[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
    MID-SESSION REVIEW AND UPDATE OF THE BUDGET AND ECONOMIC OUTLOOK

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, SEPTEMBER 5, 2001

                               __________

                           Serial No. 107-17

                               __________

           Printed for the use of the Committee on the Budget


  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire        JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
PETER HOEKSTRA, Michigan               Ranking Minority Member
  Vice Chairman                      JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire       BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota             KEN BENTSEN, Texas
VAN HILLEARY, Tennessee              JIM DAVIS, Florida
MAC THORNBERRY, Texas                EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas                     DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia                 GERALD D. KLECZKA, Wisconsin
ERNIE FLETCHER, Kentucky             BOB CLEMENT, Tennessee
GARY G. MILLER, California           JAMES P. MORAN, Virginia
PAT TOOMEY, Pennsylvania             DARLENE HOOLEY, Oregon
WES WATKINS, Oklahoma                TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             CAROLYN McCARTHY, New York
JOHN T. DOOLITTLE, California        DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    MICHAEL E. CAPUANO, Massachusetts
RAY LaHOOD, Illinois                 MICHAEL M. HONDA, California
KAY GRANGER, Texas                   JOSEPH M. HOEFFEL III, 
EDWARD SCHROCK, Virginia                 Pennsylvania
JOHN CULBERSON, Texas                RUSH D. HOLT, New Jersey
HENRY E. BROWN, Jr., South Carolina  JIM MATHESON, Utah
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel









                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, September 5, 2001................     1
Statement of:
    Hon. Mitchell E. Daniels, Jr., Director, Office of Management 
      and Budget.................................................     6
    Dan L. Crippen, Director, Congressional Budget Office........    75
Prepared statement of:...........................................
    Mr. Daniels..................................................     8
    Hon. Ken Bentsen, a Representative in Congress from the State 
      of Texas...................................................    49
    Mr. Crippen..................................................    78









    MID-SESSION REVIEW AND UPDATE OF THE BUDGET AND ECONOMIC OUTLOOK

                              ----------                              


                      WEDNESDAY, SEPTEMBER 5, 2001

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Sununu, Bass, 
Gutknecht, Hilleary, Thornberry, Hastings, Granger, Schrock, 
Culberson, Brown, Putnam, Spratt, McDermott, Bentsen, Clayton, 
Clement, Moran, McCarthy, Capuano, Honda, and Matheson.
    Chairman Nussle. Budget Committee will come to order.
    I appreciate all of the members coming back slightly early 
from the August recess to participate in this hearing today.
    This is a full committee hearing on the Mid-Session Review 
and Update on the Budget and Economic Outlook.
    We have two witnesses before our committee today, the 
Honorable Mitch Daniels, the Director of the Office of 
Management and Budget, and Daniel L. Crippen, the Director of 
the Congressional Budget Office.
    Before I begin, let me make a couple of opening comments, 
and I would ask unanimous consent that all members be allowed 
to put in an opening statement, written statement, for the 
record at this point. Without objection so ordered.
    Let me start by saying thank you. When we started this 
year, Mr. Spratt and I decided that we wanted to make this 
committee a full-time committee. There has been times in the 
past when the Budget Committee wrote the budget and went 
through that whole budget process and then the focus seemed to 
change, and we didn't always follow up with some of the 
important economic information that occurs throughout the 
year--as people know--and to review that and to have an ongoing 
process of the budget throughout the entire fiscal year. We 
made a commitment to ourselves this year, that we were going to 
change that, which is easy for members to do, but not quite so 
easy for the staff.
    While we were out in our districts working, some of us 
having a needed break from Congress, I took my kids to--in fact 
my daughter Sarah is with me today, and she is helping me out 
as an assistant. I took my kids to Springfield, Illinois, to 
learn a little bit about Abraham Lincoln, that is where I used 
my $300 check. You got yours, Henry. Spend it. Buy American, 
will you, please? Stimulate that economy.
    But while we were out doing those kind of things, the 
Budget Committee staff, Republican side and Democratic side, 
were very busy working, and I want to thank them for all of 
their hard work.
    You see here in the committee room a number of changes. We 
have a new audio-visual presentation system that we will be 
making use of today just as a demonstration, but for members' 
purposes this will be available for use throughout the year.
    The staff were busy analyzing the data that was coming in 
from the Office of Management and Budget and the Congressional 
Budget Office. They do a tremendous job while we are not here 
to prepare us so that when we come back from a work period, 
such as we were on, we can hit the ground running. I want to 
acknowledge Rich Meade and Tom Kahn and all of the folks at the 
Budget Committee, on both sides, who do a tremendous job for us 
and thank them on behalf of all of the members.
    I would also like to thank the staffs of the Congressional 
Budget Office and the Office of Management and Budget for their 
hard work in helping with all of this information. We are going 
to have a lot of discussion today, some taking issue with some 
of the information that they are going to submit. That is fine. 
These are forecasts. That is in part what we are supposed to 
do. But that doesn't mean that we don't acknowledge and thank 
their hard work that they do in putting this hard information 
together.
    I would also like to just mention that during this past 
week, the staff director for the Democratic side lost his mom, 
and I just wanted to tell him on behalf of the entire 
committee, that the entire Kahn family is in our thoughts and 
prayers--that is not easy to have to go through.
    Director Daniels went through that this year as well, and 
while we are running through all of the politics, we have to 
remember we are all human beings and we have families and it is 
not easy to go through that.
    You are in our thoughts and prayers, and we appreciate that 
you would be back here working with us already today.
    Now, what we are going to review today is similar to a 
weather report. At least that is the way I like to look at it. 
We have got some weather forecasters that try to do a good job 
in predicting the future and letting us know exactly what the 
weather is going to look like: Sunny, partly cloudy, stormy.
    I related when I came back that my sister had gotten 
married just a couple of weeks ago, and we hung on every word 
for the weather report that was coming up for that Saturday 
because she had an outdoor wedding. Well, it said it was going 
to be partly cloudy, and it rained out the wedding, and so we 
had to go inside. And then there was a power outage as a result 
of that. So it was not only a storm, but it was a pretty big 
storm. Even though we make forecasts, or we try to make those 
forecasts, those forecasts are not always right.
    These are projections that the Congressional Budget Office 
has put forward, that the Office of Management and Budget has 
put forward. What we know is--if we know anything--they are not 
completely accurate, they are forecasts. They do the best job 
they can in putting forth good information, and we try and base 
our decisions on them, as we did in January and again in May. 
These are forecasts and you can't bet the entire farm on them. 
But you do have to make decisions based on them.
    What we do know is that the budget is tight. That is 
exactly where we want it to be, and that is exactly where we 
need it to be because of the softening economy.
    We have already heard, because of the tight budget, a lot 
of hand wringing, and lot of whining. In fact, the ``D'' word 
has come back into the lexicon of politics; the word 
``deficit.''
    The observation I would make is that the only deficit that 
I see is the deficit between what people want to spend and what 
we are going to spend under this budget. We need to stick to 
this budget. We need to make sure that we enforce this budget, 
and if we do we will be just fine.
    Let's review a few things that happened this year. In front 
of this committee in January, the Congressional Budget Office 
came forward and reported three very important concerns. Number 
one, they said that the economy was softening. They built into 
their 10-year numbers, in fact, the word ``recession,'' which 
has not yet occurred according to most economists, but they 
built that into their numbers.
    Second, they said that Washington was running the largest 
surplus in American history, and that was a concern. And third, 
that Federal spending was growing at twice the rate of 
inflation. Up until that point in time, $100 billion were added 
to the budget over the last 4 years alone.
    We had been warning President Clinton about taxes being too 
high and about spending being too excessive, and in part that 
is why we built the budget that we did this year.
    Before this budget panel we had heard from Director 
Greenspan. As an example, Chairman Greenspan warned us that the 
economy would soften, and it has done so. He said large 
surpluses are as dangerous as large deficits. So we had four 
budget goals that we put into this budget.
    Number one, provide tax relief now. In a softening economy, 
the family budget is as important, if not more important, than 
the Federal budget. We agreed to take that into consideration. 
In fact, our friends on the other side offered to help us with 
regard to that and suggested that we do the rebate, and some 
suggested we do it even faster in 2001 than we did.
    But the fact of the matter is that we got $41 billion that 
is heading out of town into the pockets of the American people 
in order to deal with the economy and in order to get that 
surplus into the pockets of families.
    The second goal of the budget beyond providing tax relief 
was to pay off the debt in the next 10 years, and in fact we 
built that into this budget.
    Third was to protect every penny of Social Security and 
Medicare.
    Number four was to restrain spending. These were the four 
budget goals.
    I believe that is what we have accomplished based on the 
review that we have seen thus far. Number one, we have the 
second largest budget surplus in history. And if you view the 
chart that we have on our new fancy dancy screens, you can see 
that from 1995, when we were running actual unified budget 
deficits through today and beyond. We are running, not only as 
can you see there for 2001 the second largest surplus in 
history, but surpluses as far as the eye can see.
    Secondly, we provided tax relief to the tune of $41 
billion, and we got that out the door.
    Third, we have provided already almost half a trillion 
dollars of debt repayment; $479 billion of debt has already 
been paid off. That is, if we went home today and did nothing 
more, already $479 billion of the publicly-held debt has been 
paid off, and that was the unthinkable as a goal or an 
achievement just 10 years ago when I came to Congress.
    Next, not one penny of Social Security or Medicare is going 
to be used for anything except Social Security and Medicare. In 
fact, the focus now I believe should turn toward modernization. 
The worst enemy of Medicare is Medicare itself. If we don't 
modernize Medicare--we heard at a GAO report that was right 
before us just before we went on our district work period--it 
will completely and totally engulf the budget. In fact, we need 
to modernize Medicare and we need to consider some 
modernization for Social Security from the Pay-As-You-Go 
system, that we have right now into something that can in fact 
achieve retirement security for generations to come.
    So finally, the question is spending, and this is the 
observation that I make on spending.
    If you look at where we have wanted to be over the last 4 
years and where we have ended up, we have got a problem. The 
spending caps suggested a reasonable growth of spending, one 
that has not been achieved during those 5 years, those last 4 
years. As a matter of fact--as you can see there--this year 
alone, in 2001, we have added about $100 billion of new 
spending over what was projected--over what was budgeted 
according to our budget agreement.
    Now, you can't sustain that. In fact, you are not going to 
pay off the debt, you can't protect Social Security, you can't 
protect anything if in fact you continue to grow spending at 
that kind of a rate.
    When we passed the budget for this year, we decided that 
the rate of growth needed to slow down to the rate of inflation 
instead of twice the rate of inflation. So growth and spending 
will continue, but it will grow at a much slower rate. All of 
this fits within a budget that pays off the debt in the next 10 
years, that provided the kind of tax relief that we have 
provided that can help jump-start the economy, and can make 
sure that we protect Social Security and can modernize Medicare 
into the future.
    So while there will continue to be hand wringing, in fact 
not only hand wringing, it is even more ostentatious than that, 
Senate Democrats wield power, feast on pork. Yesterday they had 
a hearing over in the Senate saying that the budget was in 
trouble. The next day the headlines confirmed that--but behind 
the scenes the Senators were cutting up the pie and already 
adding to it. So don't wring your hands about the budget on the 
one hand and then add to spending on the other.
    Spending is the problem here. We have seen it time and time 
again. We saw it in 1981, when there was tax relief in a 
sagging economy. Spending went up, and we ran deficits. We can 
go down that road again. Spending can cause it, but we have to 
control it if we want to stick within the budget that we have.
    Today we are going to hear from the two experts in the 
budget. Both have been before the committee before and we 
appreciate the fact that they would come here and share their 
expertise.
    With that, I would like to turn to my friend and colleague 
Mr. Spratt who just became a grandfather. Again.
    Mr. Spratt. Again.
    Chairman Nussle. We congratulate you on that, and welcome 
back from the break.
    Mr. Spratt. We are glad to have Sarah here today helping us 
out.
    Mr. Chairman, we come back to a very different situation 
than the one we left just a few weeks before. When we left we 
were talking about Medicare prescription drugs. We were talking 
about a plus-up in the defense bill of $18.4 billion. We were 
talking about a plus-up in education.
    The Ag Committee has marked up a new farm bill that adds 
about $74 billion to the farm program over the next 5 years. 
What we have got now is a situation where none of this is 
easily possible.
    Director Daniels, if CBO is correct in its prognosis 
forecasts and analysis of the budget over the next 10 years and 
the economy, then we are in a situation where the Medicare 
surplus--which we believe is a legitimate surplus--and the 
trust fund surplus, will be invaded for the next 4 fiscal 
years, including the current fiscal year.
    In addition, Social Security, which you acknowledge should 
be held inviolate, will be invaded this year and again in 2003 
and again in the year 2004.
    The key thing to understand is that the CBO baseline 
factors in only inflation on top of existing spending; it is 
running in place with respect to existing programs.
    If we want to do the tax cuts that Mr. Daniels and 
President Bush lay out in the appendices of this book, the 
unfinished agenda with respect to tax reduction, which include 
repealing the sunsets in the tax bill just passed, the cost and 
revenues will be $314 billion. That is using their appendix, 
their number.
    If we want to do the Medicare projection drug proposal 
which the administration is now advancing, they are proposing 
$190 billion even though the chairman of the Senate Finance 
Committee, Senator Grassley, said when that was proposed it was 
inadequate. $300 billion is the minimum necessary, particularly 
if there is going to be catastrophic coverage. If we put it in 
at $190 billion, and if we just put in the $18.4 billion in 
defense and make a few final minor adjustments, you can see 
what happens to the bottom line. It goes red. With respect to 
Medicare and Social Security, we have got an invasion of 
Medicare and Social Security through 2005, Medicare through 
2008.
    So, none of the things that we were talking about on the 
agenda that we thought were doable in the budget we had in 
January are doable now. There may be a radical reversal of our 
situation between July and September, particularly if CBO is 
correct, because CBO only assumes that inflation will be added 
and anything else has to come on top of that.
    So we find ourselves really, Mr. Daniels, I believe, with 
an inoperative budget. All of those items were anticipated as 
part of this year's budget and they now seem to be impossible. 
The Ag Committee was told that they would have $70 billion to 
$75 billion to add to a new farm bill. That is not included in 
your budget. It is not doable under the CBO projection or your 
projection.
    The Education Committee was told that there would be more 
money for education. Mr. Bush, when he delivered his State of 
the Union message, said, ``When you get my budget, you can look 
at the accounts and you will see that the account that is 
increased by the most is the account for education.'' .
    It too will be squeezed. In both the CBO budget and your 
budget, there is barely anything there for a significant 
increment in education. So we have got a very, very different 
situation from the situation we left just a few months ago. It 
reminds us of how fickle these forecasts can be. I don't think 
they are quite as unpredictable as a weather forecast, Mr. 
Chairman, but I do think it counsels what we have been trying 
to counsel since January; that is, caution and relying--
overrelying on these particular forecasts, having a substantial 
margin of error built into any budget.
    We appreciate your coming. We appreciate Dr. Crippen 
coming. We look forward to the answers to our questions and we 
believe that we have a serious problem on our hands. Over the 
break, on three different occasions, the Democratic leadership 
has written the President, and we received back, Mr. Daniels, 
an answer back today, responding to concerns that we raised in 
our letter.
    You indicated that you wanted to avoid partisanship, and we 
do too. This is too serious a matter to get into partisanship. 
We have strongly held beliefs on both sides, but we need to 
tackle this problem with real earnest and resolution.
    We need to sit down and deal with it. We have got to get 
past denial and recognize that we have got a problem. This is 
not simply business as usual; we have got a problem. If the 
economy gets any worse, then we have got an even bigger 
problem. We don't want it to get worse. We don't want to do 
anything that is counter-cyclical or counter to the best 
interests of the economy in anything that we do, and therefore 
what we do has to be deliberately chosen and we are ready to 
engage in that respect.
    Chairman Nussle. Thank you. Director Daniels, welcome back 
to the Budget Committee. We will accept your testimony in the 
record as it is written, and you may summarize as you see fit. 
Welcome.

   STATEMENT OF THE HON. MITCHELL E. DANIELS, JR., DIRECTOR, 
                OFFICE OF MANAGEMENT AND BUDGET

    Mr. Daniels. Thank you, Mr. Chairman.
    You want to swear me in, or do you take my word for it this 
morning?
    Chairman Nussle. I'll take your word for it.
    Mr. Daniels. Mr. Chairman, I submitted for the record the 
summary of the mid-session review that we at OMB issued during 
the August recess, and let me make just a few very brief 
comments before welcoming the committee's questions.
    I think the format of your hearing is well chosen and 
important today, because now the committee has the benefit of 
two reports, independently arrived at about your fiscal 
condition and our fiscal future, and I would just draw the 
committee's attention to the remarkable coincidence between 
them.
    There probably has never been two reports, one from OMB and 
one from the Congressional Budget Office, more similar than 
these that my colleague Dan Crippen made much reference to in 
his report and in his Senate testimony yesterday. I will just 
cite a few examples that struck me as I read through both.
    The 2002 surplus forecasts were equivalent within a third 
of 1 percent. The outstanding debt at the end of the fiscal 
year was equivalent within one-fifth of 1 percent. The 10-year 
outlays, mandatory and discretionary and then total, were all 
equal within less than 1 percent; likewise for receipts.
    The Social Security surplus--just to pick another stunning 
example--over 10 years the forecasts are equal within one-tenth 
of 1 percent. And if you look behind the projections to the 
assumptions on which they are based, they are in many cases, 
inflation, long-term GDP and many other assumptions, not close 
but identical.
    This doesn't make these two forecasts right any more than 
two of your local channels' weather forecasts are necessarily 
right just because they are the same. But I do think it gives 
the committee some confidence that we start from numbers of 
integrity and numbers that have all of the accuracy that is 
possible, even looking 1 year ahead, let alone 10.
    From these two virtually identical sets of data I would 
single out just one that I think is of special importance and 
relevance to the conversation this morning.
    Maybe the single most important number in any such 
projection is receipts for next year as we move through the 
appropriations process that we hope will honor and give 
expression to the budget resolution that the members of this 
committee helped craft.
    How much money will the Federal Government have to work 
with next year? That number is identical within $1 billion out 
of 2.135 trillion, the equivalent of a dime in 210-plus in 
one's pocket.
    I would submit that the committee can have some confidence 
that we have--from the reinforcing nature of those two 
records--some good and I think cautious idea about the 
resources with which the Congress can work next year.
    What conclusions then comes from those two essentially 
identical reports? They are obvious, and the earlier 
presentation made reference to some of them. Both confirm we 
are dealing with the second biggest surplus in American history 
and that it is going to get bigger in 2002 and in future years.
    They confirm that the budget as proposed by the President 
and the budget resolution that now sits before the Congress, if 
not exceeded, will allow the funding of our Nation's 
priorities--defense, education, debt reduction--all consistent 
with the full protection of the Social Security surplus for 
debt reduction.
    So to me, the meaning of the two reports is clear. We 
should proceed under the resolution, under the framework that 
the two budget committees constructed to an orderly set of 
appropriations bills for this fall that will govern the 
Nation's spending throughout 2002.
    Both reports confirm that the budget of the United States 
and the fiscal condition of the Federal Government is in 
excellent shape. It is the economy right now that is not.
    To the end of improving it, to the extent insofar as 
government policy can affect a $10 trillion economy, I 
recommend to the committee the balanced policy the President 
proposed. I think the budget resolution captures: A balanced 
policy that includes regular debt reduction through record 
surpluses, near-term stimulus through the bipartisanship tax 
reductions of 2001, support for sustained growth through the 
future rate reductions to come. All of this ensured by spending 
restraint, moderating the growth of spending over the year as 
we are here to talk about it this morning and the years ahead.
    So thank you, Mr. Chairman and Congressman Spratt, for the 
opportunity to be here, and I will submit the mid-session 
review with those brief comments.
    [The information referred to follows:]

 Prepared Statement of Hon. Mitchell E. Daniels, Jr., Director, Office 
                        of Management and Budget

                                summary
    Despite a nearly stagnant economy, the government's finances are 
remarkably sound. The budget's enormous surpluses have allowed us to 
deliver significant tax relief to working Americans, providing badly 
needed fiscal stimulus to counteract the year-long slowdown in the 
economy. Even while weathering the slowdown and taking action on tax 
relief, we continue to take in huge surplus revenues, and to use the 
extra receipts to steadily reduce the nation's outstanding debt.
    The current estimate for the 2001 surplus is $158 billion, the 
second highest in history. This is lower than the $281 billion surplus 
estimated in the April Budget. The lower surplus is due largely to the 
year-long economic slowdown and the decision to incorporate immediate 
fiscal stimulus, in the Economic Growth and Tax Relief Reconciliation 
Act. The 2002 surplus projection is $173 billion, compared to April's 
$231 billion estimate. Over the 10 years from 2002 to 2011, the surplus 
totals $3,113 billion, down from the $3,433 billion estimated in April.
    Both this year and next year, the overall budget surpluses are 
equal to the surpluses generated by Social Security payroll taxes (and 
interest earnings). The President and Congress are both committed to 
preserving the Social Security surplus for debt reduction. As a result, 
the additional surplus available for new spending or further tax relief 
in the next few years is limited. In order to fully reserve the Social 
Security surplus for debt reduction, any further initiatives beyond 
those included in this review will also have to be accompanied by 
offsets in other areas.


