Short- and 
long-term interest rates are projected to average 4.8 percent and 5.7 
percent, respectively, during that period.

                     Uncertainty of the Projections

    CBO's baseline projections represent the midrange of possible 
outcomes for the economy and the budget, assuming that current policies 
are not changed. Actual budgetary outcomes, however, could be 
considerably different from those projections. Economic performance and 
other assumptions that deviate from CBO's baseline will surely lead to 
results that diverge from the numbers presented in this report. Policy 
changes will also occur that will alter outlays and revenues; CBO's 
projections do not attempt to take such changes into account.
    Experience shows that although CBO's projection of the surplus for 
the coming fiscal year is likely to be within 1 percent of GDP in most 
cases, discrepancies can become more substantial over a 5-year horizon. 
CBO's 10-year projections have only been made since 1992, so it is too 
soon to assess their accuracy. But 10-year projections are likely to be 
less accurate than 5-year projections.
    Many observers believe that a major structural change has taken 
place in the economy, and that belief influences CBO's projections. 
However, any transition to a ``new economy'' would have occurred only 
in the past few years, which means that little data about it are 
available from which to make projections for the next decade. Moreover, 
those data are insufficient to say for sure whether a structural shift 
has occurred or whether the economy has merely deviated temporarily 
from its underlying trends, as it has many times in the past. Under 
those circumstances, projecting the economy and the budget is even more 
uncertain than usual.
    To illustrate the possible effects of differences from the baseline 
assumptions, CBO has produced budget projections under two alternative 
scenarios that make different assumptions. One (the optimistic 
scenario) assumes that the robust performance of the past few years 
will continue indefinitely and that Medicare and Medicaid spending will 
grow at a rate 1 percentage point slower than in the baseline. The 
other (the pessimistic scenario) assumes that the economy has simply 
experienced a temporary divergence from stable, long-term trends and 
will soon return to those trends--including even faster growth in 
Medicare and Medicaid. The projections that result from those two 
scenarios suggest a very wide range of possible outcomes for the 
budget: for example, the total surplus or deficit in 2010 could deviate 
from the baseline projections by $700 billion to $800 billion.
    Under the assumptions of the optimistic scenario, the budget 
outlook would improve dramatically. If discretionary spending grew at 
the rate of inflation but there was no other action to cut taxes or 
increase spending, the annual on-budget surplus under that scenario 
would exceed $800 billion by the end of the decade, and the total 
budget surplus would exceed $1.1 trillion. Projected surpluses that 
large would imply that the Federal Government was holding huge amounts 
of nonfederal assets (more than $4 trillion). If discretionary spending 
was held to the lower levels implied by the statutory caps through 2002 
or was frozen at the level enacted for 2000, surpluses would be even 
larger.
    Under the pessimistic scenario, the on-budget surpluses that CBO is 
projecting in its baseline would never emerge. Instead, the on-budget 
deficit would rise to more than $290 billion a year by the end of the 
decade. The total budget deficit would be smaller; if discretionary 
spending was constrained for the whole decade to the level enacted for 
2000, that deficit would stay under $100 billion.

                               Conclusion

    The budgetary picture is bright. Projected surpluses are much 
larger than the ones that CBO projected last July. The improved picture 
largely results from CBO's updated economic outlook. But actual 
budgetary outcomes could be considerably different from the 
projections. Economic performance and other assumptions that differ 
from CBO's baseline will lead to results that diverge from the 
projections. Policy changes will also occur that will alter outlays and 
revenues; CBO's projections do not attempt to account for such changes.
    Although the improved budget outlook over the next 10 years 
brightens the long-term outlook, problems lie not far beyond the 10-
year horizon. Between this year and 2030, the number of retirees will 
grow by 80 percent, but the number of workers will increase by only 
about 10 percent. Ultimately, it is not the size of the balances in the 
trust funds that will limit the ability to meet long-term obligations 
but the size of the economy.

    Chairman Kasich. Let me just then ask you, Mr. Crippen, we 
were in the hearing with Mr. Lew. I was making the point that 
there are no programmatic changes in either Medicare or Social 
Security that extends the life of these programs; is that 
correct?
    Mr. Crippen. I believe so, but again, we have not examined 
the President's budget thoroughly, so I cannot tell you what 
all of the programmatic changes are.
    Chairman Kasich. Let me ask you this: If you put IOUs in 
the funds, does that extend the life of these programs?
    Mr. Crippen. No, it does not. The trust funds may look 
better, but it does not change the program or the important 
variable of how much of the economy is being dedicated to those 
programs.
    Chairman Kasich. Your report really reflects--let's talk a 
little bit about this demographic situation in terms of Social 
Security and Medicare. How about putting into perspective what 
happens the longer you wait--just kind of paint the picture of 
Medicare and Social Security, understanding that--I kind of 
look at Social Security as a program where you can do a reform, 
where you can slow the growth in benefits, but on the other 
side, if you give people private accounts, they have the 
opportunity over time to more than make up for what they lost 
in government promises, which are empty anyway.
    But there is a good news story there. Minority people 
really get hurt at all, I think that is a silly thing to even 
say. The only people that get a little bit less, at least under 
the plan I have that I think will ultimately be--what will be 
adopted to fix Social Security, this narrow range of baby 
boomers, because their private accounts cannot--well, they 
could actually grow fast enough to make up for the slowing in 
the growth rate in benefits, but for anybody, you know, under 
the age of 40, they are going to make out like bandits, and if 
you are young, you are going to do terrific under Medicare.
    So there is a good news story, but I can't figure out the 
good news story under Medicare because the population growths 
are high, and I don't know how you balance these out.
    Why don't you talk about the difference, the need to get 
onto those programs, and what we are really facing. Paint a 
picture for us.
    Mr. Crippen. Maybe one way to think about it, Mr. Chairman, 
is that if we are truly going to fund Social Security and maybe 
Medicare, our generation should pay twice: once for our parents 
and once for ourselves. By paying twice, we would save enough 
so that the economy could grow enough to keep us from 
commanding more from our children in the future than we are 
paying to our parents today. At some point, some generation 
will need to pay twice.
    Now, we can spread that out. We can certainly leave more of 
the burden on our kids by borrowing and not reforming the 
programs any time soon. We could try and shift some costs onto 
our parents by cutting current benefits, but no one is talking 
about that. Essentially, the question is, where do you want to 
place that burden for finally paying twice and funding Social 
Security?
    Chairman Kasich. Can't we just grow out of this?
    Mr. Crippen. No. Part of the problem is that in order to 
grow at all, we need to save more, which means our generation 
has to save more now and cut current consumption. Be it public 
consumption through the government or private consumption, we 
need to cut consumption now and save more so the economy can 
grow faster.
    Chairman Kasich. Isn't it true also if you have a Social 
Security System that pegs you to wages and prices, that, in 
fact, the faster we grow, in a way the deeper the hole is we 
get ourselves in? Is that not correct?
    Mr. Crippen. It is certainly correct because we index 
Social Security's initial benefits to real wage growth, 
although there is a lag, which helps, of course, in the 
process. You could change the objective of the Social Security 
System from one of maintaining a certain share of earnings to 
one of preserving purchasing power. If, for example, you 
changed the indexation of the initial benefit from real wage 
growth to price increases, you would pretty much solve the 
problem of the long-term actuarial balance in the Trust Funds.
    Chairman Kasich. That is precisely the proposal I have, but 
it is also offset, however, by the fact that you can have a 
private account that you would be able to earn money in, and 
the longer you get that account, the more money you earn. The 
longer it takes us to enact it, the less money you earn. So 
that is why we ought to get about it today.
    Mr. Crippen. The more you can increase savings, whether 
private or public, the faster the economy will grow and the 
better the fraction that I described will look.
    Chairman Kasich. Tell me about Medicare a little bit.
    Mr. Crippen. Medicare is a different story, of course, 
because Social Security is both simpler on its face and also a 
lot easier to project into the future. We know that everyone 
who is going to collect Social Security in the near term is 
alive today. And we know roughly how long they are going to 
live and what their wage patterns are going to be. Projections 
are thus much easier to make, and the program is also 
relatively stable. In that sense, there are only two or three 
variables or levers that you would pull for policy.
    In the case of Medicare, and to a lesser extent Medicaid, 
we not only have growth in the number of recipients driving the 
numbers, as is the case with Social Security, but we also have 
the growth in prices of medical care, a rate that is often 
higher than that of the general economy, and changes in medical 
technology and utilization of medical resources. So you have 
three big components driving Medicare spending and only one, in 
effect, driving Social Security. And it is those two other 
components--utilization of resources through technology, or 
intensity of use, and the prices of medical care and 
pharmaceuticals that are hard to predict and that drive 
spending for the program. And it is those components that will 
cause Medicare to eventually spend more money than Social 
Security, and it is those that, as you are suggesting, are 
probably necessary to get us through to programmatic reform. 