Tax Relief for Working Americans
    From the Administration's first day in office, President Bush 
worked to deliver on his campaign promise of meaningful tax relief. 
This package, which was originally crafted to ensure long-term economic 
growth and to return excess surplus funds to taxpayers, became even 
more urgent as the extent of the economic slowdown became apparent. 
Congress moved with exceptional speed in response to the President's 
plan. On June 7, 2001 the President signed the Economic Growth and Tax 
Relief Reconciliation Act of 2001.
    This historic measure of tax relief reduces the bottom marginal tax 
rate from 15 percent to 10 percent, delivering savings to every income 
taxpayer, and reduces the top rate to a maximum of 35 percent. It also 
doubles the child tax credit from $500 to $1,000, enhances incentives 
for investment in education, eliminates the marriage penalty, phases 
out the death tax, and encourages retirement saving.
    Of immediate importance, the tax measure includes a rebate 
provision that puts $38 billion in savings from the new 10 percent 
bracket quickly and directly back in the taxpayers' hands. The rebate 
checks, which taxpayers are receiving in the months of July, August, 
and September, could not have come at a better time to invigorate 
today's shaky economy. Economic growth has slowed steadily for over a 
year to a point that it has nearly stopped. The rebate checks will help 
prevent further deterioration by supporting consumer spending.
Reserving the Social Security Surplus for Debt Reduction
    A strong bipartisan consensus has arisen in this country, and in 
the Congress, to preserve very large surpluses as a threshold condition 
of public finance. Both parties and both the Legislative and Executive 
Branches, in this Administration and the previous one, have concurred 
in maintaining a surplus at least the size of the Social Security 
surplus.
    Some would set the minimum surplus level even higher, using as a 
target the artificial overage in the Medicare Part A trust fund. This 
is a relatively modest difference, amounting to a question of whether 
the minimum surplus should be more like 8.0 percent or 9.5 percent of 
total receipts. It is also a difference that is completely irrelevant 
either to the level of future Medicare benefits or to the health of the 
trust fund financing those benefits, which will be exactly the same 
size regardless of the level of the overall budget surplus. (For 
further discussion, see the Medicare section of this document).
    There are several reasons that the Social Security surplus makes a 
good surplus target. First, unlike Medicare, which costs much more than 
it takes in, Social Security is in true surplus for the moment. Second, 
the Administration and a majority of Americans hope for reform that 
converts a portion of Social Security receipts from mere IOUs to real 
assets, owned by the worker who paid those taxes. At that point, the 
notion of a Social Security ``lockbox'' will take on real, literal 
meaning.
    The final reason for choosing this surplus target is that it 
permits the Treasury to achieve-with some room to spare-the maximum 
amount of debt retirement possible. Over the next 10 years, Social 
Security will take in excess funds of $2.5 trillion, whereas maximum 
debt retireable without incurring unjustifiable premium expenses is 
between $2.0 trillion and $2.2 trillion. This year, the Treasury will 
eliminate well over $100 billion of existing debt, marking the fourth 
year in a row of such reductions. Further, such reductions are 
scheduled for each succeeding year. This is an important accomplishment 
for which both political parties, both branches of government, and both 
the current and prior administrations deserve credit.
    The update of the budget outlook in this Mid-Session Review 
foresees continued large surpluses above the size of the Social 
Security surplus for all years in the budget horizon. The President is 
determined to preserve surpluses at this level, and to continue using 
these funds for the steady reduction of outstanding publicly held debt.


Changes in the Economic and Budget Outlook Since April
    Since the President submitted his budget in April, the extent of 
the economic slowdown has become more evident. In retrospect, its 
length and depth are clear: the stock market began to fall in March, 
2000; manufacturing employment in August, 2000; and GDP growth in the 
third quarter of 2000. Overall, the economy has grown at only a 1.3 
percent rate since the second quarter of last year, including an 
estimated 0.7 percent annual growth rate in the most recently completed 
quarter. As discussed in a subsequent section of this review, the 
Administration-and other forecasters-believe that recent interest rate 
cuts by the Federal Reserve, coupled with the fiscal stimulus from the 
Economic Growth and Tax Relief Reconciliation Act, will spur the 
economy back to solid, sustainable growth by next year.

               TABLE 1.--CHANGE IN BUDGET POLICY SURPLUSES
                        [In billions of dollars]
------------------------------------------------------------------------
                                       2001       2002      12002-2011
------------------------------------------------------------------------
April budget estimate of total            281        231           3,433
 surplus..........................
    Social Security surplus.......        159        175           2,583
    Non-Social Security surplus...        122         56             850
Change since April:
    Tax rebates and other enacted         -40        -40              25
     tax changes..................
    Corporate tax timing shift....        -28         28              28
    Medicare Reform policy........          3         11             -37
    Tax proposals.................  .........          3              43
    Defense requirements..........         -4        -11            -198
    Farm assistance and other              -5         -1               1
     policy.......................
    Economic and technical                -46        -44             -46
     adjustments..................
    Related debt service..........         -1         -6            -136
                                   -------------------------------------
      Total, change...............       -123        -59            -320
Current policy surplus............        158        173           3,113
    Social Security surplus\1\....        157        171           2,538
    Non-Social Security surplus\1\          1        575
------------------------------------------------------------------------
\1\ The 2001 estimate is adjusted to assign $5.6 billion in prior year
  receipts to their correct year. See text box on page 9 and Appendix A
  on page 49.

    Economic weakness, coupled with the tax rebate action that is 
designed to counteract that weakness, results in a lower surplus 
outlook this year and next year. In the current year, economic 
revisions and technical factors reduce the surplus $46 billion from the 
April estimate, a difference of about 2 percent of receipts. Tax 
rebates and related provisions account for $40 billion, a legislated 
shift in timing of corporation income tax receipts reduces the surplus 
another $28 billion, and supplemental spending for meeting national 
defense and other needs uses $5 billion. This combination of factors 
and a technical adjustment described below still leaves a very small 
on-budget surplus for 2001.
    In 2002, economic and technical revisions are slightly smaller than 
in 2001. The effect of the tax relief provisions stays level at about 
$40 billion, while the shift of corporate receipts is recaptured. The 
net result is a small on-budget surplus.
    One factor artificially reducing the 2001 on-budget surplus from 
the April estimate is an upward revision to the Social Security trust 
fund due to reestimates of payroll taxes paid in previous years. As 
explained in the accompanying box, this practice has the effect of 
inflating the current Social Security surplus by adding credits during 
2001 for taxes actually paid and collected in 2000, 1999, and earlier 
years. This reduces the apparent 2001 on-budget surplus by $6 billion. 
Correcting this distortion by assigning the extra revenues to their 
appropriate year makes clear that there is a small on-budget surplus in 
2001. OMB will review with the Department of the Treasury the 
possibility of prospective changes to record the adjustments in the 
correct years.
    Over the full 10-year budget horizon, the surplus outlook is 
relatively unchanged from April. The unified surplus total for 2002 
through 2011 is now estimated at $3,113 billion, down from the $3,433 
billion estimated in the April Budget. The largest factor in the 
reduction is incorporating the outyear implications of the 
Administration's $18.4 billion defense amendment for 2002. This is the 
first installment, totaling $209 billion, of investment in restoring 
our national defense capabilities after years of neglect. The tax bill, 
because it was scaled back during Congressional consideration, 
increases the surplus slightly relative to the April Budget (which 
assumed the President's proposals), while the 10-year economic and 
technical adjustments reduce the surplus by $46 billion.
    This update to the President's budget increases the resources set 
aside for Medicare modernization, and an integrated prescription drug 
benefit, to $190 billion over the period 2004 to 2011. This new 
estimate is consistent with the Framework to Strengthen Medicare that 
the President announced on July 12th and is $37 billion more than was 
allocated in total to additional Medicare spending in the April Budget 
submission over 10 years.
    The President's April Budget proposed a program to help low income 
seniors and those with particularly high prescription drug costs get 
immediate assistance while Congress considered comprehensive reform. 
However, with the President's support, a consensus is now building in 
Congress which focuses on comprehensive Medicare modernization. The 
President's Framework to Strengthen Medicare and his budget reflect 
this emerging agreement, setting aside substantial resources to meet 
this objective which could be implemented as soon as 2004. The 
Administration is committed to continuing to work with the Congress on 
enacting legislation to strengthen Medicare consistent with the 
President's framework.
    Although the Administration is committed to enacting comprehensive 
Medicare legislation soon, the President believes we must help seniors 
get the prescription drugs they need at an affordable price now. That 
is why the Administration has begun the voluntary Medicare Prescription 
Drug Discount Card program. This program will allow seniors access to 
the same kinds of drug discounts that other Americans with good private 
health insurance currently receive. The President believes that 
seniors, who face the heaviest burden for prescription drug costs, 
should not also have to pay the highest retail prices for drugs. The 
discount card is not a substitute for prescription drug coverage in a 
reformed Medicare system, but it will bring important relief to seniors 
who need it beginning next year.
    Of the current 10-year total surplus, $2,538 billion is from the 
Social Security trust fund, down slightly from $2,583 billion in April. 
As noted above, the Administration is devoting as much of this amount 
as possible to the reduction of publicly held debt. After reserving the 
Social Security surplus, the remaining 10-year surplus is $575 billion, 
down from $850 billion in April,
    with most of this difference attributed to the $198 billion 
increase in spending on national defense and the additional commitment 
to Medicare.
The Best Course Forward
    The government's finances are extremely sound. Only persistent, 
long-term economic weakness can threaten this position. Hence, 
promoting a return to vigorous growth must be our common objective. The 
best course forward is clear: first, we must contain spending over the 
coming year.
    Last year's appropriations, agreed to 8 months ago by the last 
Congress and the last President, contained the largest oneyear spending 
increase in history, about $50 billion over 2000. Obviously, a smaller 
surge in spending last year would have ensured a larger surplus today. 
The spending growth rates of 1999 through 2001 cannot be repeated if we 
are to preserve the on-budget surpluses that we have all worked so hard 
to create. Congress must limit this year's appropriations to the level 
of the 2002 Budget Resolution, including the defense amendment recently 
proposed by the President.
    Second, Congress and the President must work together to continue 
restraining total spending in the next few years. Businesses, states, 
cities, and families do not hesitate to limit their spending when 
revenues diminish. The fifty state governments recently reported that 
collectively they are lowering spending growth from 8 percent last year 
to a more sustainable 3-1/2 percent in 2002. Spending in the Federal 
domestic agencies exploded during the last 3 years, including growth of 
45 percent at the Department of Health and Human Services and 27 
percent at Department of Transportation. These departments can benefit 
from a period of digestion without great growth beyond these expanded 
levels.
    The Administration is prepared where necessary to extend the 
principle of restraint to its own high priority initiatives. The 
Administration continues to propose several tax initiatives from the 
April Budget, with the effective dates delayed 2 years until January 1, 
2004. In addition, the Administration proposes to fund other 
initiatives that can not be delayed within the additional discretionary 
resources provided in the budget resolution, and will work with 
Congress to revise these proposals as necessary to ensure their 
enactment.


    There are a number of other items that may place demands on the 
budget. Consistent with the requirements of the Budget Enforcement Act, 
action on these or other items with additional costs to the budget must 
be accompanied by provisions to offset the costs to ensure that no 
automatic reductions are triggered. Alternatively additional 
requirements could be funded within the discretionary levels agreed to 
in the Congressional Budget Resolution including the defense amendment 
recently proposed by the President. Living within these constraints 
will ensure that the Social Security surplus is protected and can be 
fully reserved for debt reduction. Examples of these further 
requirements include:
     Farm bill. The costs of the farm bill now moving through 
Congress, which restructures farm programs through the next several 
years, will have to be offset where necessary to maintain on-budget 
surplus.
     Tax provisions. Several long-standing tax credits and 
other provisions expire at the end of 2001. The Administration supports 
the extension of these provisions in a fiscally responsible manner and 
looks forward to working with Congress to achieve that goal. These 
expiring provisions include Archer Medical Savings Accounts, the work 
opportunity tax credit, the welfare-to-work tax credit, provisions 
dealing with the minimum tax for individuals, and the treatment of 
active financial services income of foreign subsidiaries.
     Response to natural disasters. A high level of disaster 
related needs could require spending beyond the amounts assumed.
     Railroad Retirement Investment Trust. The House-passed 
Railroad Retirement and Survivors' Improvement Act (HR 1140) would 
authorize a new Federal trust fund to purchase stocks and bonds. The 
purchases could amount to $15 billion. Under long-standing budget 
scoring rules, these purchases would be scored as outlays, the same as 
purchases of stocks, bonds, and any other asset by all agencies within 
the Federal Government. However, section 105 of the House-passed bill 
directs OMB and CBO not to score outlays for these purchases.
    Regardless of how the purchases are scored, Treasury would have to 
pay for them in the same way-by using some of the budget surplus that 
otherwise would be used to redeem debt held by the public. If all of 
the purchases were made in 2002, they would exceed the non-Social 
Security surplus by $14 billion. Treasury would have to use $14 billion 
of the surplus generated by Social Security to finance the remainder.
    This Mid-Session Review presumes a policy of fiscal restraint, but 
restraint does not mean paralysis. The President's management 
initiatives and the on-going review of programs at all levels will 
result in our ability to do more with the same or similar resources. In 
government, as in any business or family, the burden of proof must be 
placed on spending proponents to demonstrate the ongoing value received 
for whatever money is being spent today. Any healthy organization 
constantly searches for ways to redeploy money from less efficient to 
more efficient purposes, and it is past time for the Federal Government 
to adopt this outlook. We expect that improvements in managing 
resources that are already underway will pay greater dividends than the 
exclusive focus on incremental new resources. Excellence is defined by 
continuing to raise the bar of performance and achievement.

                    Table 2.--CURRENT SURPLUS TOTALS
                        [In billions of dollars]
------------------------------------------------------------------------
                                                    2001         2002
------------------------------------------------------------------------
Overall Surplus...............................          158          173
    Social Security\1\........................          157          171
    Postal Service............................           -1           -3
                 On-Budget\1\                             2            4
                                               -------------------------
      1Non-Social Security....................            1            1
Examples of potential further requirements:
   Extend expiring tax provisions
   Farm Bill
   Funding for natural disasters
   Railroad Retirement Investment
   Trust
------------------------------------------------------------------------
\1\ The 2001 estimate is adjusted to assign $5.6 billion in prior year
  receipts to their correct year. See text box on page 9 and Appendix A
  on page 49.


                                                                          TABLE 3.--APRIL AND MID-SESSION BUDGET TOTALS
                                                                                    [In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      2001       2002       2003       2004       2005       2006       2007       2008       2009       2010       2011    2002-2006  2002-2011
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
April Budget:
    Revenues.....................................      2,137      2,192      2,258      2,339      2,438      2,529      2,643      2,771      2,910      3,058      3,233     11,755     26,370
    Outlays......................................      1,856      1,961      2,016      2,077      2,169      2,224      2,303      2,398      2,490      2,593      2,706     10,446     22,938
    Surplus......................................        281        231        242        262        269        305        340        373        420        465        526      1,309      3,433
    Social Security..............................        159        175        193        210        235        251        270        286        301        322        341      1,063      2,583
    Non-Social Security..........................        122         56         49         52         34         54         70         87        118        143        186        246        850
Mid-Session Review:.
    Revenues.....................................      2,013      2,135      2,220      2,328      2,463      2,553      2,668      2,797      2,941      3,095      3,245     11,698     26,444
    Outlays......................................      1,855      1,962      2,025      2,111      2,208      2,272      2,354      2,447      2,543      2,648      2,761     10,578     23,331
    Surplus......................................        158        173        195        217        254        281        314        350        398        447        484      1,119      3,113
    Social Security\1\...........................        157        171        192        211        236        249        266        280        293        311        328      1,059      2,538
    Non-Social Security\1\.......................          1          1          2          6         19         32         47         70        105        136        157         60        575
Change:
    Revenues.....................................       -124        -57        -38        -11         25         24         24         27         31         36         13        -58         74
    Outlays......................................         -1          2          9         34         40         48         51         49         52         54         55        132        393
    Surplus......................................       -123        -59        -47        -45        -15        -24        -26        -22        -21        -18        -42       -190       -320
    Social Security..............................         -2         -4        (*)          1        (*)         -1         -3         -6         -8        -11        -13         -4        -45
    Non-Social Security..........................       -121        -55        -47        -46        -15        -23        -23        -17        -13         -7        -29       -186       -275
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* = $500 million or less.
 
\1\ The 2001 estimate is adjusted to assign $5.6 billion in prior year receipts to their correct year. See text box on page 9 and Appendix A on page 49.

                accurate accounting for social security
    The President is committed to reserving the Social Security surplus 
for debt reduction and Social Security reform. It is evident that there 
is a widespread, bipartisan consensus that this is the right goal for 
fiscal policy this year and in the years ahead.
    Current estimates indicate the total budget surplus will be $158 
billion in 2001, or about $1 billion more than the Social Security 
surplus.

                          2001 SURPLUS ESTIMATES

                        [In billions of dollars]

Total Budget Surplus..............................................   158
Social Security Surplus...........................................   157
                                                                  ______
Non-Social Security Surplus.......................................     1

On-budget Surplus.................................................     2
Postal Service Loss (off-budget)..................................    -1
Non-Social Security Surplus.......................................     1

    Given the heightened status, real and symbolic, of the Social 
Security surplus, it is important to measure it accurately. Current 
budget practices potentially confuse that measurement in two important 
ways.
    First, the shorthand approach of using the off-budget surplus as a 
proxy for the Social Security surplus combines Social Security 
transactions with those of the Postal Service, the only other ``off-
budget'' program. The Postal Service is supposed to break even at a 
minimum, and in most past years it did. But in 2001 it is estimated to 
lose approximately $1 billion, so the true Social Security surplus is 
larger than the off-budget figure by that amount.
    Second, a large correction to prior year estimates of Social 
Security payroll tax collections will be booked in 2001, crediting the 
trust fund balances with an additional $5.6 billion. This correction 
reflects the fact that the Social Security surplus was larger than 
previously thought in 1998, 1999, and in 2000. (There is a lag of a 
year or more before the necessary information is available to determine 
exactly what portion of tax proceeds stemmed from Social Security 
payroll taxes). Counting this revenue as though it had been paid in 
2001 overstates the Social Security surplus for this year.
    Precise accuracy in determining the Social Security surplus in any 
year requires comparing revenue to actual expenditures.\1\ In 2001, the 
excess of Social Security revenues over expenditures is $157 billion.
---------------------------------------------------------------------------
    \1\ This correction has been made in this report for the sake of 
accuracy. Other official publications may use the historical method and 
therefore report slightly different figures. OMB will review with the 
Department of the Treasury the possibility of prospective changes to 
record the adjustments in the correct years.
---------------------------------------------------------------------------
                             summary tables

  Table 8.--ESTIMATED SPENDING FROM 2002 BALANCES OF BUDGET AUTHORITY:
                        DISCRETIONARY PROGRAMS\1\
                        [In billions of dollars]
------------------------------------------------------------------------
                                                                 Total
------------------------------------------------------------------------
Total balances, end of 2002..................................      767.1
Spending from 2002 balances:
    2003.....................................................      288.7
    2004.....................................................      161.8
    2005.....................................................      100.6
    2006.....................................................       68.9
Expiring balances, 2003 through 2006.........................  .........
Unexpended balances at the end of 2006.......................      147.1
------------------------------------------------------------------------
\1\ This table is required by section 221(b) of the Legislative Re-
  organization Act of 1970.


                                              TABLE 9.--OUTLAYS FOR MANDATORY PROGRAMS UNDER CURRENT LAW\1\
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Estimate
                                    2000   -------------------------------------------------------------------------------------------------------------
                                   Actual     2001      2002      2003      2004      2005      2006      2007      2008      2009      2010      2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Human resources programs:
    Education, training,              10.3       9.0      14.5      15.0      15.5      16.0      17.0      17.8      18.6      19.6      20.7      21.8
     employment and social
     services...................
    Health......................     124.5     140.3     152.6     170.3     185.4     201.0     217.5     235.7     255.4     276.7     300.7     324.4
    Medicare....................     194.1     214.2     224.3     235.8     248.1     267.4     276.4     297.0     315.9     336.3     357.8     387.0
    Income security.............     206.5     220.0     239.7     248.2     257.1     268.5     278.1     284.5     296.4     306.0     317.8     333.9
    Social security.............     406.0     429.9     452.5     474.4     497.6     522.9     550.3     580.4     613.6     651.5     693.5     738.4
    Veterans' benefits and            26.3      22.8      27.9      29.9      31.5      35.7      34.3      33.3      36.7      38.7      39.8      40.8
     services...................
                                 -----------------------------------------------------------------------------------------------------------------------
      Subtotal, human resources      967.8   1,036.1   1,111.5   1,173.6   1,235.1   1,311.5   1,373.5   1,448.7   1,536.7   1,628.8   1,730.3   1,846.3
       programs.................
Other mandatory programs:
    International affairs.......      -4.1      -6.3      -3.3      -3.2      -3.3      -3.2      -3.2      -3.1      -3.0      -2.9      -2.9      -2.9
    Energy......................      -4.0      -3.3      -3.4      -3.2      -3.7      -3.6      -3.6      -3.5      -2.7      -2.4      -2.3      -2.3
    Agriculture.................      32.0      23.5      15.2      11.6      10.9      10.2       9.6       9.3       9.4       9.6       9.5       9.6
    Commerce and housing credit.      -1.3      -6.8       6.3       5.6       5.4       4.6       3.8       5.4       4.7       5.3       5.0       5.1
    Transportation..............       2.1       2.2       1.8       2.0       2.0       1.9       1.9       1.9       1.9       2.0       2.0       2.0
    Undistributed offsetting         -42.6     -47.0     -48.5     -64.0     -64.2     -57.3     -59.2     -61.6     -64.5     -66.7     -69.8     -73.2
     receipts...................
    Other functions.............       0.8       1.0       3.2       2.7       4.1       3.5       3.5       3.6       3.7       3.7       3.8       4.0
                                 -----------------------------------------------------------------------------------------------------------------------
      Subtotal, other mandatory      -17.0     -36.8     -28.8     -48.4     -48.8     -43.8     -47.2     -48.0     -50.5     -51.5     -54.8     -57.8
       programs.................
                                 =======================================================================================================================
        Total, outlays for           950.8     999.3   1,082.7   1,125.2   1,186.4   1,267.7   1,326.3   1,400.7   1,486.2   1,577.3   1,675.5   1,788.6
         mandatory programs
         under current law......
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ This table meets the requirements of Section 221(b) of the Legislative Reorganization Act of 1970.










                                                             TABLE 12.--OUTLAYS BY CATEGORY
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              2001      2002      2003      2004      2005      2006      2007      2008      2009      2010      2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
April estimates:
    Discretionary:
        Defense...........................     299.6     319.2     322.1     333.5     347.6     354.6     361.0     374.1     384.9     396.0     411.4
        Non-defense.......................     349.8     372.5     389.7     397.8     406.8     415.8     425.5     435.3     445.1     458.4     465.1
                                           -------------------------------------------------------------------------------------------------------------
          Subtotal, discretionary.........     649.4     691.7     711.8     731.2     754.5     770.4     786.5     809.5     830.0     854.4     876.5
    Mandatory:
        Social Security...................     430.0     451.6     473.5     498.0     524.3     553.0     584.1     618.0     656.2     698.3     743.6
        Medicare..........................     216.0     226.4     238.6     252.2     279.1     292.2     314.0     335.6     358.4     384.3     419.2
        Medicaid..........................     128.9     142.4     152.7     166.0     180.5     196.4     213.6     232.2     252.6     274.6     297.9
        Other.............................     225.6     260.3     264.3     267.8     285.7     284.8     296.2     312.3     323.9     336.2     349.4
                                           -------------------------------------------------------------------------------------------------------------
          Subtotal, mandatory.............   1,000.5   1,080.7   1,129.2   1,184.0   1,269.6   1,326.3   1,408.0   1,498.2   1,591.2   1,693.5   1,810.1
    Net interest..........................     206.4     188.1     175.2     161.5     144.7     127.2     108.9      90.3      69.1      45.7      19.8
                                           -------------------------------------------------------------------------------------------------------------
          Total, outlays..................   1,856.2   1,960.6   2,016.2   2,076.7   2,168.7   2,223.9   2,303.4   2,397.9   2,490.3   2,593.5   2,706.3
Mid-session estimates:
    Discretionary:
        Defense...........................     304.0     329.9     335.7     357.0     366.6     376.8     385.3     395.8     406.9     418.5     430.5
        Non-defense.......................     347.4     369.5     387.8     395.5     401.9     410.1     419.2     428.5     438.0     450.9     457.4
                                           -------------------------------------------------------------------------------------------------------------
          Subtotal, discretionary.........     651.4     699.4     723.5     752.5     768.5     786.9     804.5     824.3     844.9     869.4     887.9
    Mandatory:
        Social Security...................     429.9     452.5     474.4     497.6     522.9     550.3     580.4     613.6     651.5     693.5     738.4
        Medicare..........................     214.2     224.3     235.8     262.1     287.4     297.4     319.0     340.9     363.3     386.8     419.0
        Medicaid..........................     130.3     143.0     155.1     168.9     183.6     199.3     216.5     234.8     255.3     277.1     300.7
        Other.............................     224.9     262.4     262.6     264.9     294.8     300.6     311.6     326.7     338.7     351.8     366.9
                                           -------------------------------------------------------------------------------------------------------------
          Subtotal, mandatory.............     999.3   1,082.2   1,127.8   1,193.5   1,288.8   1,347.6   1,427.4   1,516.0   1,608.8   1,709.2   1,825.1
    Net interest..........................     204.2     180.5     174.1     164.8     151.0     137.1     122.3     106.9      88.9      69.0      48.1
                                           -------------------------------------------------------------------------------------------------------------
          Total, outlays..................   1,854.9   1,962.1   2,025.4   2,110.7   2,208.3   2,271.6   2,354.2   2,447.2   2,542.6   2,647.6   2,761.0
Difference:
    Discretionary:
        Defense...........................       4.4      10.7      13.6      23.5      18.9      22.2      24.3      21.7      22.1      22.5      19.1
        Non-defense.......................      -2.4      -3.0      -1.9      -2.3      -4.9      -5.7      -6.3      -6.9      -7.1      -7.4      -7.7
                                           -------------------------------------------------------------------------------------------------------------
          Subtotal, discretionary.........       2.1       7.6      11.7      21.2      14.0      16.5      18.0      14.8      14.9      15.1      11.4
    Mandatory:
        Social Security...................      -0.1       0.9       0.8      -0.4      -1.4      -2.7      -3.8      -4.4      -4.7      -4.8      -5.1
        Medicare..........................      -1.8      -2.2      -2.8       9.9       8.3       5.2       5.0       5.3       4.9       2.5      -0.2
        Medicaid..........................       1.4       0.6       2.4       2.9       3.1       2.9       2.9       2.6       2.7       2.5       2.8
        Other.............................      -0.7       2.1      -1.7      -3.0       9.1      15.8      15.4      14.4      14.8      15.6      17.5
                                           -------------------------------------------------------------------------------------------------------------
          Subtotal, mandatory.............      -1.2       1.5      -1.3       9.5      19.2      21.3      19.4      17.9      17.6      15.8      15.0
    Net interest..........................      -2.2      -7.6      -1.1       3.3       6.4       9.9      13.4      16.6      19.8      23.3      28.3
                                           -------------------------------------------------------------------------------------------------------------
          Total, outlays..................      -1.3       1.5       9.2      34.0      39.6      47.7      50.8      49.3      52.3      54.2      54.7
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                              TABLE 13.--RECEIPTS BY SOURCE
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Estimates
                                           -------------------------------------------------------------------------------------------------------------
                                              2001      2002      2003      2004      2005      2006      2007      2008      2009      2010      2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
April estimates:
    Individual income taxes...............   1,072.9   1,078.8   1,092.3   1,117.9   1,157.0   1,196.6   1,255.2   1,330.4   1,410.2   1,499.6   1,598.2
    Corporation income taxes..............     213.1     218.8     227.3     235.5     244.2     252.2     259.9     268.1     275.8     283.5     294.3
    Social insurance and retirement            689.7     725.8     766.0     806.0     855.8     896.4     942.0     984.4   1,030.8   1,087.9   1,145.1
     receipts.............................
    Excise taxes..........................      71.1      74.0      76.3      78.3      80.5      82.3      84.8      87.3      90.0      92.8      95.7
    Estate and gift taxes.................      31.1      28.7      26.6      28.3      24.9      22.5      20.4      15.7      13.4       0.7       0.7
    Customs duties........................      21.4      22.5      24.3      25.0      26.0      27.7      29.3      30.7      33.0      34.5      36.2
    Miscellaneous receipts................      37.6      43.1      45.4      47.8      49.3      51.0      51.6      54.1      56.8      59.5      62.4
                                           -------------------------------------------------------------------------------------------------------------
      Total...............................   2,136.9   2,191.7   2,258.2   2,338.8   2,437.8   2,528.7   2,643.3   2,770.6   2,909.9   3,058.4   3,232.6
Mid-Session estimates:
    Individual income taxes\1\............   1,014.3   1,024.2   1,068.0   1,115.9   1,171.1   1,215.2   1,281.0   1,356.0   1,439.3   1,529.6   1,627.1
    Corporation income taxes..............     155.4     229.1     221.3     231.0     258.7     259.3     264.2     270.9     277.9     285.8     295.3
    Social insurance and retirement            689.4     721.9     768.7     810.1     860.3     897.7     941.5     982.8   1,027.2   1,082.9   1,139.2
     receipts\1\..........................
    Excise taxes..........................      67.6      70.4      72.8      74.8      76.8      78.3      80.5      83.0      85.7      88.4      91.1
    Estate and gift taxes.................      30.0      28.0      23.6      26.9      24.3      27.2      23.8      24.6      25.9      19.6       0.1
    Customs duties........................      19.8      21.5      23.2      24.2      25.3      26.8      28.0      29.2      31.3      32.5      33.7
    Miscellaneous receipts................      36.2      39.6      42.6      44.6      46.1      48.1      48.7      50.9      53.5      56.0      58.8
                                           -------------------------------------------------------------------------------------------------------------
      Total...............................   2,012.7   2,134.7   2,220.2   2,327.5   2,462.5   2,552.6   2,667.8   2,797.4   2,940.8   3,094.8   3,245.3
Difference:
    Individual income taxes...............     -58.6     -54.6     -24.3      -2.0      14.1      18.6      25.8      25.6      29.1      30.0      28.9
    Corporation income taxes..............     -57.7      10.3      -6.0      -4.5      14.5       7.2       4.2       2.9       2.2       2.4       0.9
    Social insurance and retirement             -0.2      -3.9       2.7       4.0       4.5       1.3      -0.5      -1.6      -3.6      -4.9      -5.9
     receipts.............................
    Excise taxes..........................      -3.6      -3.6      -3.4      -3.6      -3.8      -4.1      -4.2      -4.3      -4.4      -4.4      -4.6
    Estate and gift taxes.................      -1.1      -0.7      -3.0      -1.4      -0.6       4.7       3.4       8.9      12.6      18.9      -0.5
    Customs duties........................      -1.6      -1.0      -1.0      -0.7      -0.7      -1.0      -1.3      -1.5      -1.7      -2.0      -2.6
    Miscellaneous receipts................      -1.4      -3.5      -2.8      -3.2      -3.2      -2.9      -2.9      -3.2      -3.3      -3.5      -3.5
                                           -------------------------------------------------------------------------------------------------------------
      Total...............................    -124.2     -57.0     -38.0     -11.3      24.7      23.9      24.5      26.9      30.9      36.4      12.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The 2001 estimate is adjusted to correct for $5.6 billion in prior year receipts. See text box on page 9 and Appendix A on page 49.


                                                                       TABLE 14.--OUTLAYS BY AGENCY IN BILLIONS OF DOLLARS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                April estimates                                          Mid-session estimates
                                                                  2000   -----------------------------------------------------------------------------------------------------------------------
                                                                 Actual     2001      2002      2003      2004      2005      2006      2001      2002      2003      2004      2005      2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Legislative Branch............................................       2.9       3.1       3.3       3.4       3.4       3.4       3.5       3.2       3.3       3.4       3.4       3.4       3.5
Judicial Branch...............................................       4.1       4.3       4.9       5.0       5.1       5.2       5.3       4.3       4.9       5.0       5.1       5.2       5.3
Agriculture...................................................      75.7      69.6      63.2      61.4      61.9      63.8      65.9      72.1      65.7      63.6      64.5      65.6      66.7
Commerce......................................................       7.8       5.5       5.2       5.4       5.3       5.4       5.5       5.4       5.2       5.4       5.3       5.4       5.5
Defense-Military..............................................     281.2     283.9     303.4     306.2     317.2     331.0     337.7     288.3     313.9     319.6     340.5     349.8     359.9
Education.....................................................      33.9      36.7      45.2      49.6      50.6      51.9      53.3      36.9      45.5      50.2      51.4      52.5      54.0
Energy........................................................      15.0      16.7      17.2      17.5      17.7      18.1      18.4      17.3      17.3      17.5      17.7      18.2      18.4
Health and Human Services.....................................     382.6     430.5     468.8     498.8     532.7     566.7     594.1     428.3     457.1     486.7     532.7     574.4     602.1
Housing and Urban Development.................................      30.8      37.3      34.8      34.9      33.5      33.4      33.6      35.9      34.4      34.8      33.6      33.7      33.7
Interior......................................................       8.0       8.7       9.3       9.6      11.1      10.1      10.3       8.2       9.1       9.7      11.4      10.4      10.6
Justice.......................................................      19.6      20.7      22.5      25.4      23.9      23.3      23.6      20.9      21.7      25.4      24.0      23.3      23.6
Labor.........................................................      31.4      38.2      42.0      42.3      43.1      44.8      46.7      39.4      43.7      44.3      45.1      46.2      48.3
State.........................................................       6.8       9.3       9.7       9.7       9.9      10.1      10.4       8.3      10.0       9.7      10.0      10.2      10.4
Transportation................................................      46.0      50.6      54.9      56.9      59.2      61.7      63.4      50.5      54.6      55.2      54.9      56.3      57.5
Treasury......................................................     391.2     388.5     381.5     385.1     388.2     388.9     390.3     387.0     380.9     388.0     395.2     399.9     406.7
Veterans Affairs..............................................      47.1      45.2      51.5      53.5      55.7      60.3      59.5      45.0      51.0      53.5      55.7      60.3      59.5
Corps of Engineers............................................       4.3       4.6       4.4       4.2       4.3       4.3       4.2       4.4       4.2       4.0       4.1       4.1       4.2
Other Defense Civil Programs..................................      32.9      34.4      35.4      41.2      42.4      43.7      44.9      34.4      35.6      41.5      42.7      43.9      45.1
Environmental Protection Agency...............................       7.2       7.5       7.6       7.6       7.6       7.6       7.6       7.3       7.5       7.6       7.6       7.6       7.6
Executive Office of the President.............................       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3
Federal Emergency Management Agency...........................       3.1       3.1       3.2       3.0       2.7       2.4       1.9       3.4       3.2       2.9       2.9       2.3       1.9
General Services Administration...............................       (*)       0.6      -0.2       0.3       0.4       0.4       0.3       0.6      -0.2       0.3       0.4       0.4       0.3
International Assistance Programs.............................      12.1      11.4      12.1      12.4      12.5      12.4      12.7      11.3      12.0      12.3      12.5      12.7      13.0
National Aeronautics and Space Administration.................      13.4      13.8      14.2      14.7      15.1      15.4      15.8      13.8      14.2      14.7      15.1      15.4      15.8
National Science Foundation...................................       3.5       4.0       4.4       4.5       4.7       4.7       4.8       4.0       4.3       4.5       4.7       4.7       4.8
Office of Personnel Management................................      48.7      51.0      53.4      56.3      59.5      62.8      66.0      51.0      53.7      56.7      59.8      63.1      66.3
Small Business Administration.................................      -0.4      -1.0       0.7       0.6       0.5       0.5       0.6      -1.0       0.7       0.6       0.5       0.5       0.6
Social Security Administration................................     441.8     463.0     488.2     511.5     537.4     567.7     595.5     462.6     489.2     512.6     537.2     566.6     593.1
Other Independent Agencies....................................      10.6       4.9      19.0      16.8      17.1      17.8      17.7       1.4      18.7      17.6      18.5      18.2      18.5
Allowances....................................................  ........  ........       2.4       3.9       4.7       5.4       5.7  ........       2.4       3.3       4.0       4.9       5.3
Undistributed Offsetting Receipts.............................    -172.8    -190.2    -201.8    -226.0    -251.0    -254.9    -275.8    -189.5    -201.7    -225.4    -250.0    -251.6    -271.0
                                                               ---------------------------------------------------------------------------------------------------------------------------------
  Total.......................................................   1,788.8   1,856.2   1,960.6   2,016.2   2,076.7   2,168.7   2,223.9   1,854.9   1,962.1   2,025.4   2,110.7   2,208.3   2,271.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* = $50 million or less.