Simply changing one of those three streams--namely, trying to 
control prices--does not do you much good in terms of 
controlling the overall cost.
    Chairman Kasich. Mr. Spratt.
    Mr. Spratt. Dr. Crippen, you told the Senate Appropriations 
Committee, I believe, on January 26 that to have a freeze on 
appropriations for a period as long as 10 years would require, 
in your words, unprecedented restraint. Let's take two of the 
paths you have plotted for discretionary spending and see if 
there is any precedent for the level of expenditure of cuts 
that each of these paths would take.
    For example, you assumed--you really had to assume because 
you are pretty much bound to assume that Congress will follow 
its own law, that Congress would track the BBA or return to the 
balanced budget agreement and in 2001 drop spending, 
discretionary spending, to the level of the cap set by the BBA. 
As I recall your report, you indicated that outlays this year, 
discretionary outlays, by your calculation was $603 billion. If 
we return to the caps, outlay caps, in 2001, what sort of 
outlay cut would be required between this year and next year?
    Mr. Crippen. Roughly $30 billion.
    Mr. Spratt. Roughly $30 billion.
    And BA, budget authority, that would be, I take it, 
probably 10 or 15 billion more.
    Mr. Crippen. I think because of the advance appropriations, 
it may actually be slightly less this time.
    Mr. Spratt. Around $30 billion for both then.
    Now, is there any precedent for that?
    Mr. Crippen. I was just looking back, Mr. Spratt, to one of 
the few times we have had absolute cuts--in 1981 or 1982--and I 
do not think it was quite that much. So probably there is no 
precedent.
    Mr. Spratt. That was one year.
    Mr. Crippen. Yes.
    Mr. Spratt. Now, the next year, from 2001 to 2002, if we 
were to track the caps, we would have to go down again in 
outlay terms by about $10 billion more because the cap drops 
from around 580 to around 570 in 2002.
    Mr. Crippen. Yes.
    Mr. Spratt. That would mean we would have to take a $40 
billion reduction in 2002, and there is no precedent for that 
then, not even 1981.
    Mr. Crippen. Probably not to that extent. Total 
discretionary budget authority and outlays have never gone down 
as much as you just described, although nondefense 
discretionary spending dropped in the 1981-1982 period by about 
those same magnitudes.
    Mr. Spratt. If we had a freeze in discretionary spending 
over a period as long as 10 years, what would be the effect on 
real spending, real discretionary spending, at the end of that 
period of time?
    Mr. Crippen. It would be a diminution of about 25 percent 
in real terms.
    Mr. Spratt. Twenty-five percent.
    Mr. Crippen. Yes.
    Mr. Spratt. If we held defense spending constant against 
inflation, harmless against inflation, over that 10-year period 
of time, what would be the real spending decrease in nondefense 
spending at the end of the 10-year period of time?
    Mr. Crippen. Outlays in 2005 would be 21 percent lower. 
Over the 10 years, it would be much more than that.
    Mr. Spratt. Our calculation was roughly 40 percent. Does 
that sound right to you?
    Mr. Crippen. Yes.
    Mr. Spratt. Is there any precedent for that kind of cut in 
discretionary spending?
    Mr. Crippen. Not that I am aware of--certainly not for the 
cut over the 10-year period.
    Mr. Spratt. We have done a calculation of nondiscretionary 
spending over the last 20 or 30 years, and we found that it has 
grown at a pretty constant rate, real and nominal, over that 
period of time. Even when there were caps, as there have been 
since 1990, there has been a fairly steady incremental growth 
in discretionary spending, so it would truly be unprecedented 
restraint to have that level of cut in nondiscretionary 
spending.
    Mr. Crippen. It is certainly true, Mr. Spratt, that, on 
average, over the period you were citing--say, from on--has 
discretionary spending grown. But growth has not been 
consistent; there is no steady increase. In some years, 
spending has been down, in some years up. We have had cuts in 
nondefense discretionary spending, as I said, in 1981 and 1982 
of as much as 12 percent in real terms. So the pattern is 
variable. I think it helps to reiterate that this is 
discretionary spending; it does change from year to year, with 
no overall pattern. So that is why in my testimony I said that 
none of these baselines are really very satisfying because they 
do not tell you what your needs are going to be for next year, 
nor do they tell you what programs no longer deserve your 
support. It is really not a particularly satisfying exercise to 
have a 10-year baseline for discretionary spending. 
Discretionary means just that, and I think the history of such 
spending shows that it has, indeed, been used that way.
    Mr. Spratt. With respect to Medicare, which I mentioned a 
while ago, you have assumed continued cost growth, but at a 
restrained or lower level than historically has been the case 
with Medicare. Do you have some concern about the maintenance 
of this historically low rate of growth in Medicare and 
Medicaid, the two big health care entitlements?
    Mr. Crippen. Our concern is not about our projection; 
obviously, we can be wrong about the final numbers. But if we 
begin to add spending in the intermediate term, that is, in the 
next 10 years, it is going to change those programs in ways 
that we cannot determine today. Again, utilization rates for 
pharmaceuticals, for example, and technological changes are 
very hard to predict. My guess is that actual rates of growth 
for Medicare and Medicaid will be higher than the baseline 
rates of growth we have projected. But we are not too concerned 
that the roughly 6.6 percent growth, on average, over the next 
10 years would be exceeded greatly under current policy or 
current laws.
    Again, growth in those programs is going to be driven not 
so much by my generation's retirement but by increases in 
utilization and prices. So, although those are harder to 
project, we are not uncomfortable saying that the 6.6 percent 
is going to be twice that or half that. After my generation 
starts to retire, those numbers will be much, much different, 
of course.
    Mr. Spratt. Do you think the projection is firmer now than 
it has been in the past because more of the categories of 
benefits are in prospective payment form rather than 
reimbursement form?
    Mr. Crippen. That has certainly helped; it makes it a 
little easier to project more accurately. History is a guide, 
not an absolute. Last year, we had a 1 percent reduction in 
Medicare spending. Nobody believes that that drop is going to 
be repeated this year or any time in the future, but nobody 
predicted it was going to happen either. If we based our 
projections solely on last year's experience, we would have 
obviously a very bad prediction of what future costs are going 
to be. That is why we use a number of years of program spending 
in determining our projections. Our current outlook of 6.6 
percent annual growth--we are comfortable with that.
    Mr. Spratt. Still a little iffiness in that assumption, 
too?
    Mr. Crippen. Absolutely.
    Mr. Spratt. Finally, with respect to Social Security, we 
have had this discussion before. The President proposes taking 
$300 billion out of the general fund and over time putting it 
into the Medicare fund. Mr. Kasich calls these IOUs. Legally, 
they are bonds backed up by the full faith and credit of the 
United States Government, and so you might call them an IOU, 
but the Administrator, instead of being a political supplicant 
when his cupboard runs bare, is a secured creditor. He has got 
the strongest claim against the Treasury that you can have in 
our country. That makes it more than just an IOU. But 
economically if this is a net addition to national savings, if 
that $300 billion contribution is an offset against money that 
would otherwise be spent and is instead used to pay down 
national debt or to buy equities in the stock market, invest in 
the markets, doesn't that do something for the life insolvency 
of Social Security?
    You said for us to grow out of the problem, we have got to 
save. If we save more, we can grow more. Wouldn't this be a net 
addition to national saving that might promote growth and 
therefore help Social Security?
    Mr. Crippen. In the way you have put the question, 
absolutely. You are assuming that it is a net addition to the 
reduction of debt held by the public. If that is the case, it 
would certainly add to national savings and could enhance 
economic growth. It would help the denominator of that fraction 
I mentioned, by helping to grow the economy.
    What we have seen in the past, as in last year's budget, is 
a situation in which the transfers do not really contribute to 
a net reduction in debt held by the public. The question is, 
does the transfer contribute to a reduction in debt? If so, 
then it helps with saving.
    Mr. Spratt. Thank you very much.
    Chairman Kasich. We have got a vote on--this is the 10-
minute warning. We will go over and vote, come back right away, 
and finish the hearing. Thank you. We will stand in recess.
    [Recess.]
    Chairman Kasich. Why don't we go ahead and start. I would 
like to recognize Mr. Smith for 5 minutes.
    Mr. Smith. Mr. Chairman, thank you. And I think maybe the 
question, Mr. Crippen, with the combined challenge of Social 
Security, Medicare and Medicaid, has CBO calculated the 
increased obligation that will be put on future generations in 
terms of either payroll or income tax increases, if we make no 
changes in Medicare or Social Security?