                                                                                 TABLE 15.--OUTLAYS BY FUNCTION
                                                                                    [In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                April estimates                                          Mid-session estimates
                                                                  2000   -----------------------------------------------------------------------------------------------------------------------
                                                                 Actual     2001      2002      2003      2004      2005      2006      2001      2002      2003      2004      2005      2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National defense..............................................     294.5     299.1     319.2     322.1     333.1     347.2     354.0     303.6     329.8     335.5     356.5     366.0     376.2
International affairs.........................................      17.2      17.5      21.0      21.3      21.5      21.6      22.2      16.6      21.4      21.4      21.7      22.1      22.6
General science, space, and technology........................      18.6      19.7      20.8      21.4      22.2      22.6      23.1      19.7      20.7      21.4      22.2      22.6      23.1
Energy........................................................      -1.1      -0.7      -0.3      -0.1      -0.6      -0.4      -0.3      -0.3      -0.4      -0.1      -0.6      -0.4      -0.3
Natural resources and environment.............................      25.0      27.4      27.5      27.7      28.0      28.4      28.7      26.6      27.1      27.6      28.1      28.7      29.0
Agriculture...................................................      36.6      25.9      18.6      15.0      14.0      14.1      14.5      28.9      20.7      16.8      16.2      15.5      14.9
Commerce and housing credit...................................       3.2      -0.8       6.9       4.7       3.6       3.5       2.3      -5.2       6.4       5.5       4.9       4.0       3.2
Transportation................................................      46.9      51.1      55.0      57.5      59.7      62.1      63.8      51.0      54.8      55.7      55.3      56.8      57.9
Community and regional development............................      10.6      10.6      11.7      11.3      10.8      10.5      10.1      10.8      11.8      11.3      11.1      10.5      10.2
Education, training, employment, and social services..........      59.2      65.3      76.6      81.3      82.6      84.7      87.2      64.2      75.5      82.1      84.0      85.4      88.0
Health........................................................     154.5     175.3     201.5     224.4     243.3     250.7     264.8     173.8     190.7     212.0     231.7     251.8     271.1
Medicare......................................................     197.1     219.3     229.9     242.1     255.9     282.8     296.0     217.4     227.7     239.3     265.8     291.1     301.2
Income security...............................................     247.9     262.6     275.7     285.9     295.9     308.8     317.1     265.1     286.5     296.7     306.2     318.4     328.6
Social Security...............................................     409.4     433.6     455.1     477.1     501.6     528.1     556.8     433.5     456.1     478.0     501.3     526.7     554.1
Veterans benefits and services................................      47.1      45.4      51,6      53.6      55.8      60.4      59.6      45.1      51.1      53.6      55.8      60.4      59.6
Administration of justice.....................................      27.8      29.4      32.3      35.4      35.5      35.2      35.8      29.7      31.4      35.4      35.5      35.2      35.8
General government............................................      13.5      16.8      16.3      16.7      18.4      17.4      17.6      17.2      16.5      16.9      18.6      17.6      17.8
Net interest..................................................     223.2     206.4     188.1     175.2     161.5     144.7     127.2     204.2     180.5     174.1     164.8     151.0     137.1
Allowances....................................................  ........  ........       2.4       3.9       4.7       5.4       5.7  ........       2.4       3.3       4.0       4.9       5.3
Undistributed offsetting receipts.............................     -42.6     -47.7     -49.4     -60.4     -70.6     -58.9     -62.4     -47.0     -48.7     -61.0     -72.4     -59.9     -63.8
                                                               ---------------------------------------------------------------------------------------------------------------------------------
  Total.......................................................   1,788.8   1,856.2   1,960.6   2,016.2   2,076.7   2,168.7   2,223.9   1,854.9   1,962.1   2,025.4   2,110.7   2,208.3   2,271.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                                                                       TABLE 16.--DISCRETIONARY BUDGET AUTHORITY BY AGENCY
                                                                                    [In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                April estimates                                          Mid-session estimates
                                                                  2000   -----------------------------------------------------------------------------------------------------------------------
                                                                 Actual     2001      2002      2003      2004      2005      2006      2001      2002      2003      2004      2005      2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Legislative Branch............................................       2.5       2.7       3.0       3.0       3.1       3.1       3.2       2.8       3.0       3.0       3.1       3.1       3.2
Judicial Branch...............................................       3.7       4.0       4.6       4.5       4.6       4.7       4.9       4.0       4.6       4.5       4.6       4.7       4.9
Agriculture...................................................      17.1      19.3      17.9      18.8      19.0      19.4      19.8      19.3      17.9      18.8      19.0      19.4      19.8
Commerce......................................................       8.7       5.1       4.8       5.3       5.3       5.4       5.5       5.0       4.9       5.3       5.3       5.4       5.5
Defense-Military..............................................     287.3     296.3     310.5     319.0     327.9     337.1     346.6     301.9     328.9     337.9     347.4     357.1     367.1
Education.....................................................      29.4      39.9      44.5      45.5      47.0      48.1      49.1      40.1      44.6      45.5      47.0      48.1      49.1
Energy........................................................      17.8      19.7      19.2      19.7      20.3      20.7      21.2      20.0      19.2      19.7      20.3      20.7      21.2
Health and Human Services.....................................      45.5      53.9      56.7      61.7      63.3      64.9      66.5      54.1      56.8      61.8      63.4      65.0      66.7
Housing and Urban Development.................................      21.1      28.5      30.4      32.2      33.3      34.6      35.7      28.4      30.4      32.2      33.3      34.6      35.7
Interior......................................................       8.5      10.2       9.8      10.0      10.2      10.4      10.6      10.3       9.9      10.1      10.3      10.5      10.7
Justice.......................................................      18.8      20.9      19.9      21.9      22.0      22.3      22.8      20.9      20.0      22.1      22.2      22.4      22.9
Labor.........................................................       8.8      11.9      11.3      11.8      12.1      12.4      12.6      11.7      11.4      12.0      12.3      12.6      12.8
State.........................................................       7.8       7.5       9.1       9.3       9.5       9.7       9.9       7.5       9.1       9.3       9.5       9.7       9.9
Transportation................................................      14.5      18.4      16.3      17.3      17.7      18.1      18.5      18.5      16.3      17.3      17.7      18.1      18.5
Treasury......................................................      12.5      14.0      14.7      15.0      15.4      15.7      16.1      14.2      14.7      15.0      15.4      15.7      16.1
Veterans Affairs..............................................      20.8      22.4      23.4      23.9      24.4      25.0      25.6      22.3      23.2      23.7      24.3      24.8      25.3
Corps of Engineers............................................       4.1       4.5       3.9       4.0       4.1       4.2       4.3       4.7       3.9       4.0       4.1       4.2       4.3
Other Defense Civil Programs..................................       0.1       0.1       0.1       0.1       0.1       0.2       0.2       0.1       0.1       0.1       0.1       0.2       0.2
Environmental Protection Agency...............................       7.6       7.8       7.3       7.4       7.6       7.2       6.6       7.8       7.3       7.4       7.6       7.2       6.6
Executive Office of the President.............................       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3       0.3
Federal Emergency Management Agency...........................       3.9       2.4       2.2       2.3       2.3       2.4       2.4       2.4       2.2       2.3       2.3       2.4       2.4
General Services Administration...............................       (*)       0.5       0.5       0.5       0.5       0.5       0.5       0.5       0.5       0.5       0.5       0.5       0.5
International Assistance Programs.............................      13.6      12.9      12.8      13.1      13.4      13.6      13.9      13.0      12.9      13.2      13.5      13.8      14.1
National Aeronautics and Space Administration.................      13.6      14.3      14.5      15.0      15.4      15.7      16.1      14.3      14.5      15.0      15.4      15.7      16.1
National Science Foundation...................................       3.9       4.4       4.5       4.6       4.7       4.8       4.9       4.4       4.5       4.6       4.7       4.8       4.9
Office of Personnel Management................................       0.2       0.2       0.2       0.2       0.2       0.2       0.2       0.2       0.2       0.2       0.2       0.2       0.2
Small Business Administration.................................       0.9       0.3       0.5       0.6       0.6       0.6       0.6       0.9       0.5       0.6       0.6       0.6       0.6
Social Security Administration................................       5.7       6.0       6.4       6.5       6.7       6.8       7.0       6.0       6.4       6.5       6.7       6.8       7.0
Other Independent Agencies....................................       5.8       6.3       6.0       6.0       6.3       6.3       6.4       6.3       6.1       6.0       6.2       6.3       6.4
Allowances....................................................       (*)       (*)       5.3       5.4       5.6       5.7       5.8       (*)       5.4       5.0       5.1       5.3       5.5
                                                               ---------------------------------------------------------------------------------------------------------------------------------
  Total.......................................................     584.4     634.9     660.6     685.1     702.7     720.1     737.9     642.1     679.8     704.0     722.2     740.1     758.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                                                                      TABLE 17.--DISCRETIONARY BUDGET AUTHORITY BY FUNCTION
                                                                                    [In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                April estimates                                          Mid-session estimates
                                                                  2000   -----------------------------------------------------------------------------------------------------------------------
                                                                 Actual     2001      2002      2003      2004      2005      2006      2001      2002      2003      2004      2005      2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National defense..............................................     300.8     311.3     325.1     333.9     343.2     352.7     362.5     317.1     343.7     353.0     362.8     372.7     383.1
International affairs.........................................      23.5      22.7      23.9      24.4      24.9      25.5      26.0      22.7      24.0      24.5      25.0      25.6      26.1
General science, space, and technology........................      19.2      20.9      21.2      21.9      22.4      22.9      23.5      20.9      21.2      21.9      22.4      22.9      23.5
Energy........................................................       2.7       3.1       2.8       2.9       3.1       3.2       3.3       3.1       2.8       2.9       3.1       3.2       3.3
Natural resources and environment.............................      24.6      28.7      26.4      27.0      27.6      27.6      27.4      28.9      26.4      27.1      27.6      27.7      27.5
Agriculture...................................................       4.7       5.1       4.8       5.2       5.2       5.3       5.4       5.1       4.8       5.2       5.2       5.3       5.4
Commerce and housing credit...................................       5.1       0.7      -0.3      -0.1      -0.4      -0.5      -0.5       0.6      -0.1      -0.1      -0.4      -0.5      -0.5
Transportation................................................      15.2      18.9      16.8      17.8      18.2      18.6      19.0      19.0      16.8      17.8      18.2      18.6      19.0
Community and regional development............................      12.2      11.0      10.4      10.7      10.9      11.1      11.3      11.6      10.4      10.7      10.9      11.1      11.3
Education, training, employment, and social services..........      44.4      61.1      65.4      67.1      69.0      70.7      72.3      61.1      65.7      67.4      69.4      71.0      72.7
Health........................................................      33.8      38.9      41.0      45.7      46.9      48.1      49.4      38.8      40.9      45.6      46.8      48.0      49.3
Medicare......................................................       3.0       3.4       3.5       3.5       3.6       3.7       3.8       3.4       3.5       3.5       3.6       3.7       3.8
Income security...............................................      31.6      39.5      42.8      45.1      46.7      48.3      49.6      39.7      42.9      45.1      46.8      48.4      49.6
Social Security...............................................       3.2       3.4       3.5       3.6       3.7       3.8       3.8       3.4       3.5       3.6       3.7       3.8       3.8
Veterans benefits and services................................      20.9      22.5      23.5      24.0      24.5      25.1      25.7      22.4      23.3      23.8      24.3      24.9      25.4
Administration of justice.....................................      27.1      30.0      29.8      31.9      32.3      32.8      33.5      30.0      29.8      31.9      32.3      32.8      33.5
General government............................................      12.4      14.0      14.8      15.0      15.4      15.7      16.0      14.2      14.8      15.1      15.4      15.7      16.1
Allowances....................................................  ........  ........       5.3       5.4       5.6       5.7       5.8  ........       5.4       5.0       5.1       5.3       5.5
                                                               ---------------------------------------------------------------------------------------------------------------------------------
  Total.......................................................     584.4     634.9     660.6     685.1     702.7     720.1     737.9     642.1     679.8     704.0     722.2     740.1     758.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         TABLE 18.--MID-SESSION BASELINE TOTALS
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                   2001      2002      2003      2004      2005      2006      2007      2008      2009      2010      2011    2002-2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Discretionary:
    Defense....................     304.0     317.1     325.5     336.8     351.0     357.5     363.7     376.5     387.3     398.4     413.9    3,627.8
    Non-defense................     347.4     368.6     387.3     398.0     406.2     416.4     427.8     439.2     450.7     462.6     474.9    4,231.6
                                ------------------------------------------------------------------------------------------------------------------------
      Subtotal, discretionary..     651.5     685.7     712.7     734.7     757.2     773.9     791.5     815.7     838.0     861.0     888.8    7,859.4
Mandatory:
    Social Security............     429.9     452.5     474.4     497.6     522.9     550.3     580.4     613.6     651.5     693.5     738.4    5,775.1
    Medicare...................     214.2     224.3     235.8     248.1     267.4     276.4     297.0     315.9     336.3     357.8     387.0    2,946.0
    Medicaid...................     130.3     143.0     155.1     168.9     183.6     199.3     216.5     234.8     254.9     276.7     300.3    2,133.1
    Other......................     224.9     262.9     259.9     271.8     293.8     300.3     306.9     321.9     334.6     347.5     362.8    3,062.5
                                ------------------------------------------------------------------------------------------------------------------------
      Subtotal, mandatory......     999.3   1,082.7   1,125.2   1,186.4   1,267.7   1,326.3   1,400.7   1,486.2   1,577.3   1,675.5   1,788.6   13,916.7
      Net interest.............     204.2     180.2     173.1     162.7     147.1     130.6     112.8      93.8      72.1      47.7      19.7    1,139.8
                                ------------------------------------------------------------------------------------------------------------------------
Total, outlays.................   1,855.0   1,948.7   2,011.0   2,083.8   2,172.0   2,230.9   2,305.0   2,395.8   2,487.4   2,584.3   2,697.2   22,916.0
Receipts.......................   2,012.7   2,135.3   2,221.5   2,333.5   2,476.1   2,573.1   2,693.0   2,826.6   2,972.6   3,142.9   3,383.4   26,758.0
                                ------------------------------------------------------------------------------------------------------------------------
Surplus........................     157.8     186.6     210.5     249.8     304.1     342.2     388.0     430.9     485.2     558.6     686.2    3,842.0
    On-budget surplus\1\.......       1.9      18.0      18.2      38.9      67.8      92.0     122.2     150.3     191.4     247.3     357.7    1,303.8
    Postal service surplus.....      -1.3      -2.6       0.1       0.2       0.8       1.2      -0.1       0.7       0.9       1.1       1.4        3.7
    Social Security surplus\1\.     157.1     171.2     192.2     210.6     235.5     248.9     265.9     279.9     293.0     310.2     327.1    2,534.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The 2001 estimate is adjusted to correct for $5.6 billion in prior year receipts. See text box on page 9 and Appendix A on page 49.


                                                    TABLE 19.--FEDERAL GOVERNMENT FINANCING AND DEBT
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    Estimate
                                                2000  --------------------------------------------------------------------------------------------------
                                               Actual    2001     2002     2003     2004     2005     2006     2007     2008     2009     2010     2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Financing:
  Unified budget surplus....................      236      158      173      195      217      254      281      314      350      398      447      484
  Financing other than the change in debt
   held by the public:
    Premiums paid (-) on buybacks of               -6      -11      -10  .......  .......  .......  .......  .......  .......  .......  .......  .......
     Treasury securities\1\.................
    Changes in: \2\
      Treasury operating cash balance.......        4       -2       -5  .......       -5  .......  .......       -5  .......  .......       -5  .......
      Checks outstanding, deposit funds,            3       -4        1  .......  .......  .......  .......  .......  .......  .......  .......  .......
       etc.\3\..............................
    Seigniorage on coins....................        2        1        1        2        2        2        2        2        2        2        2        2
    Less: Net financing disbursements:
      Direct loan financing accounts........      -22      -31       -4      -17      -18      -17      -16      -16      -16      -16      -16      -15
      Guaranteed loan financing accounts....        4       -1       -1        1      (*)      (*)        1        1        1        1        1        1
                                             -----------------------------------------------------------------------------------------------------------
        Total, financing other than the           -13      -48      -17      -15      -21      -16      -14      -19      -14      -14      -18      -13
         change in debt held by the public..
                                             -----------------------------------------------------------------------------------------------------------
          Total, amount available to repay        223      110      155      180      196      239      267      295      337      385      429      471
           debt held by the public..........
  Change in debt held by the public: \4\ \5\
    Change in debt held by the public.......     -223     -110     -155     -180     -196     -239     -267     -295     -337     -385     -155      -35
    Less change in excess balances..........  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......     -274     -436
                                             -----------------------------------------------------------------------------------------------------------
      Change in net indebtedness............     -223     -110     -155     -180     -196     -239     -267     -295     -337     -385     1129     -471
Debt Subject to Statutory Limitation, End of
 Year:
  Debt issued by Treasury...................    5,601    5,727    5,829    5,935    6,040    6,125    6,201    6,266    6,303    6,310    6,568    6,963
  Adjustment for Treasury debt not subject        -15      -15      -15      -15      -15      -15      -15      -15      -15      -15      -15      -15
   to limitation and agency debt subject to
   limitation\6\............................
  Adjustment for discount and premium\7\....        6        6        6        6        6        6        6        6        6        6        6        6
                                             -----------------------------------------------------------------------------------------------------------
    Total, debt subject to statutory            5,592    5,717    5,819    5,926    6,031    6,115    6,192    6,256    6,294    6,300    6,558    6,954
     limitation\8\..........................
Debt Outstanding, End of Year:
  Gross Federal debt: \9\
    Debt issued by Treasury.................    5,601    5,727    5,829    5,935    6,040    6,125    6,201    6,266    6,303    6,310    6,568    6,963
    Debt issued by other agencies...........       28       27       27       26       25       23       22       20       20       20       20       20
                                             -----------------------------------------------------------------------------------------------------------
      Total, gross Federal debt.............    5,629    5,753    5,855    5,961    6,065    6,148    6,223    6,286    6,323    6,330    6,588    6,983
  Held by:
    Debt securities held as assets by           2,219    2,453    2,711    2,996    3,296    3,618    3,959    4,317    4,691    5,082    5,495    5,926
     Government accounts....................
    Debt securities held as assets by the
     public: \5\
      Debt held by the public...............    3,410    3,300    3,145    2,965    2,769    2,531    2,264    1,969    1,632    1,248    1,093    1,057
      Less excess balances..................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......     -274     -710
                                             -----------------------------------------------------------------------------------------------------------
        Net indebtedness\10\................    3,410    3,300    3,145    2,965    2,769    2,531    2,264    1,969    1,632    1,248      819      348
--------------------------------------------------------------------------------------------------------------------------------------------------------
* = $500 million or less.
 
\1\ This table includes estimates for Treasury buybacks of outstanding securities only through 2002. These estimates assume that Treasury will buy back
  $35 billion (face value) of securities in 2001 (in terms of settlements) and $40 billion in 2002. The premiums paid on buybacks are based on
  experience to date and the interest rates in the economic assumptions.
\2\ A decrease in the Treasury operating cash balance (which is an asset) would be a means of financing a deficit and therefore has a positive sign. An
  increase in checks outstanding or deposit fund balances (which are liabilities) would also be a means of financing a deficit and therefore would also
  have a positive sign.
\3\ Besides checks outstanding and deposit funds, includes accrued interest payable on Treasury debt, miscellaneous liability accounts, allocations of
  special drawing rights, and, as an offset, cash and monetary assets other than the Treasury operating cash balance, miscellaneous asset accounts, and
  profit on sale of gold.
\4\ Indian tribal funds that are owned by the Indian tribes and held and managed in a fiduciary capacity by the Government on the tribes' behalf were
  reclassified from trust funds to deposit funds as of October 1, 1999. Their holdings of Treasury securities were accordingly reclassified from debt
  held by Government accounts to debt held by the public, which affected the change in debt held by the public without affecting borrowing or the
  repayment of debt.
\5\ The amount of the unified budget surplus that is available to repay debt held by the public is estimated to be more than the amount of debt that is
  available to be redeemed in 2010 and subsequent years. The difference is assumed to be held as ``excess balances.'' (``Excess'' means in excess of the
  amounts held for operational and programmatic purposes). The debt held by the public is the amount of Federal debt securities held by the public. The
  net indebtedness is the debt held by the public less the excess balances.
\6\ Consists primarily of Federal Financing Bank debt.
\7\ Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than zero-coupon bonds) and unrealized discount
  on Government account series securities.
\8\ The statutory debt limit is $5,950 billion.
\9\ Treasury securities held by the public and zero-coupon bonds held by Government accounts are almost entirely measured at sales price plus amortized
  discount or less amortized premium. Agency debt is almost entirely measured at face value. Treasury securities in the Government account series are
  measured at face value less unrealized discount (if any).
\10\ At the end of 2000, the Federal Reserve Banks held $511 billion of Federal securities and the rest of the public held $2,899 billion. Debt held by
  the Federal Reserve Banks is not estimated for future years.