    Mr. Crippen. By 2030, which is when roughly the end of the 
baby-boom generation hits retirement, the amount required to 
fund obligations to the elderly will be twice what is needed 
today--that is, 14 percent of GDP instead of 7 percent. What 
does that mean? In today's terms--if that was the situation you 
were facing as you write next year's budget--it would mean that 
you would have only $400 billion left to spend on everything 
else. To put it another way, you would have to raise taxes by 
$600 billion next year to fund those obligations. We would go 
from taking 7 percent of the total output of the economy to 
taking 14 percent. You could also raise taxes, increase 
borrowing, or cut benefits. The policy that is chosen will 
affect which generation is paying for what. As I said, one way 
to think about it is that my generation needs to pay twice, 
once for our parents and once for ourselves. In order to do 
that, we obviously have to save a lot more and forgo 
consumption, whether it is through the government or by 
ourselves. Of course, we can put that burden on our kids by 
ignoring the problem for as long as we can or by borrowing 
more. It really has to do with which generation you want to pay 
for those benefits.
    Mr. Smith. A combination of your office and Social Security 
actuaries show that without any program changes, within 40 
years we would have to approach a 40 percent payroll deduction 
to pay for Social Security, Medicare, and Medicaid. I am sorry 
Mr. Spratt isn't here. With your permission, Mr. Chairman, I am 
going to just shout. Mr. Spratt suggested that it is 
inconceivable that we can have a freeze and that we should 
increase spending with inflation. But it is obvious that we 
don't increase spending consistent with inflation. Actually we 
see a downturn in spending compared to the red line of 
inflation.
    Mr. Spratt, I was just saying that maybe your point that it 
is going to be tough to have a freeze, and saying that we 
should automatically increase spending consistent with 
inflation is unnecessary. What I was pointing out on this chart 
is that we haven't increased spending with inflation and it 
isn't necessary to increase spending with inflation.
    Mr. Crippen, I would like to ask you a question on an issue 
that is coming up before Rules Committee today, and that is a 
biennial budget. With our performance record on not doing a 
good job guessing what the revenue is 2 years down the road, 
plus the increased power that it gives the administration, 
would you say that having a biennial budget tends to shift some 
power over spending from the legislative branch to the 
executive branch?
    Mr. Crippen. I would have to confess that I have not really 
thought about it in those terms. I think it does shift power 
within the Congress, among the budget committees, the 
appropriations committees, and the authorizing committees, 
although I am not quite sure how.
    My first reaction is that I do not think that a biennial 
budget would shift power much. Presumably, the administration 
would present a budget every 2 years instead of every year, so 
congressional activity in the second year would be enhanced. 
One of the things I was talking about with some of your folks 
earlier was that the result of biennial budgeting will probably 
be determined by what the media decides to cover or what 
becomes interesting and newsworthy. In the second year of the 
cycle, you could see a lot of oversight by appropriators and 
authorizers, and that would be the news, as opposed to the 
President presenting his budget or the State of the Union 
address.
    Mr. Smith. Are we good enough guessers on revenues 2 years 
ahead of time to accurately have a 2-year budget?
    Mr. Crippen. Clearly, we would have to update the outlook 
at the halfway mark if you wanted to make adjustments at that 
point. We have had trouble in the recent past projecting 
revenues for a 2-year period, but last year was almost dead on. 
This year, we are hoping we will be pretty close, too.
    Mr. Smith. Last year was dead on on revenue projections?
    Mr. Crippen. Very close.
    Mr. Smith. Whole 12 months ahead of time?
    Mr. Crippen. Not the whole 12 months ahead, but closer to 
the end of the year. We are now doing 10-year policy-based 
projections where we used to do 5-year ones. We are more 
comfortable with 2 years than we are with 5 and 10. So I think 
our projections are accurate enough to do a 2-year budget. Are 
they going to be precise? No. You are going to want to review 
and perhaps adjust things 12 months down the road.
    Mr. Smith. Thank you.
    Chairman Kasich. Ms. Rivers, you are recognized.
    Ms. Rivers. I was listening very carefully when you were 
answering Mr. Smith's questions about Medicare and Social 
Security and the long-term solvency of them, and you said at 
one point we better by saving a hell of a lot more now than we 
are. If you look at it from that perspective, what would the 
effect of, say, the $1.7 trillion tax cut Governor Bush is 
proposing or even the $8 trillion proposed by Republicans in 
the House, what would the effect of that be in our efforts to 
deal with Medicare and Social Security over the long haul?
    Mr. Crippen. It would depend on what your assumption is 
about the alternatives.
    Ms. Rivers. Loss of revenue; what would the loss of that 
kind of revenue do?
    Mr. Crippen. If it were to be spent on something else, it 
might have no effect----
    Ms. Rivers. If it were not, if it were going to be used to 
pay down the debt.
    Mr. Crippen. If we saved all of it, as I said in my 
testimony, by the end of the decade we could pay off the debt, 
and the additional savings would help Social Security.
    Ms. Rivers. So having a tax cut would make it harder, and 
not having a tax cut and not spending the money would make it 
easier to deal with Medicare and Social Security?
    Mr. Crippen. Let me retreat into economist talk. The one 
thing most economists agree on is that if you save the 
surpluses, the economy will grow faster. If the economy grows 
faster, it will be easier to pay the obligations owed to my 
generation. After that, there is a division of the house. A tax 
cut of one kind might help economic growth; a tax cut of 
another kind might not. As the Chairman pointed out, there may 
be spending programs that help economic growth, and there are 
certainly those that probably do not. You cannot make a broad-
brush statement--or, rather, I am unwilling to make the broad-
brush statement that you just made.
    Ms. Rivers. The other question I have, this is my sixth 
year, and I was in State government before that, and the idea 
that we can bring down spending by large amounts by ferreting 
out waste, fraud and abuse, which is one that gets floated all 
the time. Do we have any historical data that suggests how 
successful these efforts have been in the past?
    Mr. Crippen. We have no data that you would find 
satisfying; they are not very precise. Let me use one example 
from recent history, and that is in Medicare. It is quite 
apparent that the efforts the Clinton administration has 
undertaken to increase compliance with Medicare regulations 
have had a profound effect on spending. How much is open to 
question because we do not know exactly how much of the drop in 
spending is due to those efforts and how much is the result of 
a change in----
    Ms. Rivers. But we also know that the legacy of that broad-
based account, that sort of meat-axe approach, was that home 
health care providers, hospitals that were doing nothing wrong, 
that were not operating in any way in a wasteful, fraudulent or 
abusive manner, found their overall costs cut, and they were 
unable to deliver services. So when you have a flat cut as 
opposed to ferreting out specific problems, don't you create 
other kinds of consequences?
    Mr. Crippen. You can; however, the waste, fraud, and abuse 
effort--and I use those terms advisedly--for Medicare was not 
really the same thing as the cuts in payments implemented by 
the Congress and the Balanced Budget Act. The payment cuts had 
a different purpose--some were intended to save money and some 
to change the payment policy. The assault, if you will, by the 
administration on noncompliance in Medicare did not have 
anything to do directly with the BBA's changes. The things they 
have done to enforce compliance have become quite public.
    Let me give you an example. Medicare had a long history of 
aggressive billing by hospitals for particular conditions--that 
is, the more expensive conditions were showing up more often. 
After the administration began their compliance efforts, that 
trend reversed.
    Ms. Rivers. My understanding is the cuts in home health 
care were specifically directed at abuse in a minority of 
States, and that there was a meat-axe approach used to cut 
funding across the board for everyone in an effort to deal with 
these specific States, which is sort of what is being proposed 
for the budget. Make a big cut, everybody has to live with it, 
and maybe we will get the fraud and waste and abuse; and if we 
don't, well, we will still save some money. Isn't that 
analogous?
    Mr. Crippen. There could be some unfortunate outcomes when 
spending is cut across the board. But spending restraint does 
not have to mean an across-the-board cut. For instance, our 
freeze baseline variation, or even the capped baseline version, 
is only a top-line amount. It does not assume that spending for 
every program is frozen at this year's level. It just assumes 
that in total, when you add up all spending for the year, that 
it is frozen roughly at the 2000 level of spending. That is why 
we call such spending discretionary, so that it can go up and 
go down for particular programs. Our frozen baseline variation 
is just a top-line assumption; it does not assume across-the-
board cuts in individual programs.
    Ms. Rivers. The last question I have, since I have always 
had reservations about the projected surplus, I wonder if the 
cartoon you chose to bring us today is to remind us we 
shouldn't be too sure about your projections either?