    Chairman Nussle. Thank you, Director Daniels.
    Let me begin with a pretty basic question. What happened to 
the surplus? When you came before the committee earlier this 
year and through all of the projections, we were seeing huge 
surpluses. What happened to those surpluses?
    Mr. Daniels. The first thing that happened is something 
that needed to happen. A surplus of 275 or $281 billion, 
depending on which set of numbers you look at, was vastly 
bigger than it should have been, vastly bigger than the Nation 
had any use for, and therefore a bipartisanship majority acted 
to leave much of that with the taxpayers who earned the money 
in the first place.
    I have often then described the remainder of the shift from 
the baseline of February or April to today in this way. We 
started with a 14-cent overcharge of the American people, 14 
cents at least of revenue collected out of each dollar for 
which there was no expenditure need. About 2 cents of that was 
returned to taxpayers in the first installment of tax relief. 
About 2 cents of that did not materialize because of the 
economic slowdown. About a cent and a half was spent by the 
Congress on the defense supplemental, urgent needs in defense, 
and on agricultural income support. And a cent and a half is 
still there, but was moved into 2002 during the tax relief bill 
writing. So we still have 8 cents in 2001 remaining; still the 
second largest surplus ever and still at, by our calculations, 
the level of surplus attributable to Social Security.
    Chairman Nussle. Does one penny of Medicare that comes in 
through the FICA taxes, is that used for anything else besides 
Medicare?
    Mr. Daniels. No, sir. All of the cash coming in from 
Medicare and another $50 billion besides is required to pay the 
bills of Medicare.
    Chairman Nussle. So Medicare is actually, as you have 
discussed before, running a deficit throughout the budget?
    Mr. Daniels. Well, I prefer to use the word ``shortfall'' 
or to at least say that it does not run a surplus. Like most 
programs of the Federal Government, it is a consumer of general 
revenues.
    I think probably the most accurate thing to say is that the 
surplus is fictional. But I would simply observe that it does 
cost more than it takes in.
    Because we maintain the 50 year old and/or 40 some year 
old--and I would say archaic division between hospital costs 
and the rest of health care in Medicare--we do for the moment 
at least maintain a trust fund attributable only to the 
hospital portion. Now that trust fund of course will grow this 
year by 30 some billion dollars of bonds exactly as it would 
have under any surplus outcome.
    Chairman Nussle. Does one penny of Social Security that 
comes in, the same way, used for anything else besides Social 
Security?
    Mr. Daniels. It is used for debt reduction and the cash 
financing of the Federal Government. Some of it is used 
depending on what snapshot, and what window you take a snapshot 
of or through. But some of it is used for loans to students 
under the--in the last few years the Federal Government went 
into the banking business of making direct loans to students, 
and that is a consumer.
    The biggest use by far, most of it is used for debt 
reduction. This year we actually used 10 billion of it, because 
we are prepaying the national mortgage. About $10 billion of it 
was used in premiums to bring in debt that was not due.
    Chairman Nussle. According to the projections that you have 
there before you, that you are presenting to us today, does the 
change in the surplus figures that you have, even though we are 
still running the second largest surplus in history--we are not 
running the first largest surplus in history any longer--are we 
still able to pay off the debt that matures and pay off the 
publicly held debt that you can pay off as we committed to as 
part of this budget over the next 10 years?
    Is that still possible under this budget plan, according to 
your projections?
    Mr. Daniels. Absolutely.
    Our estimate and CBO's and the Fed's are all on top of each 
other as somewhere between 2 and the 2.2 or 2.3 trillion is 
possible without punitive penalties over the time period, and 
the surplus is available to do that.
    The Social Security surplus alone is $2.55 trillion, let 
alone the remaining budget surplus. So the answer to that 
question is indisputably yes.
    Chairman Nussle. That is on top of the $49 billion that we 
have already paid toward the publicly-held debt over the last 4 
years now?
    Mr. Daniels. Yes, that is correct. At the September 30th 
turn--OK, incidentally, our projection is for exactly the 3.300 
trillion balance. That is down from 3.8 just a few years ago 
and headed south at a rapid rate, as you know.
    I have observed elsewhere we are going to pass an important 
landmark in 2002. The interest cost to the Federal Government, 
the carrying charge, so to speak, of the national debt will 
drop into single digits for the first time in over a quarter 
century.
    The burden of the debt, as the debt is coming down, is 
shrinking fast and will be down to 9 cents on the dollar; and, 
of course, it was in the high teens just a few years ago.
    Chairman Nussle. Finally, what is your advice and the 
advice of the President of the United States with regard to 
spending as we move into the very important final month of the 
appropriations process for 2002? As we move through those 
appropriations bills in the House and Senate, what is your 
advice in order to stay within this budget and not do any more 
harm to the economy that has already been done? What is your 
spending advice with regard to this final stage?
    Mr. Daniels. The President's advice would be that the 
Congress should honor the budget resolution, that it should not 
exceed it. He will be a participant, if necessary, in trying to 
see that it is not exceeded. But, if we live within it, we will 
grow spending at a moderate rate. We will make a major first 
step toward the repair of our national defenses, which I think 
a bipartisan majority believes is overdue and necessary.
    We will take a big step forward in--education, medical 
research and other key priorities, were marked out in the 
President's budget; and it seemed to have bipartisan support in 
the Congress. Those things we can do as long as we do restrain 
spending growth to the level that the resolution calls for; and 
I think from many conversations with Members and particularly 
leaders of the appropriations process, we are on track to do 
that.
    Chairman Nussle. As the President's chief budget watchdog, 
if appropriations go outside the boundaries, are you prepared 
to advise the President to veto spending bills that bust the 
budget?
    Mr. Daniels. I always start the answer to this hypothetical 
question by----
    Chairman Nussle. I didn't ask whether he would. I was 
asking whether you would give him that advice.
    Mr. Daniels. Well, I do like to start by saying that we 
hope that the advice need never be given and that we can work 
with the Congress, as I think we have every opportunity to do, 
to knit together the budget under the resolution and without 
that kind of a disagreement.
    But there has been at least the one occasion already this 
year where there were suggestions of spending we thought was 
beyond what was necessary, and we did give that advice, and I 
think the President was prepared to act on it if it had finally 
proven necessary.
    Chairman Nussle. Thank you.
    Mr. Spratt.
    Mr. Spratt. Mr. Daniels, as you know, CBO is the 
scorekeeper as far as Congress is concerned. When we look at 
the implications of spending initiatives and tax cuts both, we 
look to CBO and to the Joint Tax Committee for our estimates.
    CBO has sent us a forecast that is very different from 
yours in terms of what can be accommodated. You call the 
differences minuscule, but by our calculation, under CBO's--if 
I understood your proposal, you have got $767 billion in tax 
cuts, $315 billion in tax cuts is still to come--and other 
spending proposals like Medicare that add up to $767 billion 
that cannot be done, if CBO is correct, without further 
degradation of the bottom line, without further digging into 
the Medicare surplus and into the Social Security surplus and 
aggravating what is becoming a structural on-budget deficit.
    Now, let me turn first to the question, ``Where did the 
surplus go?''
    You have got a deceptively simple chart that is table 1 in 
your booklet. It is on page 4.
    Table 1 shows that when you sent your April estimate up 
with your budget, we had a surplus in April, just last April, 
of $281 billion. The Social Security surplus was $159 billion 
of that. So the non-Social Security surplus in April was $122 
billion. That was after factoring in the budget proposals that 
had been made through April.
    You then show the changes that have occurred since April. 
And if you add up the changes due to legislation, they come to 
$76 billion. If you add up the changes due to economic and 
technical adjustments, they come to $46 billion. So about 38 
percent of the disappearance of the surplus is attributable to 
economic and technical adjustments, about 62 percent is due to 
policy changes such as the transfer of corporate tax payments 
from this year to next year, the rebate, farm assistance, the 
supplemental, the defense supplemental, all things that the 
Bush Administration and the Congress for the most part 
supported.
    So most of those changes were really policy changes, were 
they not, two to one, as opposed to economic and technical 
changes; is that correct?
    Mr. Daniels. Yes, sir.
    Mr. Spratt. So the budget surplus was dissipated two-thirds 
by policy changes that the Bush Administration supported, and 
when the measures came to them, they signed. And all of the 
spending in prior years, the spending increase from 2000 to 
2001, is subsumed in that $281 billion surplus in April.
    In other words, when that surplus was calculated at $281 
billion, it included all of this cost growth in prior years. We 
still had a big surplus, $281 billion, $122 billion after 
Social Security, notwithstanding the increases in discretionary 
spending in the prior year, that is correct, isn't it? I am not 
misreading this chart.
    Mr. Daniels. No, sir. I am waiting to see wherein we 
differ.
    Mr. Spratt. Well, so you agree with me.
    Another interesting thing is, under economic and technical 
adjustments, table 1, the amount comes in total to $46 billion 
this year; and over the 10-year period of time, there are some 
puts and takes, pluses and minuses, but it never gets bigger 
than $46 billion over the 10-year period of time from 2002 to 
2011. So most of the degradation in the surplus we are seeing 
in the out-years is not attributable therefore to economic and 
technical factors; is that correct?
    Mr. Daniels. That is correct.
    Mr. Spratt. That is policy, too. And the main policy that 
you factored in here is the tax cut; is it not?
    Mr. Daniels. That would be the single largest.
    Mr. Spratt. I beg your pardon?
    Mr. Daniels. Yes. That would be the single largest change.
    Mr. Spratt. Your letter today to Mr. Gephardt says, ``Since 
April there has been a decline in the budget surplus due 
largely to the economic slowdown.''
    But the line of questioning we just went through indicates 
that 38 percent was due to the economic slowdown, some of that 
is technical, some of it is economic, and 62 percent was due to 
other factors, namely enacted legislation and policy proposal 
that the administration supported. Is that correct?
    Mr. Daniels. Yes. I think it is the same as the analysis 
that I gave, in my simple-minded way, by reducing it to cents 
on the Federal dollar. The single biggest contributor by a 
small amount is the economic slowdown. But if you aggregate the 
other choices made, I would agree with you on a bipartisan 
basis you get a slightly larger amount. You know we should all 
acknowledge that the last cent and a half here, the corporate 
tax shift is money that is still going to come in.
    Mr. Spratt. But 62 percent is due to other factors, only 38 
percent to the economic slowdown?
    Mr. Daniels. Fair enough.
    Mr. Spratt. All of that working out on the long term, even 
though we have got a decline in the bottom line and an invasion 
of the Medicare and Social Security trust funds into the 
future, that by and large is not attributable to these economic 
and technical factors, too, because you are assuming that 
beginning next quarter this economy rebounds at a pretty smart 
rate, 3.2 percent I believe.
    Mr. Daniels. We are. Let me interject. I know--because we 
have discussed this before--that you misspoke a moment ago, 
that the Trust Funds are never invaded. The trust funds are 
never affected. The trust funds are at exactly the same size 
that they would be under any other policy mix. So, I think, as 
you had put it before, I think in the correct way, Social 
Security revenues and so forth.
    Mr. Spratt. I thought you were drawing a distinction 
between the Social Security Trust Fund and the Medicare Trust 
Fund. Page 1 of your mid-session review says, ``In order to 
fully reserve the Social Security surplus for debt reduction, 
any further initiatives beyond those included in this review 
will have to be accompanied by offsets in other areas.''
    Mr. Daniels. No disagreement there. I used the word 
``surplus.'' That is the right word to use. Since we are 
rummaging around my report, if you will look at page 13, table 
4, we make the point which is sometimes overlooked or 
misunderstood that under any surplus projection the current 
projection--this just happens to be 2002. It wouldn't make any 
difference what year we use or much larger ones. Total Medicare 
spending on benefits will be exactly the same. Every penny will 
be paid. The Trust Fund balance will be exactly the same, and 
it will increase by exactly as much and so forth.
    So I am just--I don't mean to pick on words, but I do think 
that they are important here. You are absolutely right when you 
speak of the surplus and whether we are going to be able to 
protect as much of it as you think is wise. I didn't want 
anyone confused that the trust funds were any smaller than they 
deserve to be.
    Mr. Spratt. Well, the difference is, if you have a spending 
initiative that is not offset, then you will borrow the money 
from Social Security to fund that initiative. Sure, Treasury 
will give a bond to the Social Security trustees in return for 
that borrowing, but that will be to the extent of the value of 
that bond, that much less debt that will be paid down in that 
particular year.
    Mr. Daniels. Well, now we are at the right point. The 
question is finally that last increment of debt to be paid down 
and how much is enough, how soon.
    Mr. Spratt. I am reading your own language, and I take it 
you do believe differently with respect to the Social Security 
Trust Fund, that we should only use it for the buy down of 
outstanding debt.
    Mr. Daniels. Yes, that is the President's position.
    Mr. Spratt. OK. Let me ask you about the Medicare Trust 
Fund, and we have disagreed about this from the first day you 
testified here. The administration has taken one position; the 
Congress--both parties have taken, up until now, a different 
position.
    If you look at your forecast again on table 3, page 8, OMB 
shows that your budget--if I am reading this correctly--will 
invade the Medicare Trust Fund, every year through 2006.
    Now, this particular rendition of your budget includes the 
$18.4 billion addition for defense, but it doesn't include any 
follow-on increment, nothing for transformation. In fact, you 
say, ``Pending the completion of the defense strategy review, 
this review assumes a current services budget for DOD in the 
out-years based on the proposed 2002 level.''
    My question to you is: You also described this as a first 
installment. But I look out 9 years, waiting on the other shoe 
to drop, and I don't ever see it drop. I don't see the second 
increment, the increment that will go to fund transformation. 
Where does that come? How is it paid for?
    Mr. Daniels. Well, it will come if and when the President 
approves the recommendations from the Defense Department or 
elsewhere for any increases. It can come from two places, 
probably from a combination of two. One, of course, which is--
somehow usually brushed by in these conversations is the 
embedded base of spending in the Federal Government. You know, 
all of the numbers on the chart behind you assume that the 
entire $1.9 trillion edifice of spending just lumbers on 
absolutely untouched and grows with inflation.
    The numbers which mostly I can read as I look across and 
see minus 40, minus 38, 40, 41, 42 and so forth, these amount 
to 2 percent of the revenue, less than that by then, of the 
Federal Government. And, you know, this should not be beyond 
your ability to manage.
    So one place that any increases come from is from the 
redeployment from old, outmoded, duplicative, perhaps failed 
programs to new.
    Also, there remains under either projection here hundreds 
of billions of dollars of on-budget surplus uncommitted. Even 
after the defense increase, the Medicare prescription drug 
increase, that is already incorporated into our numbers, there 
is almost $600 billion on-budget surplus uncommitted so far and 
available to be distributed among all of those programs.
    Mr. Spratt. That is only if we use OMB instead of CBO's 
forecast?
    Mr. Daniels. That is right. The differences between the two 
are very small, even here. It is not particularly a 
disagreement about receipts. The largest single difference 
between our professionals' forecast and the CBO forecast, has 
to do with the cost of Medicare.
    CBO sees the cost of today's Medicare program growing more 
rapidly, $224 billion more over the 10 years, than we do. And 
when we get a chance I know our folks and theirs will want to 
counsel back and forth about who is right.
    Mr. Spratt. The extra money you are talking about also 
includes the Medicare surplus, which gets back to the 
fundamental disagreement between us. We have to recant and 
abandon all of our commitments that we have made over the last 
couple of years, legislation brought to the floor, statements 
made in earnest. We have to trash those in order to have that 
additional money to spend. We have got to spend the Medicare 
surplus to have that kind of walking-around money that you are 
talking about.
    Mr. Daniels. Well, it is not my place to recommend how 
folks deal with those things. I would say that the commitment 
that was made in time of deficit, in time of real deficits, 
just yesterday--really a few years back, although I must say, 
and it has been written a thousand times now in all of the 
newspapers that can I find, that is fiction. But, you know, 
some fictions are useful; and I think this was one because it 
did help bring greater discipline. But it doesn't make it, at 
least in our reading, any less fictional when you really look 
at what Medicare takes in and costs.
    Mr. Spratt. Regardless of the administration's position, my 
counterparts on the other side of the aisle, wrote into the 
budget resolution a provision with respect to defense and the 
farm bill. It effectively gave the chairman substantial 
authority, unprecedented authority, to adjust the budget 
allocations to those two programs by whatever amount he deemed 
advisable and wise after looking at Rumsfeld's report on 
transformation, in the case of defense.
    But we put a limit on it. They put a limit on it. That is, 
we limited him from invading the Medicare Trust Fund.
    So now the chairman of the Armed Services Committee and the 
chairman of the Budget Committee have a hard decision to make. 
If they add the $18.4 billion additional funding for defense 
which the administration is seeking, they have got to take it 
out of the Medicare Trust Fund. That is where it will come. It 
will mean a deeper, more lasting invasion of the Medicare Trust 
Fund. So they have got to not just recant political rhetoric, 
they have got to violate the written letter of the budget 
resolution that we--that the Congress--adopted just months ago.
    How do you resolve that? Are you saying to the Congress 
that we should ignore the Medicare Trust Fund since it is not a 
Trust Fund, it is an artificial overage, as you put it, in the 
resolution and go ahead and pay for the defense increases out 
of the Medicare Trust Fund?
    Mr. Daniels. First of all, I would reassure the chairman as 
he thinks about his decision, whatever he is doing does not 
affect the Medicare Trust Fund as the chart behind you 
indicates. It doesn't say anything about the level of the Trust 
Fund. It talks about the surplus, the part attributable to 
that.
    It is my happy opportunity to let Chairman Nussle know that 
if the budget resolution is funded all of the way, as the 
President would recommend, the Medicare Trust Fund next year 
will be $234 billion.
    If for some reason Congress decides not to fund it and not 
to fund any of the defense requests, the Medicare Trust Fund 
next year will be $234 billion. It will have no affect 
whatsoever on the level of the Trust Fund, let alone benefits 
paid.
    I just think we do need to be precise about this, so as to 
not lead any recipients or supporters of that program in any 
confusion.
    I do understand the point you are making, that there will 
have to be an active decision made to make an additional 
request, and I very much respect the position of the chairman 
and others who have said they want to see a real showing of the 
justification and the strategy and so forth. I believe those 
things are in the works and that showing will be made, but that 
is a position I think we all respect.
    Mr. Spratt. Let me make one final point and then we will 
turn to others. On several occasions in your report and in your 
testimony, you refer to explosive spending increases to the 
biggest one-time increase in discretionary spending, 2001 over 
2000. Let me just say to counter that and see how you respond 
to this; on page 5 of your mid-session review, you state that 
last year's appropriations include the largest 1-year spending 
increase in history, about $50 billion over 2000. I take it 
that is budget authority. Isn't it true that BA, budget 
authority, for advanced appropriations more than doubled from 
2000 to 2001, from $11 billion to $23.5 billion, and that kind 
of artificially inflates the number for 2001?
    Mr. Daniels. Well, advanced appropriations have multiplied. 
It is certainly true. It is one of the--as we see it--unwise 
practices that we are working hard to try to corral and curb 
along with earmarks, for example, and the misuse of the 
emergency designation. So, yes, that was a contributing factor. 
It does lead to real spending, but I agree that it certainly 
was a factor in generating this very large----
    Mr. Spratt. So that we can have an apples-to-apples 
comparison, this simple bar chart here shows you if you back 
out advanced appropriations and supplementals and just deal 
with regularly appropriated discretionary spending, from the 
year 2000 to the year 2001 the increase was $38 billion, 6.7 
percent. This year from 2001 to 2002, your first fiscal year 
will be--full fiscal year will be 2002--the increase is $44 
billion. That is using budget authority. Do you dispute that?
    Mr. Daniels. No, but it makes in my judgment, one very 
fundamental error. You say if we don't count supplementals. 
Multiple supplementals of the last year amounted to--I have to 
check--$20-odd billion or more. The President has said this 
year we were going to be much more guarded about that, and of 
course the only supplemental that has passed and was signed was 
that essentially for defense, about $6 billion.
    So, two things: Number one, I think the 2001 level is 
dramatically understated. I don't think it is fair not to count 
the supplementals. Also, when you do put the supplemental that 
was passed this year into the base for the preceding year, it 
brings that 7.2 percent down to a little under 6. I understand 
the adjustments you are making, but I think that one is not a 
fair representation.
    Mr. Spratt. Let us look at it differently, and this will be 
the last question. Look on page 36, if you will, of your mid-
session review, table 12. You have the mid-session estimates 
there of discretionary outlays, actual spending. This year, 
fiscal year 2001, you are estimating actual spending at $651.4 
billion. About 2 or $3 billion of that is in supplementals, the 
defense supplemental. Next year, your estimate of outlays is 
$699 billion. If you deduct the supplemental from this year, 
that was your policy, and just look at what the level of 
spending was as appropriated. You have got a $50 billion 
increase from this year to next year. So while you are decrying 
the $50 billion increase from 2000 to 2001, in effect you have 
got the same thing, with an outlay increase in your budget 
request from this year to next year.
    Mr. Daniels. First of all, of course, the Congress votes 
that budget authority outlays can move around based on--and not 
in lockstep with the spending Congress votes for--the timing of 
when the program finally spends.
    I think the general comment I would make about the spending 
of last year--and I think we have been fairly consistent in 
this--is the President has taken note that there were very 
rapid increases. Chairman Nussle's earlier chart showed the way 
in which spending took flight above and beyond the caps that 
were in law as soon as the surplus arrived about 3 years ago. I 
think when we have noted that, it is less for the purpose of 
looking in the rear-view mirror than really for purposes of 
saying that we can--because there was an awful lot of new 
spending done last year, and the previous couple, we can 
moderate the rate of growth of spending in a lot of these 
programs; in many cases I believe, very much a need for 
digestion, a pause and reflection on what all this new 
spending--how effective it has all been. And I think that is 
the main reason to draw attention to it.
    Mr. Spratt. I don't disagree with that, and I think every 
dime we spend ought to be scrutinized and heavily justified. 
But nevertheless, when you look at these numbers, you are not 
exactly pulling in the reins yourself. You have got a 
substantial increase this year over next year in your own 
budget, and defense is part of it. You are--
    Mr. Daniels. That's correct, sir, we----
    Mr. Spratt [continuing]. Billion in defense over and above 
this year.
    Mr. Daniels. I think when the budget was presented this 
year, we talked in terms of reasonable growth, not cuts and 
freezes and that sort of thing. The Nation does have needs, and 
clearly in defense probably more than other areas; probably 
education behind it. The President supported a significant step 
forward, but the budget presented, even as amended, year over 
year, is about 5.9 percent above the final 2001 number, and 
that does reflect a moderation in the growth rate that preceded 
it.
    Mr. Spratt. Let me just say in closing, with respect to the 
numbers that the Chairman showed, putting the caps, I was one 
of the budget principals who helped negotiate the Balanced 
Budget Agreement of 1997. When we set the out-year caps, we 
knew they were extremely tight. We were resolved to adhere to 
them if necessary. As it turned out, we were in unified surplus 
the first year out of the box; 1998, we had a unified surplus. 
As a consequence we, de facto, abandoned those and went back to 
budget reality for out-year spending. So those were 
unrealistically low caps to start out with.
    Thank you very much, Mr. Daniels.
    Chairman Nussle. Mr. Sununu.
    Mr. Sununu. Thank you very much, Mr. Chairman. I very much 
appreciate the closing remarks of the ranking member, and in 
general agree with some of the points he was making with those 
final slides. We can debate about the budget mechanics, but 
whether the increase year on year from 2001 to 2002 is 5\1/2\ 
percent or 6\1/2\ percent or even, as one of his slides 
suggested, 8 percent, I think the point is there. It is a 
pretty significant increase over last year, and in that regard 
it completely undercuts the point he was making at the 
beginning of his presentation that somehow we can't possibly 
adhere to the 2002 budget arrangement, the caps, the limits, 
the appropriated levels; that we have to reopen the budget for 
some reason at this point.
    I don't think there is a need to do that. Certainly in the 
35 years of deficit spending that occurred before I became a 
Member of Congress, there was never a discussion about 
reopening the budget because we are running a deficit. We have 
had surpluses now for 4 consecutive years, and I think we did 
put together a budget that is reasonable. And if we hold to the 
limits of the 2002 budget agreement, we will have resources to 
increase education spending by the 10 or 11 percent that the 
President included in his budget. We will have resources to 
invest in research and development, new medical or scientific 
breakthroughs, to begin rebuilding our defense infrastructure.
    That doesn't mean that we won't have difficult choices to 
make during the appropriations process. I think that is to be 
expected--it seems to me it is more clear than ever in hearing 
this discussion--that Chairman Nussle's point about spending 
being the problem, spending driving deficits, is very much the 
case; because even in an environment where we allow for a 5 
percent or 6 percent or 8 percent increase in discretionary 
spending, for some in the House that is not enough, that there 
is never enough. And there we get back to one of the 
fundamental arguments for cutting taxes in the first place is 
to control the revenue flow.
    We still have record revenues. We have CBO and OMB agreeing 
on the collection of revenues, but more tax collections than 
ever in the history of the United States. I think we ought to 
recognize that we cannot grow the Federal budget faster than an 
average family is growing their budget, that we do have to live 
within our own means.
    I would like to touch on two points that were also raised, 
the causes of the change in the surplus level.
    First, the economic slowdown. I don't think there is anyone 
in this room, anyone in Congress or around the country who is 
pleased that we have such a significant economic slowdown. In 
fact, as the President recognized the slowdown in the economy 
at the beginning of the year, there were some people that 
criticized him for doing that; he is talking down the economy, 
he is somehow precipitating this slowdown. We see now that his 
comments and concerns were right on the mark; that the economic 
slowdown is the biggest single cause in the reduction in 
revenues and the smaller surplus.
    At the same time, the second biggest contributor to the 
decrease in the surplus has been the tax relief package which 
we have even heard today come under some criticism. But I 
haven't heard anyone recommend that we increase taxes, and I 
think those that finger-point at that particular policy 
decision ought to be willing to state clearly and unequivocally 
whether they think we ought to be increasing taxes now or not. 
I think that would be a horrendous decision, a terrible policy 
prescription, just at a time when the economy is slowing down.
    As I traveled through August across New Hampshire, the 
biggest single issue I heard raised with the tax relief was why 
in the world isn't this tax relief package permanent? How can 
it possibly be that the House and Senate act on a tax package 
that isn't permanent? I think if we do anything for the economy 
and for consumers, we ought to implement right now, as soon as 
possible, legislation that makes that tax relief that we passed 
into law several months ago permanent.
    Even so, we do have a situation today where the surplus 
will be somewhere between $150 billion and $160 billion at the 
end of this fiscal year, the second largest surplus in history. 
The chairman pointed out we will have paid down almost $500 
billion in the public debt, and in contrast to the 35 or so 
years of deficit spending, I think that is pretty dramatic.
    Finally, the question persists, why are we setting aside 
these surplus in the first place? What are we trying to achieve 
in setting this money aside? Yes, we are paying down debt. That 
is important. I think it is important to control the size of 
our public debt. It does help strengthen our budget. But 
ultimately, the reason to have these resources this year and 
next year and the following years is to help us pay for and 
fund the strengthening and modernization of Social Security and 
Medicare.
    The director made one mistake which I am inclined to point 
out, and that was with regard to the age of Medicare. The 
Medicare is 36 years old. I happen to know because we are the 
same age. I have changed a little bit in 36 years, but as the 
director pointed out, Medicare really hasn't.
    So I would like to close with a question for Mr. Daniels 
about these programs.
    The size of the surplus: To what extent does the size of 
the surplus, whether it is $150 billion this year or 180, does 
it affect the long-term strength or health of these programs, 
and what are the real issues that are contributing to long-term 
weakness in Medicare or in Social Security? I am concerned that 
with all the discussion about whether the surplus will be $152 
billion or $160 billion and whether it is the second largest in 
history or the largest in history, we lose sight of the need to 
take up serious substantive legislation on these issues. And I 
hope you can address that point.
    Mr. Daniels. It would be really quite tragic if the process 
were to procrastinate on the reform of either Social Security 
or Medicare. On other occasions I pointed out, I think that may 
be the single biggest problem with the misconception that we 
have a Medicare surplus. It could lead people to believe that 
any program with a surplus is doing just fine, thank you, and 
the political process does have a tendency to wait for crises 
to act. That would be very, very unfortunate in this case 
because, as we all know, action to reform a long-term 
entitlement program can be much more moderate, much more 
gradual, if taken in a timely fashion as opposed to waiting 
until the wolf is at the door.
    So I would remind the committee that this President has 
committed himself to the reform of both programs, and we all 
know how difficult that will prove to be to reach agreement on 
that. But I sure hope that there will be bipartisan commitment 
to get about that business.
    Mr. Sununu. What about all of the discussion or concern 
about the tax relief package, that somehow is a part of the 
problem; and the suggestion, I suppose, that repealing that 
package or raising taxes would help solve some problems? What 
effect would a significant tax increase right now have on the 
long-term solvency of the Social Security program, for example?
    Mr. Daniels. It wouldn't move the solvency date by 1 day or 
1 year, just as it wouldn't mover the benefit level. And it 
wouldn't move the size of the trust fund----
    Mr. Sununu. Let me interrupt you there. I don't know if 
that is correct, because if a tax increase were to have a 
negative effect on economic growth, economic growth is one 
thing that really can hurt the solvency for Social Security and 
move it back; isn't that right?
    Mr. Daniels. That is correct. I was going to move on to say 
that there are really only two things I think that matter in 
terms of the long-term viability of those programs. One is 
economic growth and anything that bends the trend line--again, 
CBO and OMB as well as most private forecasters, we have 
identical and most have very similar expectations for long-term 
real growth--anything that bends that trend line down will have 
a very deleterious effect on those programs pretty quickly. So 
higher taxes anytime, particularly at a time of near stagnation 
like now, we think would be very ill advised.
    The other thing that matters is reform. The biggest thing 
that matters is whether we can put those programs on a viable 
footing on a day when we have a much lower ratio, much lower, 
of people paying to people taking out.
    Mr. Sununu. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. McDermott.
    Mr. McDermott. Thank you, Mr. Speaker. I----
    Chairman Nussle. No. Mr. Chairman. I haven't gotten a 
promotion yet.
    Mr. McDermott. With your skillful way, I am sure you will 
be there shortly.
    I spent half a month in August in my district and I am 
happy to report--I want to say something positive before I get 
going--that the checks are arriving in my district. A lady sent 
me a $1.65 check and said, you use this anyplace you think it 
will do any good. Another one sent me the letter that said she 
didn't get any tax rebate at all. She had this letter and down 
at the bottom it said zero. She said how can that be? I pay 
taxes.
    I want to understand, you have got John here who is a 
country lawyer, and I actually come from corn and pig farmers 
in Illinois, in the Speaker's district. I just came from a 
family reunion in Oswego, and the people there when they pay 
their taxes, they think of it in terms of three shells. They 
put one shell, that is, the Social Security part on their 
paycheck. And then they have the Medicare part on their 
paycheck. And then they have their income taxes. And you have 
been real careful with how you have used your language. The 
President said in his speech, anybody who pays income taxes is 
going to get a tax cut. Now, people at this family reunion 
couldn't figure out, if they paid these other two into Medicare 
and Social Security, why they didn't get anything. I explained 
to them those are trust funds. You have got to keep that money 
separated from the regular income tax money.
    What you are telling us today is that these numbers on this 
driver's eye chart up here, if we move anybody from that 
Medicare money, any money that came into the Medicare fund, and 
we put it over here in the general government fund, it really 
is still over there. It is still under this one, right? And you 
say if you take any money out of that which was paid in for 
Social Security and it winds up over here in any kind of 
general government, it is still under here really; you just 
can't see it.
    Well, I will tell you something. You should go to a county 
fair, because they have got a game like this, and they put a 
pea under here and they move it around real fast, and you can 
win if you can figure out under which shell that pea really is. 
And if I understand you correctly, what you are saying is we 
really have only one bag of money. These trusts don't really 
mean anything. What you want the American people to believe 
now, after all this talk about lockboxes and all that stuff, is 
suddenly it is all under one. Don't worry about your Social 
Security, don't worry about your Medicare, we don't have any 
trust funds or anything, we will take care of it out of this 
one. Is that what you are telling the people? There is no place 
where their money is being taken from? I know you are putting 
bonds under here. That is what you want them to believe. That 
isn't raiding the Social Security when you take it and put a 
bond under there and say someday you come collect the bond when 
you need it. Is that what you are saying to people?
    Mr. Daniels. Well, Congressman, first of all, I think your 
metaphor is probably an interesting one, because there is 
certainly a shell game quality to the way Social Security has 
been presented for a long time. If people have believed, for 
instance, that they had any money that they owned, that they 
were actually putting money away for their own retirement, 
obviously there was no pea under that shell. But I think our 
understanding has begun to improve about this.
    Mr. McDermott. Do you mean they were stupid in the first 
instance and now they have gotten educated? What are you saying 
about people? They were led to believe that by the United 
States Government.
    Mr. Daniels. Well, I hope that was inadvertent, because it 
was never true, ever, that a person was putting money aside for 
his or her own retirement. But I don't think that is the 
question you are really asking. And the answer simply is--I 
mean to the multiple questions you asked--we are treating the 
trust funds as we always have, always, from the inception of 
the programs. They are growing by exactly what they are 
entitled to grow. But it is not cash in the drawer. It is 
bonds, future promises, as it always has been; nothing has 
changed.
    Mr. McDermott. Let me stop you right there, because you and 
I know, maybe the American public doesn't understand what the 
baby boom generation is all about, but you and I know that at 
the end of this budget period in 2010, all the people born 
since the Second World War are going to show up looking for 
their money under this Social Security Trust Fund. And when we 
talk about surplus, we are talking about right now, yes, we are 
raising more because we want to have it there when we get to 
2010 and try to pay for those people.
    Mr. Daniels. What do you mean ``it,'' Congressman, it won't 
be there? If by ``it'' you mean the money coming in the door, 
it won't be there. Only bonds will be there, exactly the same 
as the number under any set of policies----
    Mr. McDermott. But wouldn't it be better to leave it 
there----
    Mr. Daniels. If the government continues to gather in 
vastly more money than it needs to pay its bills--it doesn't go 
under a mattress, doesn't go into your shell, doesn't go into 
some box, locked or unlocked. It goes to pay the debt to the 
extent we can, and that is it. The Social Security Trust Fund 
in 2010 will be exactly the same size as it would be if there 
had never been a tax cut or if there had never been a 
rebuilding of our defense. They are completely unrelated. And 
that is the truth.
    Mr. McDermott. You are basically saying that we have one 
bag of money from which we can pay all this stuff. Now, what I 
don't understand is how you are going to pay--I sit on the Ways 
and Means Committee. I don't understand how you are going to 
pay for tax extenders or the energy bill we passed out. The 
budget had $9 billion for energy. We passed out $33 billion 
with no offset. The House leadership would not let us put an 
offset on the floor. So I don't understand where--the 
difference between 33 and 9 is, in my calculation, $24 billion. 
Where does that come from?
    Mr. Daniels. Well----
    Mr. McDermott. Where are we going to pay for that?
    Mr. Daniels. Well, there are a lot of ideas and bills 
around. The bill----
    Mr. McDermott. But you are representing the President. He 
has the veto. He will end this process. What are you going to 
recommend to him?
    Mr. Daniels. I am going to recommend that total spending, 
whatever its compensation, be held to the level of the budget 
resolution. It so happens that by doing that, we believe the 
Nation's needs can be met, and among those the goal that will 
be fulfilled is the full protection of the Social Security 
surplus for next year for debt reduction. So that would be my 
recommendation and----
    Mr. McDermott. So you are going 1 year at a time, if I get 
it? I listened real carefully to your words. You said, I am 
going to recommend that you have enough money to pay for Social 
Security next year. So you are worried about 1 year at a time 
and----
    Mr. Daniels. Excuse me. I thought you were asking about the 
budget that is in front of us and the appropriations decisions 
that are in front of us which applied to fiscal 2002.
    Mr. McDermott. But these implications of this budget run 
out for 10 years, don't they?
    Mr. Daniels. All are subject, as you know, to human will 
and leadership, and I made this point when I thought there was 
an inference that we were locked into baseline increases for 
this entire $2 trillion Federal edifice. We are not. We can 
change all of that. And, by the way, we should. No business I 
know, no nonprofit enterprise I know, just automatically 
assumes in everything that is unquestioned, grows it by 
inflation, and then worries about if you can pay for the new 
needs. And we have got to get a----
    Mr. McDermott. The only thing I can say in closing is this: 
We shut the government down. The chairman and his fellows 
thought it was important to shut the government down in 1995 
because we were using OMB numbers and we had to use CBO 
numbers. If we couldn't get it based on CBO, we were going to 
have this country without any financial operation. And we went 
by that.
    I now hear people saying that your budget, which implies 
has all kinds of policy in it--Dr. Crippen's budget does not 
have policy. It just goes by the law. Yours has all kinds of 
manipulations which gives you a 1 billion surplus this year and 
1 billion next year and a 4 billion the third year and 6 the 
fourth. That is like landing a 747 on a dime. The reason they 
make those runways 9,000 feet long is because you can't be sure 
you are going to get them down right on the spot you want them 
on. But you are saying that is budget numbers--if we rely in 
this committee on CBO, we are going to have some trouble with 
your budget in my view.
    Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Bass.
    Mr. Bass. Thank you, Mr. Chairman, and thank you, Director 
Daniels, for coming here today.
    We need to remember, as you mentioned in your opening 
remarks, that we have budget surpluses that are larger than we 
have ever had in American history. We have a lot to be grateful 
for, although there are some problems and some challenges 
facing this committee and the Congress and the administration 
that were not anticipated earlier on this year. I hope that we 
can work with you in a constructive manner over the next few 
months to develop changes, if necessary, to construct a budget 
that would reflect reality.
    Now, I would only point out that complaining for 
complaining's sake is not how I would define a constructive 
approach for dealing with the problems that we face today. The 
fact is for the last 35 years or so--or since I was 13 or 14 
years old--the trusts didn't mean anything. They didn't mean 
anything to the administrations at the time, sixties, 
seventies, eighties. They didn't mean anything to the Congress. 
And now all of a sudden they seem to mean everything.
    I also harken back to the four or five, five or six late 
nights that I have spent in this room working up a budget in 
which we discussed and debated tier 1 and tier 2 and tier 3 
amendments, all of which, every one of which, were offered by 
my friends who are now so concerned about the disappearing 
surplus. Had all those amendments passed--and fortunately none 
of them did--two thirds of the loss of surplus, or probably 
more than that, would be due to increased spending. There would 
be economic issues to deal with, probably very little tax 
relief, and we would be in the same position we are in today.
    The fact is that this Congress has moved forward in a 
bipartisan fashion with the administration to try to deal with 
the economic slowdown proactively through a rebate program 
which I think will work. We do have some problems which have 
been brought up and will be continuing to be brought up by the 
other side which I think we can work out.
    Director Daniels, I look forward to working with you in a 
positive and constructive manner to make sure that we do 
everything we possibly can to bring about an economic 
turnaround in this country; that we try to keep the lid on 
spending to the greatest extent possible; and that we get the 
business of complaining about something that we have all been 
working on over the last 6 months, on both sides of the aisle, 
out of the way and start looking toward the future.
    I really have no other observations, Mr. Chairman, and I 
will yield back to you.
    Chairman Nussle. Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Daniels, it is always good to see you. You talked about 
overcharge, and I think there is another word we need to talk 
about and that is ``overpromise.'' Looking at your budget, the 
administration has a choice to make. They have a choice of 
whether or not they are going to keep the commitments that the 
President made last year and the commitments he made when he 
addressed Congress this year, or whether or not they are going 
to have to come forward and admit that they can't meet those 
commitments.
    I look at your mid-session review and, yes, we can 
accomplish what you say we can accomplish and not go into these 
trust funds if the administration goes back and says, well, we 
are not going to plus-up DOD, we are not going to reform 
Medicare, we are not going to reform Social Security, we are 
not going to increase funding for education--as the President 
said he wanted to--we are not going to fund prescription drugs. 
And, in fact, your own document cuts back what the Congress 
said they were going to do for prescription drugs in the budget 
resolution that the Republicans passed. On top of that, that 
the economy in the next 6 months is going to grow at an 100 
percent faster growth rate than it has in the previous 12-month 
period. I am not aware of anybody in the mainstream school of 
thought on Wall Street, in academia, or in the Washington, D.C. 
area, who believes that the economy is going to turn around 
that fast. I hope it does and I know all of us hope it does, 
but I don't think we are going to go from 1.7--if we get to 1.7 
GDP growth rate this year--to 3.2 percent GDP growth rate next 
year. I think that is quite a loaded assumption.
    So I think the administration is going to need to come up 
and tell Congress--and pretty darn quick--what priorities of 
the President it wants and how it intends to pay for those 
priorities.
    I also must take issue with your comment regarding the 
trust funds because if you look at your own document, on one 
page you say the trust funds don't exist; on the other page, 
you take credit for how this administration is increasing the 
amount of dollars that are in the trust fund, even though that 
is a matter of ongoing law. It is a mandatory program. It is 
not anything you did. It is not anything we did. It is 
something that, quite frankly, was started 30-some-odd years 
ago. But you all trumpet that fact, and then you turn around 
and say it doesn't exist.
    It does matter--and I am going to give you a very 
bipartisan approach as to why it does matter--whether or not 
you spend against the Medicare and/or Social Security Trust 
Fund, which, if we use the CBO numbers, is exactly where you 
are heading. I think you would agree with this because I think 
this is as much a Republican as Democratic theory of why it 
does matter. And you are right, it isn't going to affect the 
amount of money that is in the trust fund; but what it is going 
to affect is the amount of public debt in the future that our 
children and grandchildren are going to have to pay off, and 
without doing one thing for Medicare, without doing one thing 
for Social Security, to extend the solvencies of those 
programs. What we are doing under the budget that the President 
has submitted and the spending that the President himself 
wants, without any action by Congress, would be to increase the 
public debt, increase the mortgage that our children are going 
to have to pay, without fixing these programs at all.
    So, yes, it does matter. You cannot just say we have plenty 
of money, the surplus numbers are going to be the same, we are 
just not going to pay down as much debt. But we are borrowing 
today to spend today under the President's budget, and I think 
that is a serious problem.
    We use CBO's numbers--which is what we in the Congress do--
and as my colleague mentioned, we had serious debates over 
this. The government was shut down twice in my first term in 
Congress over this issue. The prior administration agreed to 
use CBO numbers. If we use CBO numbers, you all are in the red, 
and that is just on a current services budget. But if we 
include the defense plus-up that we know the President wants, 
if we include what the President agreed with Congress earlier 
this year on prescription drugs in Medicare reform, the $300 
billion program, not the $149 billion program that you all are 
talking about now, if we take all of the things you said we 
want, we are in the red.
    How do you intend to pay for those, not just this year but 
over the next 10 years, and when are you going to send that up 
to Congress? When are you going to send us, particularly as it 
relates to the coming fiscal year, the cuts that the 
administration wants Congress to make to make the budget 
balance?
    Mr. Daniels. Thank you, Congressman. There are several 
important questions in there. I think I caught them all. Let me 
first say that I don't think you heard me say the trust funds 
don't exist. Of course they exist. It is what they consist of 
that some people occasionally mistake, and they only consist of 
government bond's promise to pay in the future. It is a 
privileged promise and one people can rely on, but that is what 
it is. Sometimes I try to help people straighten out the 
confusion that suggests that they get bigger or smaller 
depending on our on-budget decisions or the size of those 
surpluses. As I think I illustrated again today, they don't.
    Let me answer your question about assumptions and so forth. 
Let's untangle this for you, because I do think it is an 
important question. We are still pretty low-tech, too. But 
looking at the left side of the chart, the green bar refers to 
our assumption for next year, 3.2. It is above the median of 
the blue-chip forecasters but sort of within that range. And it 
is below the sort of the top quartile, quintile, I guess; 10 
out of about 47. Meanwhile, CBO is just on the other side of 
the median on the low end, but also I would say kind of in the 
mainstream, well above the bottom fifth.
    But none of that really matters or should matter to this 
committee because of the bars on the right side. They are 
somewhat more guarded about economic growth. Some people act as 
though that were the direct driver of the revenues. It isn't. 
It is just one of the variables. We are more conservative about 
how much revenue will be collected per dollar of economic 
growth, so----
    Mr. Bentsen. If I might just interject, because if you look 
at your mid-session review and your long-term numbers, you 
actually argue, after we have seen this downturn in the economy 
and in virtually all indicators--even productivity numbers are 
off from a year before--you are projecting an actual increase 
in your mid-session review of about 74, $75 billion in long-
term receipts. Where does that come from? I mean, the spread 
between your GDP assumptions and your other assumptions on just 
the baseline alone shows a spread of about half a trillion 
dollars between you and CBO over the next 10 years. Those are 
pretty big numbers.
    Mr. Daniels. Actually, the receipts difference--as Dan's 
testimony points out, and you can ask him about this when he 
gets here--is less than a percent over the whole time period. I 
think the basic difference between our economists and theirs 
has to do with how fast the snap-back is and whether the lost 
ground is eventually recovered. The difference is very small, 
and it is zero for next year, which I think is the question 
that may be most important for now. You know, some would have 
thought, not an unreasonable conjecture, if you knew only that 
we saw a little higher growth for next year, you would think we 
were expecting a lot more money to spend. We are not. We are 
projecting exactly the same amount of money, 2135, that CBO 
comes to. All I can tell you is that both organizations are 
populated by very serious career professionals, and through 
somewhat different combination of assumptions, have given this 
committee of Congress really the same forecast for next year as 
to how much money is available. I would hope that Congress 
takes some comfort from that.
    By the way, this amounts, apples to apples, to about a 
little over 3 percent increase in revenues over what we are 
getting this year. That is about the growth rate of this year; 
and this was a pretty crummy year, relatively speaking, for 
revenue growth.
    These forecasts, I think, are pretty darn cautious as to 
how much money will be there, how much surplus will be left 
after we subtract spending.
    Let me go to a couple other questions that you asked. 
Please be careful about saying things like we are borrowing 
today. We are not. We are reducing borrowing. People are 
already beginning to talk about what happens when there are not 
enough Treasury bonds to keep the markets liquid; but we are 
reducing borrowing, paying down well over $100 billion of debt 
on a net basis. You said something about debt increasing over 
the time period. No. We are talking about how much and how fast 
debt will come down----
    Mr. Bentsen. That increase is relative to the amount it 
otherwise would have been reduced. The fact is that there will 
be debt in the future, and rather than pay it down more 
rapidly, you do borrow against it. You are leveraging the trust 
funds, and that is not--I am not alone in that thought. Ask 
Chairman Greenspan his viewpoint on that. I think he has been 
very clear on that thought.
    Mr. Daniels. Sure. And I think we can have honest debate, 
and we should year by year, on what is the right amount, how 
fast is it necessary to bring it down. I would just say that 
from the President's standpoint, we seek a balanced program 
that includes historic levels of debt reduction but also 
includes tax relief that we hope will restart and then sustain 
economic growth, without which this will all become a very 
different discussion if we don't have economic growth. And so, 
what we ought to discuss is, is $170 billion enough to bring 
down debt, or is for some reason 75 or 80 a better number?
    My only view is that you are really fooling around with 
margins there, and debt reduction is not the only objective; 
and, if carried too far, we can make a real mistake. We cannot 
tax our way to a better fiscal future. We cannot tax our way 
through a sustainable Medicare system, for instance. If you pay 
down all the debt we can a year earlier and have not reformed 
Medicare, for instance, you haven't done anything, because that 
money will be borrowed back in a flash and you will be 
hopelessly in arrears before you know it.
    So thank you for an important series of questions----
    Mr. Bentsen. Finally, but also in order to fund your 
programs, assuming CBO's numbers are correct, the President's 
priorities, not Congress's, what cuts do you all intend to send 
up to the Hill to fund those?
    Mr. Daniels. None. None in the 2002 context because our 
data--and I think CBO is right on top of it--says that we can 
fund the budget resolution levels and maintain Social Security 
surpluses for debt reduction----
    Mr. Bentsen. Then are you going to declare a recession or 
declare war, because CBO says you go into Social Security by I 
think $9 billion and----
    Mr. Daniels. Oh, you are talking about 2001, the year we 
are just concluding, which is the budget that the President 
inherited, and we talked about this before. We won't know for a 
month or two whether we are just above or just below that line. 
But in either case, it has nothing to do with the President's 
budget.
    [The prepared statement of Mr. Bentsen follows:]

Prepared Statement of Hon. Kenneth E. Bentsen, Jr., a Representative in 
                    Congress From the State of Texas

    I am pleased that the House Budget Committee will have the 
opportunity to question Office of Management and Budget (OMB) Director 
Mitch Daniels, as well as Congressional Budget Office (CBO) Director 
Dan Crippen about their new economic forecasts released during the 
August district work period.
    Today is not about assessing blame. It is about the Congress and 
the White House coming together to evaluate these new forecasts and 
begin appreciating their ramifications with respect to the President's 
domestic and foreign spending priorities. I am stunned at how much the 
Nation's fiscal picture has changed in four short months. Recall that 
in April, the OMB surplus projections were $281 billion for this fiscal 
year and $3.4 trillion for the next 10 years, which they portrayed to 
be more than enough to fund Bush's tax cut and new spending 
initiatives, while staying the course on debt reduction.
    Today, our Nation must come to terms with a new fiscal reality. By 
OMB's own admission, $123 billion of this year's surplus had somehow 
vanished, leaving a $158 billion surplus, almost entirely made up of 
Social Security tax receipts. We now expect that in Fiscal Year 2001 
alone, all of the Medicare Trust Fund ($29 billion) and $9 billion of 
the Social Security surplus will be consumed to fund government 
operations, according to the CBO, the Congress' official budget 
analysts. Moreover, looking ahead, the CBO estimates that all $170 
billion of the Medicare surpluses and $30 billion of the Social 
Security surpluses will need to be diverted to meet our current 
obligations over the next 5 years.
    At this critical juncture, with much of the Appropriations process 
still ahead, it is vital that President Bush identify where spending 
will be cut in order to make room for his initiatives, including a 
$18.4 billion boost to defense an enhanced Federal role in education as 
well as Medicare reform. Will farm subsidies have to be slashed? What 
about tax credits for the working poor or housing programs? What about 
prescription drugs? What about the missile defense shield?
    Additionally, I am growing increasingly concerned about recent 
statements from Congressional Republicans that signify an about-face 
regarding Congress' commitment to protecting the Medicare Trust Funds. 
On four separate occasions over the past 2 years, the Republican 
leadership has shepherded legislation to the floor that not only 
dedicates the Social Security surplus but also the Medicare surplus to 
debt reduction. At this time of weakened economic performance, I am 
deeply concerned by the apparent willingness of Congressional 
Republicans' to retreat from their commitment to paying down the 
national debt. This departure from the path of debt reduction, in 
addition to the ``incredible shrinking surplus,'' perpetuates economic 
uncertainty within the financial markets, potentially doing real damage 
to today's sluggish economy.
    Finally, it clearly appears that the President and his allies 
overcommitted and cut the budget and fashioned the tax cut too close to 
the margin on the basis of overly optimistic economic assumptions. Now, 
the President's budget has us borrowing against Social Security and 
Medicare, increasing our long term public debt and leaving not a penny 
for fixing those programs.
    I am eager to hear where the administration plans to make the 
budgetary adjustments to meet our current obligations and their own 
spending priorities while adhering to the Congressional mandate for 
debt reduction and protection of the Social Security and Medicare trust 
funds.