    Mr. Crippen. That is certainly true. I brought it because I 
thought it was somewhat appropriate to our discussion. In the 
volume we just released, ``The Budget and Economic Outlook: 
Fiscal Years 2001-2010,'' Chapter 5 is entitled 
``Uncertainties.'' In it, we highlight a number of the factors 
that we are unsure about and, in fact, develop two different 
scenarios of assumptions about spending and the economy that 
could produce surpluses greater than we are now projecting or 
smaller than we anticipate. The farther out you project, the 
more uncertainty there is; 10 years is a long time to project 
anything--the economy or government policy.
    Ms. Rivers. As we look at decisions that have long-term 
consequences, how firm is the footing on which we are making 
decisions that are going to play out 5 and 10 years from now?
    Mr. Crippen. Well, let's take Social Security as an 
example. We know a little more about Social Security in the 
future than we do about many other programs because we know, 
for instance, roughly how many people are now alive and are 
going to retire. And we know about factors that will influence 
spending growth in such programs over the long term. But short-
term projections of spending and tax revenues are more 
uncertain. Discretionary spending has gone up, then gone down; 
taxes have gone up and gone down. Of course, the politics of an 
issue might make it difficult to reverse directions or do 
something else, but clearly, the history of the budget shows 
that we have had both tax increases and tax cuts, spending 
increases and spending cuts--for example, the BBA's home health 
care.
    Now, I am not saying that you should hesitate to do 
something because 10 years from now we do not know what the 
situation is going to be. There may be current spending needs 
that should be funded or tax cuts that would be appropriate and 
that indeed, might help long-term programs by growing the 
economy more quickly. The uncertainty of the projections, 
although they might suggest the need for caution, obviously 
should not prevent you from taking action you think is 
appropriate.
    Ms. Rivers. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Kasich. Mr. Hoekstra is recognized.
    Mr. Hoekstra. Good morning.
    Mr. Crippen. Good morning.
    Mr. Hoekstra. Words make a difference. Benchmarking makes a 
difference. I chair a subcommittee of oversight, and we have 
oversight over the Education Department, about $35 to $40 
billion of discretionary spending annually. They also manage a 
loan portfolio that runs into the billions of dollars. In 1998, 
they couldn't audit their books. I don't know if you factor 
that kind of information in or not when you put these numbers 
together, but you have got an agency out there that makes up 
$35 billion of your discretionary number, and they can't really 
tell us how much money they spent or where they spent it.
    If we benchmark that Department against the Pentagon, it is 
kind of like, hey, they are doing a great job. If we benchmark 
them against the private sector, and we just met with Ernst & 
Young yesterday, they said their performance for 1999, while 
improved, would still be somewhere in the C minus to D minus 
range, and if they were listed on the Securities and Exchange 
Commission, they would be--or if they were listed--they would 
be in trouble with the Securities and Exchange Commission for 
that kind of performance.
    The question I have is your CBO baseline budget 
projections, assuming that discretionary spending is frozen, 
there could be another title on there, it saying that perhaps 
you could deliver the same services at these dollars or if you 
had roughly a 2, 2\1/2\ percent productivity enhancement; is 
that correct?
    Mr. Crippen. Yes, absolutely.
    Mr. Hoekstra. Because one of the things that--I have got a 
lot of automotive suppliers in my district, and I can tell you 
that none of them build in discretionary--excuse me--build in 
automatic inflationary increases to any of the automotive 
companies. A lot of them actually go in the other direction. If 
they are building a product today that they are getting a 
dollar for, they have got contracts into the future that say 
next year you will deliver an improved product with enhanced 
features, and you will do it for 95 cents, and in the third 
year of the contract you are going to be doing it for 92 cents.
    So how do you--the Education Department, I take a look at 
them and they tell me how they try to keep their books, and it 
sounds like a monastery with monks copying Holy Scripture in 
500 or 600 A.D. They close their books and they bring in 
outside contractors to manually reconcile their books and bring 
it together, and, again, when you benchmark that against the 
private sector, it is like, wow, why do you use the term 
``freeze'' instead of ``productivity enhancement''? Could they 
be identical?
    Mr. Crippen. Sure. If you had an adequate productivity 
increase, you could have the same output even though spending 
was frozen. It is a nomenclature that we did not just develop 
this year--it has been around for a while. Let me piggyback 
some comments on what you said. I mentioned earlier that we do 
not account for any productivity increases, although I suspect 
there are some in the public sector. They may not be as great, 
perhaps, as the private-sector examples you are citing, but 
there should be some. I can look around CBO and see increased 
productivity in the fewer clerical support people we need and 
the better use we are making of resources in other areas.
    But a freeze does not tell you about the programs that 
should or should not be funded; it just suggests a number to 
look at. And what we are doing with a baseline is trying to 
give you a set of numbers that over 1 year or 5 or 10 years 
gives you a sense of where we are headed. It is just very hard 
to do with discretionary appropriations because you change them 
from year to year, which is the nature of the beast and should 
be.
    The question is, what is the best measure, or benchmark, 
for discretionary appropriations? It may well be that the 
freeze baseline variation, which holds spending to last year's 
enacted appropriations, is the best benchmark, at least for the 
near term, because it gives you the most recent programs you 
funded, presumably deservedly, and it also gives you the last 
analysis anybody did of the existing system.
    I think any baseline projecting discretionary 
appropriations over 10 years is a very iffy proposition. But 
whether you start with last year's appropriation levels as your 
base or whether you assume some productivity increases, it is 
important to recognize that underneath that big number we give 
you are lots of programs that you need to examine, presumably 
on an annual basis. That is why they are discretionary.
    Mr. Hoekstra. When I take a look at--only in government 
would we think that benchmarking off of last year and putting 
in an automatic inflationary increase is the most reasonable 
way to go. That is not the world that my constituents live in 
in the business world. They take a look each and every year. 
They take a look at new technology and say, hey, if we 
incorporate this new technology, we will be able to deliver a 
better quality product at a higher service level at a lower 
cost, and so overall we can give a better degree of service to 
our customers, and we will lower our costs and our prices at 
the same time.
    Mr. Crippen. The Congress enacted a program--I think, 7 
years ago--under the Government Performance and Results Act 
that has spent the past 7 years developing program objectives 
and ways to measure whether those objectives are being met. I 
believe the first round of reports from the agencies are due to 
the Congress at the end of next month. So there should be ample 
material there for the Congress to take a look at to see how 
well the programs are performing, what are their objectives, 
how are they doing. You could also have the departments come up 
and talk to you about the programs. In that sense, you have, I 
think, a very new and very good opportunity to do what your 
private-sector constituents do.
    Mr. Hoekstra. Thank you.
    Mr. Green [presiding]. Mr. Minge, questions?
    Mr. Minge. Thank you, and thank you, Mr. Crippen, for being 
here. I would like to focus on the question of debt reduction 
and how that factors into the projections and the activity that 
is currently taking place here in Congress. And it is my 
understanding that you and Chairman Greenspan really--the 
consensus position of the economists and public policy experts 
that have been analyzing the Federal budget is that the 
surpluses that we are beginning to realize have contributed to 
holding down interest rates to economic growth and to the 
soundness of our economy, and I am assuming that you share this 
position.
    Mr. Crippen. Yes.
    Mr. Minge. It is also my understanding that you recognize 
the risks inherent in multiyear forecasts, especially 10-, 15-
year forecasts, and I understand if a 10-year forecast like we 
are talking about at this point is off by 1/10 of a percent 
each year, that the cumulative effect over that 10-year period 
on the Federal budget would be in excess of $200 billion. So 
either we would have $200 billion more or, heaven forbid, $200 
billion less. And we have seen some fairly significant swings 
here in the forecast, as you already recounted, in the last 7, 
8 years, and it has all been on the upside, so it gives us 
reason for optimism, but you have tried to maintain some sort 
of pessimistic estimates in your own forecast.
    My concern is that if we were to come up with a bold new 
entitlement program as opposed to even just a modest expansion 
of the current program and lock that in place in reliance on 
this 10-year forecast, you would probably caution us that that 
is not a prudent move if we are committed to having a surplus 
over this 10-year period of time. Would I be correct in that?
    Mr. Crippen. I think so. It depends on the size and the 
nature of the entitlement program you are talking about. If the 
range of expenditures was $10 billion to $100 billion a year, 
you would have to worry about it. If expenditures were pretty 
well circumscribed--$10 billion to $15 billion a year, for 
example--and you could predict with some certainty that that 
spending would not grow quickly to $100 billion, you would have 
a different story. If you were proposing a new entitlement 
program that would spend $100 billion a year, you would 
certainly have to be very cautious about how much of the 
surplus you would have left to dedicate to paying down debt.
    Mr. Minge. And certainly many of us share that concern, and 
I know this is a part of the debate over prescription drug 
coverage, can it be contained, will it grow, how can you 
contain it and so on.
    And one other aspect of this is on the revenue side, and I 
expect that you would share that same concern if a new tax 
approach was locked in, what is the impact on that over a 10-
year period of time on the revenues that are needed to finance 
Federal operations.
    Mr. Crippen. As I said to Ms. Rivers earlier, the one thing 
most economists do agree on is that paying down the debt is 
generally helpful for the economy. After that, there is no 
consensus on whether cutting taxes or increasing spending would 
be just as or more helpful. In fact, there may be spending on 
education, for example, that could help the economy grow more 
than would paying down debt. There could be tax cuts that might 
help the economy grow more. But economists as a group do not 
have a clear view of exactly how that would go.
    One thing I did say to Ms. Rivers, too, is that because of 
the uncertainty----
    Mr. Minge. I was here when she asked those questions, so 
rather than revisit those, what I would like to conclude with 
is an observation based upon what I have seen at the State 
level. In Minnesota, and I expect in many other States, as 
these surpluses have rolled into the State treasuries, they 
have established rainy day funds, first to make sure that they 
have a hedge against a bad year, if they have a bad year the 
next year or two, and then secondly, they have had some modest 
program expansion. Third, they have had tax refunds, which have 
been curious to me because instead of making changes in the tax 
code that would be carried forward from year to year, they 
start by having a rebate. And I am just wondering if you could 
give us any observation on whether or not what the States have 
been doing is something that we should be paying more attention 
to as opposed to spurning that and insisting on long-term 
changes in the Tax Code itself, and certainly before these 
surpluses have even begun to roll in.
    Mr. Crippen. It is an excellent point but not, 
unfortunately, one that I know much about. We may well have 
some folks in CBO's State and local budget analysis section, 
though, who pay more attention to it. I have read that States 
are anticipating cutting taxes again this year, because, as you 
say, surpluses are growing. I have not thought about the 
different effects of rebates versus changing the Tax Code, but 
we could certainly take a look at that.
    [The information referred to follows:]

            Tax Actions Taken By States in Times of Surplus

                              introduction
    Facing sluggish economies in the late 1980's and early 1990's, 
states took a number of actions that bolstered their finances and 
created opportunities for present surpluses. States established rainy-
day funds, or some variation of them; they cut spending and reformed 
many of their programs; and a number of states increased taxes. Because 
of the danger of overextending themselves in the future, states did not 
take dramatic actions to reduce early surpluses. Instead, they hedged 
against overcommitting themselves by using surpluses in limited, yet 
productive ways-by increasing rainy-day funds, spending funds for one-
time infrastructure improvements or program formulation, and enacting 
limited or phased-in tax reductions. However, with surpluses occurring 
year after year, states began to reduce taxes in various ways, 
including multiyear cuts in tax rates and other adjustments to 
deductions and exemptions. In 1999, 31 states cut income taxes in some 
way; 28 states will reduce them in 2000. Some states have also 
continued to provide periodic tax relief through rebates.
                tax rebates and one-time rate reductions
    Tax rebates can provide a one-time tax reduction without changing 
the underlying structure of state taxing authority. Through rebates, 
states give money back to taxpayers, although they may create a Federal 
tax liability for people who itemize their deductions if they return 
the money through a state income tax rebate. Consequently, some states 
base their rebates on sales taxes. Such rebates take a number of forms 
but are usually available to all state residents and, on occasion, to 
some out-of-state residents who can prove that a sales tax liability 
occurred. Sales tax rebates are often tiered amounts, ranging from $30 
to $500 in some cases, depending on the state and the total amount 
designated for rebates; they are provided to most adult residents of 
the state. In most instances, states use their own income tax data to 
provide the rebates, although on occasion, they may use additional 
Federal databases from the Internal Revenue Service or the Social 
Security Administration. For rebates based on income taxes, the state 
may require a simple form, or it may determine the amount on the basis 
of existing records. However, income tax rebates are not always based 
solely on income tax liability; marital and household status may be a 
factor as well. Six states will provide tax rebates or one-time rate 
reductions in 2000 for prior tax years.
    Constitutional Rebates. In Missouri and Colorado, provisions of the 
state constitution require rebates when revenues exceed either 
estimates or some other defined level or cap. Missouri will rebate $178 
million in taxes because revenues exceeded a cap on growth established 
in state law. Colorado will rebate $679 million because of 
constitutionally established limits on revenue and spending growth. 
Oregon may have rebates in the upcoming year, but because the state 
budgets biennially, rebates would not occur until the end of the 2-year 
budget cycle.
    Legislated Rebates. Three other states have provided rebates 
through annual legislative action, despite no governing requirement in 
existing law or in their state constitutions. Connecticut, Minnesota, 
and Wisconsin have rebated $118 million, $1.3 billion, and $700 
million, respectively. To avoid a Federal tax liability for taxpayers 
and an adjustment to a prior year's itemized deductions, the states 
returned that money in the form of sales tax rebates. (Another 
rationale for providing sales tax rebates is that they can reach a 
larger part of the population.) Before its most recent rebate, 
Minnesota had provided tax rebates based on the amount of property 
taxes that an individual had paid. A person could claim the rebate by 
completing a line on his or her income tax form.

                                                   TAX REBATES
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                          State                           Rebate year 1999  Type \1\  Rebate year 2000  Type \1\
----------------------------------------------------------------------------------------------------------------
Colorado................................................               530         I               679        I*
Connecticut.............................................               102         I               118         S
Minnesota...............................................               468         P             1,300         S
Missouri................................................               319         I               178         I
Oregon (Biennial).......................................               167         I              n.a.      n.a.
Wisconsin...............................................              n.a.      n.a.               700         S
----------------------------------------------------------------------------------------------------------------
\1\ I = income tax rebate (for Colorado in 2000, this amount also includes a business personal property tax
  rebate, as indicated by the asterisk); S = sales tax rebate; and P = property tax rebate.

    One-Time Rate Reduction in Ohio. Ohio adjusts its income tax rates 
annually on the basis of prior-year surpluses, a unique way of 
providing tax relief on an annual basis. After meeting a number of 
funding requirements for rainy-day funds, special reserves, and 
spending priorities, the state determines the total surplus accruing at 
the end of the year. That surplus is returned to taxpayers by adjusting 
baseline tax rates. Each tax bracket is reduced by the percentage that 
the prior year's surplus exceeds projected revenues for the upcoming 
year. By that method, Ohio will provide $293 million in tax relief by 
reducing its baseline tax rates by 3.6 percent. That approach 
accomplishes the same goal as more common rebate programs; however, it 
can create problems with public perceptions. A large surplus one year 
might necessitate a large cut in the tax rate, whereas a lower surplus 
the following year would cause tax rates to increase-even though those 
rates are lower than they would have been under the baseline estimate.
    Unlike permanent reductions in tax rates or changes to exemption 
status and deductions, tax rebates do not automatically recur. Rather, 
they depend on excess revenues and most often require some form of 
legislative action. They also allow lawmakers to provide a form of tax 
relief without raising the possibility that tax rates will have to be 
increased at some later date when spending pressures increase or 
revenues fall.
                           other tax changes
    Although tax rebates may offer states greater flexibility in the 
future compared with permanent changes to their tax systems, recurring 
surpluses over the past few years have led many states to make such 
changes. Fifteen states made significant net tax cuts in 1999, after 21 
states took similar action in 1998. Since income and sales taxes 
provide the majority of state revenues, it is not surprising that those 
taxes saw the greatest reductions. Nine states cut income tax rates for 
the 2000 tax year, and seven states raised exemptions or the amounts 
allowed for standard deductions. Twenty-three states made some type of 
reduction in sales or use taxes.
                  tracking changes in state tax policy
    Both the National Association of State Budget Officers and the 
National Conference of State Legislatures publish annual updates on 
state tax and budgetary actions. The Center for the Study of the States 
(located at the State University of New York at Albany) also publishes 
regular summaries of states' revenue experiences and changes in their 
tax laws.

    Mr. Minge. I would appreciate receiving some advice and 
guidance from CBO on this because the States have had these 
surpluses for several years, and so they have struggled with 
this, and at this point they are beginning to change their tax 
codes. But at least the first couple of years my observation is 
that they were focusing on rebates and other approaches to 
this, and similarly they were cautious about embracing new 
programs which under at least current leadership it doesn't 
appear we are at much risk of doing. So that, I think, would be 
helpful. The States, so to speak, are a laboratory for 
experimentation, and we can certainly learn from watching what 
they have done and whether or not it has been successful.
    Mr. Crippen. Fortunately for the citizens of Alaska, they 
have been giving back revenues for a long time. We have some 
examples.
    Mr. Minge. Thank you very much.
    Mr. Green. Mr. Gutknecht, please.
    Mr. Gutknecht. Thank you, Mr. Chairman.
    Thank you, Mr. Crippen. It is always good to have you here. 
I do check your Web site from time to time, and I am sorry I 
haven't checked it for the last month or so, but the first 2 
months of the fiscal year, revenues were running ahead of last 
year by 7 percent. Are we roughly at that level today?
    Mr. Crippen. We are still above what we had projected at 
this point, but these early months are quite variable compared 
with some of the others. So it is clearly too soon to tell, but 
we are above, not below, what we had anticipated.
    Mr. Gutknecht. Under your model--and I know everybody likes 
to look out 5 years and 10 years, and frankly, as the 
weatherman, they don't do a very good job predicting what is 
going to happen tomorrow let alone what is going to happen 5 
years from now. This year what are you assuming for economic 
growth?
    Mr. Crippen. I believe it is 3.3 percent. I could check 
that for you.
    Mr. Gutknecht. But that is--you are still being relatively 
conservative compared to what we are seeing?
    Mr. Crippen. Yes.
    Mr. Gutknecht. I want to go back to another point, and this 
is as much a comment as a question in response to what some of 
my colleagues have said. I think we need to change the whole 
way we look at this, and our job as a budget committee, as far 
as I am concerned, is to bake the bread like the little red 
hen. We have got to create the surplus. I have said if we could 
simply do this, if we could limit the growth in total Federal 
spending to no more than the average growth in the average 
family budget--in other words, the Federal budget should grow 
no faster than the average family budget, and that is running a 
little over 3 percent right now, and I think actually next year 
we can do a little bit better than that. We can actually come 
in under that number. I believe if we do that, we are going to 
guarantee strong economic growth and significant surpluses as 
we go forward.
    I want to go back to a point. When people say we can't 
limit the growth in Federal spending or we can't freeze Federal 
spending, we are going to have a meeting tomorrow, and I hope 
all of my colleagues will come and take a look at how much, as 
far as I am concerned, waste is still in this Federal budget.
    Let me just throw out a couple of things. Last year we 
spent $1 billion on construction projects in Europe for the 
Army, the military, to defend Europe from whom? I mean, at some 
point we have to ask who are we defending Europe from? Last 
year we spent over $9 billion in the Balkans. Again, there was 
supposed to be burden-sharing between us and our allies. I 
haven't seen it.
    We are currently, just in Medicare alone--let me just give 
you a few numbers, Mr. Crippen. We sometime have to start 
calculating this. Let us take one drug, Coumadin. If you buy it 
in the United States, the price is $35.25. If you buy that drug 
in Europe, it is $2.85. I can go on to a long list of what we 
pay for prescription drugs in the United States, and ultimately 
it costs the taxpayers--right now, back in the envelope 
calculations we could save $1.8 billion in Medicare alone, not 
even including what we pay through the VA for drugs, if we just 
simply could get somewhere close to the world price of 
prescription drugs.
    Let me talk about some other areas where I think there is 
just enormous waste. As my colleague from Michigan said, the 
Education Department is a $38 billion company, which, for the 
second year in a row, our own General Accounting Office says 
their books are unauditable. At some point we on the Budget 
Committee have to demand some accountability.
    I raised the issue last year when the representatives from 
the Pentagon were here, because I have heard this and it has 
yet to be refuted. We currently have more generals and admirals 
than we had at the peak of World War II when we had 16-1/2 
million Americans in uniform. We have become so top-heavy, and 
yet we can't find any savings. In my opinion--and this report 
is filled with even more examples. The Pentagon is still 
spending, one example, $75.60 for set screws that American 
consumers would buy for 57 cents.
    I mean, I think we on this committee have to take a very 
tough stand, and the argument that we can't balance the budget 
or we can't provide tax relief or we can't freeze spending, 
discretionary spending, I think, is outrageous, and I think 
when the American people begin to realize how much, whether it 
is the Pentagon, the Department of Education, do we need 6,000 
people in the Department of Housing and Urban Development, I 
think that is a legitimate question, and somebody ought to be 
asking it, and I think it ought to be the members of this 
committee, because if we do, and if we get better answers and 
better accountability, I think we can balance the budget. I 
think we can save Social Security. I think we can pay down 
debt. And I think we can have tax relief that helps families 
keep more of what they earn.
    That is an editorial statement, but, Mr. Chairman, I hope 
more of the Members will be here tomorrow to go through this 
report and just see how much waste and mismanagement is still 
embedded in this Federal budget, and I think once they do, they 
will come to the same conclusion. We can balance this budget, 
and we can freeze discretionary spending if we have the courage 
to say no to some of this waste.
    I yield back my time.
    Mr. Green. I think the session tomorrow will be very 
interesting.
    Before we proceed, I would like to ask unanimous consent 
that any questions may be submitted for the record.
    Mr. Green. And without objection, we will proceed on 
questions.
    Mr. Bentsen.
    Mr. Bentsen. Thank you Mr. Chairman.
    Mr. Crippen, good to see you. I thought for a second my 
colleague from Maine, Mr. Allen, was my colleague from 
Minnesota, Mr. Minge, when he was talking about drug prices and 
whether or not we ought to impose some price controls, maybe 
some European Union-type model or something, but I won't go any 
further on that.
    I want to reference my questions back on the discussion of 
what the baseline is and what our future fiscal policy should 
be because that is really what we are talking about. I would 
reference you back to last year's markup of the fiscal 2000 
budget resolution, which ended up going nowhere. I am going to 
bring this up all year, but I did offer an amendment last year 
that would have frozen spending at the caps per the 1997 BBA 
and dedicated all surplus, on- and off-budget surplus, to debt 
retirement. That amendment was not unanimously, but almost 
unanimously, rejected by Republican and Democrat alike. So when 
my colleagues talk about us being able to do this, I would 
remind them that they were given an opportunity and failed.
    CBO uses a criteria dealing with behavioral compliance in 
the Medicare baseline. In a second, I will talk about the 
Medicare baseline, but right now I want to talk further about 
the table that our Chairman put up there. If you were to apply 
that type of formula to congressional action in your budget 
projections and extrapolate what the trend has been for 
Congress over the previous 3 to 5 years in discretionary 
spending, what would your baseline look like, because according 
to your testimony it certainly wouldn't be a freeze. In some 
instances, it would certainly be somewhere at or above the rate 
of inflation, is that correct?
    Mr. Crippen. It depends on which 3 or 5 years you choose.
    Mr. Bentsen. Let's just talk about, say, fiscal 1995 
through fiscal 1999.
    Mr. Crippen. Because spending in 1995 was lower, you 
probably have essentially a freeze since then.
    Mr. Bentsen. Nominal freeze?
    Mr. Crippen. Yes, nominal. This shows the sensitivity of 
what base you use. Because there was an absolute reduction in 
discretionary spending in 1995, by including that year you show 
that a freeze is possible. By leaving out 1995, you may suggest 
that a freeze is not possible, which belies the variability in 
the underlying----
    Mr. Bentsen. You said a nominal freeze. A nominal freeze 
assumes the rate of inflation.
    Mr. Crippen. No. Nominal without inflation.
    Mr. Bentsen. So it did assume the rate of inflation.
    Mr. Crippen. It did not.
    Mr. Bentsen. So are you talking about a real freeze.
    Mr. Crippen. Again, if you choose a different time period, 
you will get a different answer. The point I would like to make 
is simply that discretionary spending has gone up, and it has 
gone down. Over the past several years, it has gone up.
    Mr. Bentsen. But the valley was hit in 1995, and since 
then, we started to ramp back up, right?
    Mr. Crippen. Yes.
    Mr. Bentsen. So, if you looked at the behavioral experience 
of Congress on the discretionary side, then you would say it is 
less than likely that they are going to follow a real freeze in 
the future.
    Now, through your testimony you show a rampdown, a dramatic 
rampdown in discretionary spending as a percentage of GDP from 
1960 to today, dramatic rampdown certainly from 1980 to today, 
and a dramatic increase in mandatory spending. I would just 
note that for all that we hear about how government is 
strangling the American economy and how terrible things are as 
a result of it, it is ironic that you look and see how little 
discretionary spending is of the gross domestic product, 
particularly nondefense discretionary spending. I might add 
that it is hard to find the period of economic growth that 
compares to the current recovery cycle, certainly in the 
postwar period and even in the last century. So it certainly 
has not caused a recession or a depression or controlled growth 
to such an extent that it is killing the American economy. I 
think maybe we should also not just focus so much on what we 
would do on the discretionary side, because, as I see it, our 
experience on the discretionary side of trying to achieve a 
real freeze is not particularly good.
    But in Medicare, as I read it, the Medicare baseline from 
1997 to today has changed dramatically. Since the Balanced 
Budget Amendment in 1997, the baseline has decreased by about 
$100 billion over 5 years and is projected to decrease even 
more. First, I want to know how did CBO miss that reduction, 
because we relied upon you when we formulated the BBA in 1997?
    Second, virtually all of us on this committee have heard 
from hospitals about the cuts, I probably have more hospitals 
than anybody else in a district. Last year we had the BBA give-
back bill, and we put back about $15 billion over 5 years. What 
is to say that Congress won't at some point put back more of 
the BBA? There are about a dozen bills that have been filed, 
including bills from very influential committees. Should we 
not, when we look at these surplus figures, be taking a very 
hard look as to whether or not Congress may decide to go back 
to what the projected 1997 BBA baseline was for Medicare?
    Mr. Crippen. There are two questions here. One is, what 
happened to CBO's 1997 estimates? The second is, how much of 
that is factored in or should be factored in for the future? 
The 1997 estimates may well be accurate. That is to say, the 
change in policy that the BBA instituted may produce roughly 
the savings that we estimated at that time. Other things have 
changed as well since then, a principal change being what has 
happened with the initiatives by the administration to increase 
compliance with Medicare law and regulations.
    As I mentioned earlier, we are getting some effects out of 
the compliance efforts that we did not expect in 1997 and that 
does not have anything to do with the BBA. So it is not just 
that the policy changed in 1997. There are other things that 
have happened that are causing Medicare to spend less than we 
projected in 1997. Home health care was mentioned earlier. The 
law that you passed limited the average payment per beneficiary 
under the interim payment system. What many home health 
providers did was cut off services to patients who reached the 
per-beneficiary limit, which lowered average payments below the 
allowable limit. So the implementation had a little different 
effect than anyone had anticipated.
    The primary point, though, is that other things happened in 
addition to your policy changes. So it is not----
    Mr. Bentsen. But if we were to reverse the policy----
    Mr. Crippen. You would not get all of that spending back.
    Mr. Bentsen. Any we get back obviously is going to adjust 
the Medicare baseline, and it is going to take it out of the 
hide of the projected surplus. We should be cognizant of that, 
given our earlier actions.
    Mr. Crippen. Right.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Green. Ms. Hooley, questions.
    Ms. Hooley. Yes. Thank you.
    Thank you for coming today. I am looking forward to your 
coming in another month when you have actually finished your 
job.
    Mr. Crippen. So am I.
    Ms. Hooley. I come from the State of Oregon, and I can 
remember in 1979 when we were going great guns in our economy, 
and all of a sudden without any warning in 1981 the bottom fell 
out of our economy, and we made huge cuts. It was a tough time 
in our State, and we spent about 6 years getting back on track. 
So I have--when I see huge new proposals that would really have 
huge impacts for future on the budget, I get very nervous about 
it, knowing how quickly your surplus can disappear.
    And I think there is agreement in this group and with you 
that paying down the national debt should be a priority, and 
you talk about it would promote private investment and 
therefore increase our productivity and spur faster economic 
growth. I think the problem is just how much do we need to do 
to pay down that debt.
    The President has proposed that we should use the bulk of 
the surplus to pay down the debt. Greenspan has argued, and you 
saw it up on the chart, that we need to pay down our debt. My 
question is do you agree that using the bulk of our surplus to 
pay down the debt should be our number one fiscal priority, and 
how much would you use?
    Mr. Crippen. Relative to your first question, as 
economists, we would say yes, we think paying down the debt 
will help economic growth and therefore long-term budgetary 
problems. I have no answer as to how much. If we look at Social 
Security, for example, or the Nation's long-term obligations, 
it is clear that even if we saved all the projected surpluses, 
they would not be enough to fulfill the obligations that we now 
have on the books to my generation. We are still going to be 
taking more out of the economy in 2030 than we are today for 
retirement and other programs for the elderly.
    But that is not to say that you may not find priorities 
that are more important than economic growth. You may find 
other ways to grow the economy that have little to do with 
saving--with paying down the debt. This is not an absolute in 
which you can say saving $2 trillion is enough, or saving $3 
trillion is more than enough. In some absolute sense, all of it 
is not enough. It depends on what your objective is.
    Ms. Hooley. Your analysis concludes that if we maintain a 
zero real growth spending level over the next 10 years, that 
our on-budget surplus will be a little over $800 billion, 
right?
    Mr. Crippen. Right.
    Ms. Hooley. If we adopted a zero growth spending on the 
discretionary budget, do you think we could continue to make 
substantial progress in paying down the national debt?
    Mr. Crippen. No matter which of these baseline variations 
you look at, by 2010, we will have something like $2.3 trillion 
in surpluses in Social Security alone. That means that if we do 
not cross this line we have established between on-budget and 
off-budget surpluses, we will have at least $2.3 trillion in 
debt paid down. Anything above that is obviously helpful as 
well. So no matter which of these variations you want to 
assume, you will have substantially paid down $3.6 trillion in 
debt, $2.3 trillion out of Social Security alone. I do not know 
if that has been responsive to your question.
    Ms. Hooley. Representative Minge brought up looking at some 
of the States' programs and what they have done. We have a 
unique program in our State, and some people would think it is 
good, and some people not good, but it really depends on the 
projections, whether they come true and whether or not there is 
a refund or not a refund. And it is a way of--because of the 
uncertainty with any projection, it is a way of dealing with 
the budget, giving the money back to the people without 
changing your tax code. And again, I am going to recommend that 
you--that someone on your staff maybe look at some of those 
programs out there that States have been successful in doing 
that. Thanks.
    Mr. Green. Mr. Gutknecht.
    Mr. Gutknecht. Mr. Chairman, I want to come back to a point 
that was raised. I won't debate who has more hospitals in their 
district, I or Mr. Bentsen. My hospitals have been quite noisy 
regarding the Medicare cuts. And one of the questions I had for 
them was how much were you cut, and the answer I keep getting 
is, I don't know, but it was a lot.
    So we went to the Health Care Finance Agency and said, 
well, how much in aggregate were hospitals cut? And their 
answer was something like, well, we don't think they were cut, 
that they actually got about a 6 to 6-1/2 percent increase. I 
said, well, just give me the numbers. They can't give me the 
numbers. They don't have the numbers.
    Do you have the numbers? Can you help us get the numbers?
    There was a debate that raged during the Middle Ages in 
terms of exactly how many teeth a mule had. Finally one bright 
young fellow said, let's open its mouth and count them. You 
know, it would be very helpful if we had an honest count here 
of how much we are actually--I understand there are some 
unintended consequences, and there are some things that have 
happened with the way the reimbursements are made and so forth, 
but at the end of the day it would be helpful if we at least 
knew how much hospitals were reimbursed in fiscal year 1999, 
how much they are being reimbursed in fiscal year 2000 and so 
forth. And I think you could be the person who helps us count 
those teeth.
    Mr. Crippen. We have thought some about this, as you might 
guess. Part of the problem is the data lags at the Health Care 
Financing Administration (HCFA). Traditionally, lags are 12 
months or 18 months.
    Mr. Gutknecht. I think you are being very generous. This is 
amazing to me that an agency that is responsible for paying 
bills, I mean, that is basically what they do, and yet they 
don't have data for up to 18 months after the checks have been 
issued. Now, I would not invest in a bank that did business 
that way.
    I am sorry, that is an editorial.
    Mr. Crippen. We rely on other agencies to develop that kind 
of data--we do not develop data on our own. In terms of HCFA, 
we can do nothing until they produce the numbers, but we have 
talked to our sister agency, the General Accounting Office 
(GAO), for example, which has studies under way and has 
actually gone into the field. The question we need to ask is 
not only how much has been cut but what effect that has had on 
beneficiaries. That is the important question--whether 
beneficiaries are receiving the services they need.
    GAO has been checking on that, but I do not know the status 
of their research. We are kind of stumped. We think about these 
problems, but we have no answers for you.
    Mr. Bentsen. Would the gentleman yield on that point?
    Your hospitals may want to talk to my hospitals, because my 
hospitals certainly know how much is in their budget 
projections, what the reductions mean, and the PPS update and 
the other reimbursements they get. And the impact is on that 
there are other costs arising, their census of patients is 
rising, and so against that they do feel a cut. And 
particularly for those hospitals which I know----
    Mr. Gutknecht. Is it 3 percent? Is it 4 percent? Is it 6 
percent? Is it 10 percent?
    Mr. Bentsen. CFO should be able to provide you with 
information. In dollar terms of what the impact is when they 
project what their Medicare receipts will be on a per-patient 
basis against what they perceive to be their per-patient cost.
    Mr. Gutknecht. At this point I haven't been able to get 
very good information from anybody, and they are all talking 
about the cuts, and they are saying it is devastating them. As 
a member of the Budget Committee, I think we do want to try and 
rectify that, but it is really difficult to get our arms around 
it if neither they, nor you, nor the Health Care Finance Agency 
can give us some numbers. Right now we have no numbers to work 
with.
    Mr. Green. Since we allowed questions to be submitted for 
the record, I would be interested to see Mr. Crippen's response 
to the number of teeth in a mule.
    Next, Mr. Markey?
    Mr. Markey. I thank you very much, Mr. Chairman. And like 
that medieval theological debate, we have similar problems here 
today because everyone can see what they want to see. You can 
see a lower, a midcourse, or a higher surplus over the next 10 
years, depending on which way you want to turn the image. You 
can see whatever you want to see. It is beautiful because each 
one of us can then project our own theological beliefs, 
politically speaking, into this surplus projection. But I know, 
as does the gentleman from Texas, that when three hospitals 
close in your district in the 2 years after the Balanced Budget 
Act amendment is passed in 1997, that you don't have to be a 
mining expert to know that the canary died in the mine shaft. 
There is something wrong down there. There just isn't enough 
air to breathe.
    So we have got a problem at the local level. And again, I 
believe, as you know, this committee has the highest 
prevarication coefficient of any committee in Congress. The 
hardest thing to get numbers out of is CBO or even OMB back in 
1997, because if we were able to open up the mule's mouth back 
then, we would have known that the budget was already balancing 
itself by the end of 1997, but, of course, they were told by 
this committee and by the administration not to give any new 
numbers while we were anticipating the vote at the end of July 
on the Balanced Budget Amendment in 1997. So we didn't have the 
updated numbers at that point in time which would have revealed 
that this miraculous balanced budget that was the target for 
the year 2002 was reached in 1998.
    Isn't that great, just by a single vote in 1997. We did the 
whole thing in that year and started to see the projections. 
That is because the mule didn't open his mouth. It was under 
orders from both OMB and CBO. So that is a problem. These 
people just take orders, so it is just the way it is.
    So I am going to get away from that because that gets 
theological.
    What I would like to do is to deal with the issues on 
Social Security. Again, it gets kind of hard to solve the 
problem for 7 years, kind of gets outside people's grasp, but 
Mr. Bartlett, Roscoe Bartlett, zero ADA rating, and Ed Markey, 
100 percent ADA, kind of joined together in a very simple plan 
which we think makes some sense, and I would like to get your 
views on it. What it does is it permits a portion of the Trust 
Fund to be invested each year in securities. It is no geniuses 
need apply. Investments will be under index funds only to 
mirror the long-term growth of the market as a whole, and 
additional political insulation would be provided by requiring 
proxies to be voted to mirror the voting by nongovernment 
investors. And we would have multiple 10, 20 mutual funds or 
other financial institutions each taking a relatively small 
percentage of the money so that no one investment firm would 
have the control over that large sum of money.
    What do you think about that as an idea, Mr. Crippen? Do 
you think that would help to advance the solvency of the Social 
Security Fund?
    Mr. Crippen. The answer depends critically on exactly how 
you just asked the question. Your idea could certainly raise 
the rate of return and make the Trust Funds look better. The 
ultimate question, though, is, does the investment increase 
national savings and therefore help economic growth? Because 
ultimately, the controlling factor is the size of the economy, 
not the balances in the Trust Funds.
    For example, you have a choice today. You could pay down 
debt with, say, some of the Social Security surpluses now, or 
you could buy equity securities. The two strategies would have 
the same effect essentially on national savings, so that would 
not change the outlook for the economy. So if your plan would 
increase----
    Mr. Markey. Do you think this plan would? The gridlock is 
that a lot of the Republicans want to give the money to 
individuals, and they would invest, and a lot of Democrats 
don't want to give it to anybody, even index funds. So we are 
trying to go up the middle here.
    Let's just compare what we are doing here with IRAs, with 
individual accounts that the Republicans want. Would there be a 
difference in terms of the impact it would have on savings if 
it was done this way as opposed through individuals?
    Mr. Crippen. Probably not, but it depends critically on----
    Mr. Markey. If we could create similar incentives in both 
programs, you would still remain agnostic in terms of whether 
or not it would enhance the savings?
    Mr. Crippen. I would.
    Mr. Markey. So a lot of this discussion gets to that 
pivotal first question, and you are not sure that anything we 
would do----
    Mr. Crippen. Very clearly, paying down debt held by the 
public would enhance net national savings.
    Mr. Markey. I'm talking about going to individual 
accounts----
    Mr. Crippen. It depends on how you do it. There are many 
plans--yours may be included--that would actually enhance 
national savings and therefore help economic growth. What I am 
trying to emphasize is that the balances in the Trust Funds 
have little to do with our ability to pay for the obligations 
we have.
    Mr. Markey. If I gave you my plan, would you give me a 
written response as to whether or not you think that that would 
enhance national savings?
    Mr. Crippen. I will be happy to.
    Mr. Markey. And contrast it with whether or not the 
Republican plan that gives individuals the ability to take 
their own----
    Mr. Crippen. Which Republican plan?
    Mr. Markey. The one that Dennis Hastert would split. How is 
that? So we would take that. But just so--I just want to break 
this cycle here. We have got to move to this marketplace, and I 
think that the biggest obstacle that we have is that neither 
side wants to give up either doing nothing or going all the way 
like individuals do it. I don't think either one of them is 
realistic. I think we have got to get our foot in the water 
here. We have got to get people used to it. If this is a way 
that enhances the savings goal and yet gets us to get the 
benefit of the stock market long term, then it would be a good 
way of going.
    So I would appreciate it if you would give me a written 
response. We will give you the details of the plan, and if you 
tell us that it enhances national savings, then we would, I 
think, be able to build a broader coalition this year toward 
advancing that goal.
    Thank you, Mr. Chairman.
    Mr. Green. Thank you, Mr. Markey.
    Mr. Crippen, earlier when you were responding to a question 
from Mr. Bentsen, I was intrigued by how you pointed out that 
discrepancies in forecasts have been less due to based on 
calculations and more on other side events that have changed, 
the eddies and currents have changed. As we go forward, as you 
know, we will be looking at a variety of tax relief plans. In 
your view, what kind of tax relief plans would project or would 
create greater economic growth and would create a positive push 
on the surplus as opposed to a cost, which some have suggested?
    Mr. Crippen. Let me answer you in two ways. First, if you, 
for example, sent us a tax cut and asked not only what the 
revenue effects would be--which the Joint Committee on Taxation 
provides--but also what would be the economic effects, we would 
say, we do not know. Currently, when we prepare estimates, we 
do not also assess the impact of the proposal on the economy or 
on economic growth. We may do that someday, but we are not 
currently doing it.
    Second, what I can say in answer to your question is not 
our view because CBO does not have an opinion on this matter. 
There is a pretty extensive literature that suggests that 
changing incentives in the Tax Code for savings or for work--
changing marginal tax rates, for example--is the kind of things 
that is more likely to increase output, work, and economic 
growth. But beyond that, there is not much the literature--the 
empirical literature, in particular--can tell you about whether 
one kind of tax cut is better than another.
    Mr. Green. Well, for example, a--the marriage penalty 
reduction that we just passed, what is your view as to the 
incentives changed by that?
    Mr. Crippen. Again, CBO has no view. Probably, the view of 
the economics profession would be that the change in the 
marriage penalty will have relatively little effect on economic 
growth. The effect on incentives to work or to save would be 
limited because so much of the tax savings from the cut would 
not affect taxpayers at the margin.
    Mr. Green. What about the type of State tax reduction that 
we saw in last year's tax bill that was passed? What is your 
view as to the economic impacts from that?
    Mr. Crippen. Again, CBO does not have a view. I think the 
literature is mixed on the question but mostly suggests that 
there is not much impact. I would have to check that, however. 
The last time I looked, there was not much effect on economic 
growth.
    Mr. Green. Are there other questions? Ms. Hooley, do you 
have any further questions?
    Ms. Hooley. No.
    Mr. Green. Seeing no other questions, again, Mr. Crippen, 
we thank you very much.
    Mr. Crippen. Thank you.
    [Whereupon, at 12:30 p.m., the committee was adjourned.]