    Chairman Nussle. Mr. Spratt.
    Mr. Spratt. One clarification for the record. When you said 
that you are requesting still the existing 302(a) allocation 
for discretionary spending, do you mean that, plus the 18.4 
billion?
    Mr. Daniels. Yes, sir; I am sorry, I probably spoke too 
casually. The budget resolution, but I do mean to include the 
supplemental request----
    Mr. Spratt. On top of that.
    Mr. Daniels. Yes, sir.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman.
    I must say that listening to the testimony and looking at 
the charts, I feel reassured. Frankly, some of the overheated 
rhetoric we heard over the last several weeks coming out of 
Washington I think has been unfair and in some respects 
misrepresented what is happening with the budget. One of things 
I would like to really make clear is that we heard the term, we 
had a $280 billion surplus and now that surplus is gone. I just 
want to make it real clear we never really had $280 billion in 
the bank. Wasn't it a projected surplus?
    Mr. Daniels. That is correct.
    Mr. Gutknecht. So in some respects, I think all of this 
discussion has been, as I say, unfair.
    I want to come back to something else that was said earlier 
about the shutdowns, because I think even there, there was some 
misunderstanding of what happened. For those who weren't here, 
the shutdowns, in my opinion--and everybody is entitled to 
their own opinions, we aren't always entitled to our own 
facts--but the shutdowns weren't so much about CBO versus OMB. 
It was really ultimately about spending. And, as I recall, the 
last number of years where we have had budget impasses--in 
fact, I think the budget that we are all concerned about today, 
the 2001 fiscal year budget, the final numbers were agreed to, 
if I recall, after last year's election. In fact, I think it 
was in December when we finally came to an agreement. And if I 
recall what the pivotal differences were, the President wanted 
to spend more money than the Congress wanted to spend; and, as 
a matter of fact, that goes back to 1995. The debate was never 
that the President was trying to slowdown the spending of the 
Congress. The problem was that the President continually wanted 
more money for the administration's proposals than the Congress 
wanted to give him.
    Now, you weren't here, Mr. Daniels, and you don't have to 
comment on that, but that is the way I remember it. One of the 
reasons I am reassured by your testimony is that it sounds to 
me--and I hope this is true--that this administration intends 
to be pulling the rope in the opposite direction. You are going 
to be trying to slowdown the growth in spending that perhaps 
Congress wants to authorize and appropriate.
    I want to come back to two points that I thought were very 
important and hopefully didn't slip by members of this 
committee. The first was that I think you made the point that 
this year we will be paying a premium for debt reduction of $10 
billion. Is that correct? Did you say that?
    Mr. Daniels. I did.
    Mr. Gutknecht. In other words, we are paying down debt 
faster than the debt is actually coming due.
    Mr. Daniels. We are paying down some debt that is not yet 
due; that is correct.
    Mr. Gutknecht. And so we are paying a $10 billion premium 
to do that. That is interesting, especially in light of some of 
the overheated rhetoric.
    Mr. Daniels. Let me just interject. Not to leave any 
confusion, these are prudent premiums. These are simply present 
value premiums more or less for debt that is not yet due. We 
are not yet at the point, which at some stage we will reach 
under these projections, where you have to pay penalties to get 
people to turn over their bonds early. So I don't want any 
confusion----
    Mr. Gutknecht. But in any event----
    Mr. Daniels. These were prudent repurchases.
    Mr. Gutknecht. All right. But in any event, we are paying 
off the debt as fast as it comes due right now.
    The second point I think is important as well, that our 
former colleague, Mark Newman, probably had the best regression 
analysis of anybody I have ever seen, and I remember what he 
would project in terms of revenue growth over the next 10 years 
or however long you wanted to go. I found it interesting that 
you are actually only using a little over 3 percent revenue 
growth, year to year, for next year. Could you put that in the 
context of how much Federal revenue has grown? Do you have the 
numbers, or would one of your staffers have the numbers of how 
much revenue has grown to the Federal Government over the last 
10 years?
    Mr. Daniels. I don't have it on the top of my head, but it 
would be well in excess of that, certainly, for the last few 
years where revenue growth was very, very rapid and surprised 
everybody with how rapid it is.
    By the way, in case anybody is rummaging through the 
tables, for apples to apples purposes, I put the corporate tax 
receipts 2 days earlier, where they otherwise would have 
fallen, just to make sure we had an accurate capture of how 
rapid a growth--underlying real growth, we were expecting. That 
is why I get 3.3 or some such number.
    Mr. Gutknecht. My point is if I look at it historically, I 
think over the last 10 years we have averaged almost 6 percent 
revenue growth----
    Mr. Daniels. In that area.
    Mr. Gutknecht. Perhaps you or Mr. Crippen can confirm that. 
So to look at only slightly more than 3 percent revenue growth 
next year, it seems to me you are using conservative numbers, 
and the real goal here is to get the economy growing again, and 
as the economy grows--and I think it will--we are going to find 
a lot of the discussion we are having today is almost 
irrelevant next year. We are still going to have to control 
spending. That is going to be a big fight.
    But I feel very reassured that you and your team down at 
your administration have done a good job. I think you are on 
top of this, and we would appreciate a little help and 
cooperation if it looks as if we do have a little bit of a 
problem before the end of the fiscal year. It seems to me that 
is very manageable. You can slow some of the spendout rates. It 
may well be some defense contractors may have to wait for a 
week to get paid.
    There are other things you can do administratively, and 
frankly if you need some help from us in the Congress, I think 
most of us would be willing to help symbolically to make 
certain that we don't wind up in the situation that some people 
have talked about. And, again, thank you.
    Chairman Nussle. Mr. Clement.
    Mr. Clement. Thank you very much, Mr. Chairman, Mr. Spratt, 
members of the committee.
    Director Daniels, I know you have got a tough job advising 
the President on the budget and all that, and we appreciate 
your being here.
    I have had town hall meetings in Tennessee during the 
break, and they are very concerned about the economy, the 
softness in the economy, the layoffs. They are concerned about 
the direction of our country and feel like the present 
administration needs to show more leadership, more direction, 
more vision, maybe more initiatives. The fact is, here the 
Federal Reserve Board wrenched up those interest rates, about 
six or more interest rate increases, and then started bringing 
them down. But when they started bringing them down, it was too 
little too late. The tax cut doesn't seem to be kicking in or 
stimulating the economy much. I know you are saying that by the 
fourth quarter, as I understand, we are going to have a 
turnaround. But what stimulation are we going to have between 
now and then to bring that turnaround?
    Mr. Daniels. First of all, Congressman, I think the folks 
in your town hall meetings are showing a lot of common sense. 
They are concentrating on the real issue, which is how is the 
economy doing; what, if anything, can the Federal Government do 
to hasten its recovery? And, as I have said many times, it is 
the economy that is struggling, not the finances of the Federal 
Government.
    The first observation I would make is that the rebate tax 
relief for which the Congress voted is only about halfway out 
the door so far; so I think it is too soon to know how much 
effect it will have or won't have. I think we have just passed 
over the halfway mark and therefore probably more than half the 
effect, whatever it will be, has yet to come. There is usually, 
economists tell me, a long time lag on interest rate 
reductions, so we would hope that there will be effects yet to 
be seen from the last couple three of those. But I think that 
if the President were here, he would tell you that he 
associates very much with the concern that you have reported, 
and if what has occurred now doesn't show sufficient signs in 
time, then we will be looking for more action.
    Mr. Clement. Director Daniels, let me also ask you about 
transportation. I am on the Transportation Committee, and the 
administration's mid-session review indicates that outlays for 
the highway programs have been reduced for 2003 and beyond to 
reflect lower-than-expected revenues to the Highway Trust Fund 
referred to on page 26. But, given the economic benefits of 
highway construction and maintenance, such as job creation, do 
you think it makes sense to plan such a dramatic decrease in 
Federal funding for highways?
    Mr. Daniels. I don't know, Congressman. Of course, spending 
on transportation has gone up very, very sharply due to the 
direction of Congress to require full use of trust fund 
revenues; so spending rose with those, and rose to meet those 
levels and will still be very high, I think, under any 
projection. But we would welcome your input and that of others 
as future budgets are put together about these--what I would 
call baseline forecast levels that you are looking at, 
recognizing that this may be one form of spending that has some 
more economic effect than others.
    Mr. Clement. Let me mention also about veterans--being a 
veteran myself, and I feel like at times I am on the endangered 
species list because we have fewer and fewer veterans serving 
in the U.S. Congress--but the conference report on the budget 
resolution included additional direct spending for veterans' 
programs that the President's budget does not. Would the 
President veto a bill to improve veterans' benefits that is 
accommodated within the congressional budget resolution, and 
would he require that spending be offset; and is the White 
House considering additional cuts to veterans' programs other 
than eliminating the loan program?
    Mr. Daniels. Of course, the President did propose well over 
a billion dollars in additional spending for veterans this 
year, and I recognize it is a good chance that Congress will 
increase that further. I won't speculate on what, if anything, 
the President might do, but I would just say given his 
commitment to veterans, it is highly unlikely that certainly 
any bill within the budget resolution could not meet with his 
approval.
    Mr. Clement. Now, I know the chairman mentioned a while ago 
and Mr. Spratt talked about the weather. Naturally I want 
clement weather rather than inclement weather, you understand 
that. And I want to improve the economy and all, that is 
critically important for all of us.
    But you are saying in no uncertain terms--because the folks 
at home ask me this all the time--are we or are we not tapping 
into the Social Security Trust Fund? Because some of us are 
awful proud of turning that corner and having surpluses rather 
than deficits.
    I know some want to always be talking about the Clinton 
Administration and blame everything on that. But we have a new 
watch now--we have the Bush Administration. You have to take 
responsibility for what actions or what happens in the Bush 
Administration.
    Are we or are we not going to tap into that Social Security 
Trust Fund? Because my folks at home and now people all over 
the United States do not want to tap into the Social Security 
Trust Fund because that is a sacred contract between 
individuals and the Federal Government.
    Mr. Daniels. You can and should tell them that there will 
never be one dollar tapped out of the Social Security Trust 
Fund. It will grow by every dollar that it is entitled to and 
you can tell them that President Bush, as President, has 
promised every penny in Social Security benefits will be paid, 
and we are doing that now with no trouble at all. And we have 
$150-odd billion left over.
    And the very recent--those are the sacred permanent 
commitments, I would say, and they will be kept, and I am sure 
both parties and certainly this administration is determined to 
keep them.
    There is a very new commitment, a couple or 3 years old, 
not 60--got to be careful. Sununu is here. He will call me on 
this--not 60-plus years old, but a couple or 3 years old, that 
says, ``Let's make sure that our total surplus is as big as the 
Social Security surplus and we will use that money for debt 
reduction, and that we intend to do.''
    Mr. Clement. Thank you.
    Chairman Nussle. Mr. Thornberry.
    Mr. Thornberry. Thank you, Mr. Chairman. Director, I 
appreciated your answer to Mr. Clement's first question, 
because I do think the key question before us is how do we get 
the economy going again. I am somewhat amused by reports, press 
reports that come out that say, oh, it is obvious the rebates 
are not working, when as you just say they are maybe halfway 
out the door.
    But, the real story, the rest of the story is we do have 
limited tools in the tool box to deal with the economy, both 
Congress, the administration, and the Federal Reserve. I 
appreciate your comments that the administration will look at 
other tools if it appears at the appropriate time that this tax 
relief is not working as we would like it to do to stimulate 
the economy.
    I think that the key point that has been made so far is to 
clear up some of the confusion about these trust funds. As with 
my colleagues, I had town meetings and other meetings with 
constituents over the break, and I am afraid that the way that 
some of the stories were written it caused undue distress with 
some folks who are concerned that their Social Security or 
Medicare benefits may be affected by those differing 
projections that go up and down.
    Making the point that those benefits are not affected in 
any way, adding to that the point you have made today that the 
size of the trust fund is not affected in any way by these 
differing projects, I take it a step further I guess in a way 
and that is the consistency of the trust funds are not affected 
in any way. They still consist of the same things they would 
have if we had a hundred billion dollars more in surplus, or a 
hundred billion dollars less in surplus. The trust funds are 
not only the same size, they are the same consistency.
    So thinking ahead or thinking about you, our challenges for 
the future, that has not been altered. I want to get, I guess 
really I want to get to the point that I don't think that we 
have talked quite enough about; that is, the opportunity that 
these type budgets give us to reexamine programs and agencies 
and spending. Mr. Culberson and I come from a State where 
periodically every program and every agency is reexamined 
because it expires and you have got to take a new look at it to 
see whether you want to continue that program. They are 
sunsetted.
    I am most struck by your chart 3 on page 6, which gives us 
the average annual percentage growth by agency over the last 4 
years, and it shows, for example, HHS up an average of 11 
percent, education up an average of 10 percent. Those are 
pretty amazing numbers. Having been here during that time, I 
don't think we have adequately examined what is working, what 
is not, what is being wasted, really taking a look at those 
programs. We have talked about reforms of Social Security and 
Medicare. We have got to do that. But would like to know what 
the administration has planned for a wider examination.
    I am interested in defense reform, among others. But if you 
look at this chart and the increases without that kind of 
examination, it seems to me that has got to be a focus as we 
move ahead. Can you tell me what the administration has planned 
in that regard?
    Mr. Daniels. Yes, sir. First, let me notice--or take note 
that on the chart you reference that incorporates the 2002 
request that the President has made or the--and so even with a 
year of more moderate growth averaged in, you still have these 
numbers which, as you point out, I think are pretty impressive 
in showing how rapid the growth has been or I'm sure some would 
say how rapid the catch-up has been for some of those 
departments.
    Looking forward, it would certainly be our intention to 
bring to the Congress in the budget proposals for 2003 and all 
subsequent years as rigorous a review of the existing $1.9 
trillion of spending as we can. We were pretty, I think, candid 
in admitting this year that given the abbreviated time for 
transition and so forth, we were pretty cautious about 
suggesting reductions and eliminations of programs and that 
sort of thing, trying not to be reckless, not to post things 
that hadn't been looked at carefully.
    But we have been working very hard this year. We have 
reviewed very, very carefully trying to for the first time 
assign performance ratings to many programs, and we do take it 
as an important responsibility to come to the Congress with 
well thought out suggestions for how--for where money could be 
redeployed from older uses to newer ones.
    I hope this is something that people, whatever their 
general outlook about policy, could agree on. The better we are 
at ferreting out the less productive uses of the taxpayers' 
dollars, the more dollars will be available. Then we can move 
on to the discussion about what are the most important new 
needs and how much, what is the right total and so forth.
    I really do hope that as we become a little better about 
this, we can have agreement that it is absolutely the starting 
point for good public policy.
    Mr. Thornberry. Thank you.
    Chairman Nussle. Thank you. Mr. Moran.
    Mr. Moran. Thank you, Chairman Nussle. You began this with 
the fancy technology we have here by showing the dramatic 
change in deficit spending that really began in 1981, went for 
almost 15 years and then there was a dramatic turnaround from 
deficit spending to a balanced budget and ultimately to surplus 
spending.
    Now, many of us feel that we are going right back again 
into making the same mistake that we did in 1981, rushing 
prematurely into a deeper tax cut than the economy can 
necessarily afford, and thus jeopardizing our determination to 
balance our budgets and give confidence to the financial 
markets.
    Those surpluses that were achieved over the last 8 years 
were despite the fact that the Republican led Congress 
consistently appropriated less--excuse me, consistently 
appropriated more than President Clinton requested in his 
budget estimates.
    And my friend Mr. Thornberry has, I guess he just left, but 
he was citing the mid-session review, page 5, where it talks 
about the fact that spending in the Federal domestic agencies 
exploded during the last 3 years, including growth of 45 
percent in Health and Human Services and 27 percent at the 
Department of Transportation. Then it says these departments 
can benefit from a period of digestion without great growth 
beyond those expanded levels.
    These were policy decisions that were made by the 
Republican leadership, not to make this too partisan, but I 
think it needs to be said that transportation is up because the 
Congress decided to make trust funds flow through all gas 
taxes. That is why it is up. It is a policy decision.
    Health and Human Services is up primarily because of the 
increases in the National Institutes of Health, which granted 
was very much a bipartisan agreement, but we ought not to 
phrase these statements in an accusatory manner. I think it is 
fair to say that they have been at least bipartisan, if not at 
the initiative of the Republican led Congress.
    Now, Mr. Daniels, you have called the surplus in the 
Medicare Hospital Insurance Trust Fund, and I quote, ``an 
artificial overage completely irrelevant to the future of 
Medicare benefits.''
    The budget resolution under which Congress operates treats 
the Medicare Trust Fund as real and significant. In fact, if 
the budget resolution reported by this committee and passed by 
the House and Senate is upheld and followed, the additional 
$18.4 billion sought by President Bush for defense this year 
can only be added to the 302(a) and 302(b) allocation for 
defense if the additional spending does not encroach on the 
surplus in Medicare.
    So regardless of how the Bush Administration and OMB regard 
the Medicare Trust Fund surplus, Congress and the budget 
resolution passed by the Congress pay it great deference.
    Let me quote for you what our chairman, Mr. Nussle, told 
Secretary Woodridge at one of the most recent hearings when he 
was here just a few weeks ago. Chairman Nussle said, ``This 
Congress will protect 100 percent of the Social Security and 
Hospital Insurance Trust Funds, period, no speculation, no 
supposition, no projection.''
    Yet, the Bush Administration is telling Congress that 
despite our lockbox legislation and other promises, the $18.4 
billion addition for defense will be spent from Medicare Trust 
Fund surplus this year if we intend to balance our spending 
with our revenue.
    That is why we keep going back to these numbers, because 
there is an inconsistency here, and in referring to the OMB 
forecast on Table 3, page 8 of the mid-session review, OMB 
shows that to balance our budget you will have to use Medicare 
Trust Fund receipts every year through 2006.
    Obviously that includes the $18.4 billion in defense with 
inflation in the outyears, but it doesn't include any follow-on 
increment, nothing for transformation.
    In fact, the transformation of the military, which of 
course is being discussed in the Armed Services authorization 
right now, probably as we speak, by the committee, it has been 
the subject of the Defense Department's ongoing strategic 
review, as you know. It is going to be very costly if it is to 
be effective in aligning our national defense strategy with the 
threats and security needs of the 21st century.
    The administration does plan to address future year funding 
priorities. We know that because we read that in the present 
statements in the mid-session review. Secretary Rumsfeld has 
indicated that 18.4 is only the first installment of necessary 
and substantial future increases in defense spending.
    So how, with this revised budgetary scenario, are longer 
term defense spending plans going to be affected? That would be 
the first question, and I think one of overriding importance 
right now.
    Mr. Daniels. Well, I was asked this question a little 
earlier, and my answer would be the same, that first of all 
this is a significant first step, not to be underestimated. It 
does add to 200 billion, 198 billion or 209 in authority over 
the time period. So I don't know how much more might prove 
required, but we should note the dimension of this. Yet there 
remains, before we touch the first dollar, as I hope we 
certainly will of the embedded spending base, the Federal 
Government, including the Pentagon, by the way, there remains 
uncommitted $600 billion above and beyond Social Security 
surpluses for purposes like this.
    You didn't ask about Medicare, but do I want to point out 
that in the mid-session review the money set aside or proposed 
for Medicare reform, including prescription drugs, was 
increased from our earlier estimate. The $300 billion that is 
in the budget resolution I think is somebody's sort of good 
faith place holder, but it is not based on a real plan and in 
our judgment is more expensive than is necessary, particularly 
if real reform is part, as it must be, of the package.
    We increased ours from 153 to 190 billion, and that is over 
8 years. So instead of an average 15 a year, it is an average 
of 24, about halfway to the average of 30 that is in the place 
holder figure. I am just trying to suggest that we not overlook 
the sort of forest here, which is that by either set of 
projections, ours or Dr. Crippen's, there is vastly more money 
scheduled to arrive in the Federal till after the tax relief 
that has been passed than we need for today's purposes. We can 
work on an accommodation of tomorrow's purposes some mix of 
those within the available funds, I am quite confident.
    Mr. Moran. Well, I heard your first response, and I know 
this is consistent with it. But we keep coming back, showing 
that in order to balance the budget, the receipts are not there 
this year unless you are including receipts from Medicare--and, 
in fact, even Social Security--to the tune of $9 billion in 
Social Security, and that is our concern. We are also looking 
at the fact that discretionary spending has gone up, and we 
have got all of those other commitments that we are talking 
about, what, $190 something billion, but that is over a 10-year 
period, for defense. That appears to be inconsistent with what 
the Defense Department is anticipating. We have also got 
spending levels in our appropriation bills, even ones that have 
already passed the House, that are consistently above the 
estimates that you are attempting. Would you anticipate at this 
point recommending that the President veto any of these 
appropriation bills?
    Mr. Daniels. Again, I don't--I try never to anticipate or 
speculate on what the President might do--very hopeful that 
there will not be vetoes necessary this season. I really don't 
see any reason for it, because I believe we see leadership of 
both parties, Senator Daschle yesterday in his comments, for 
instance, moving toward something I believe this committee 
ought to feel really good about, which is appropriations bills 
that fit within the framework of the budget resolution, and 
here I am footnoting that to include the President's 
supplemental, or I am sorry, amendment request for defense, 
that fit within that and honor all of our commitments, 
including preservation of the Social Security surplus.
    So I don't see why we should have to get to that point, 
although the President retains the tool and the resolve if need 
be.
    Mr. Moran. We will see. Thank you.
    Mr. Daniels. Thank you.
    Chairman Nussle. Mr. Hastings.
    Mr. Hastings. Thank you, Mr. Chairman. Mr. Daniels, thank 
you for being here.
    When your report came out and when the CBO report came out, 
we were all home and we heard the initial reaction come out, 
albeit somewhat negative. But I have to tell you since I have 
been back here and listening to you and the testimony and at 
least listening to even the people on--my colleagues on the 
other side of the aisle, I have to be very optimistic, because 
the point I think needs to be made again, and that is that we 
are going to have the second largest surplus that we have ever 
had this year.
    The economic outlook from your organization and CBO is very 
strong, albeit a slow area, and we are on track to pay down the 
national debt.
    But there is another point that has come across loud and 
clear that I am very pleased to have heard. That is that 
everybody is concerned that we do not--I will put it this way--
tap into Social Security or Medicare. People on both sides of 
the aisle agree; that is, we should not. You have been very 
emphatic in stating where the President is. Frankly, I don't 
know why that question keeps getting asked over and over and 
over, unless there is an underlying reason that it should be 
asked that has nothing to do with policy.
    There is one ingredient that is left out that has been 
touched on that maybe is not emphasized enough. That is what we 
can control here in the Congress; that is the issue of 
spending. Now, we can't control what the revenue expectations 
are. The economy is going to make that judgment. The economic 
outlook is--again, our capitalistic system will make that 
determination, but what we do have control over is the spending 
part. And the chairman emphasized this right from the get go, 
which is a matter of priorities.
    I just want to once again ask you, and ask you to 
reemphasize that in the President's budget, 2002 budget which 
we are now debating, if we live within the budget resolution we 
can fund all of the priorities that certainly we have put in 
our budget resolution, but what the President has also talked 
about during the campaign and now that he has been President. 
Is that essentially correct?
    Mr. Daniels. Yes, that is correct.
    Mr. Hastings. One other thing that I want to talk about, 
entirely unrelated to this but worth talking about because we 
are talking about paying down the debt. We are still on course 
of redeeming all of the debt that is redeemable?
    First of all, for the record, explain what you mean by 
redeemable debt and paying down.
    Mr. Daniels. I generally use the term ``maximum retireable 
debt'' to refer to the maximum amount that we can pay back 
without being boneheaded about it; that is to say, beyond a 
certain point--all of the economists we have consulted, the Fed 
is in the very same place, and I think so with CBO--beyond a 
certain point, scarcity of the remaining debt, as you try to 
buy in debt that is not due yet, leads the holders to demand a 
premium. Beyond some point that premium it is not smart to pay 
and no administration would do it.
    So that is the issue there. You know, whatever number one 
sees here doesn't really change anything fundamental. We can 
achieve that as we can under our projections and CBO's. We can 
achieve that kind of debt reduction.
    We will have driven debt as a percentage of the budget, a 
percentage of the economy, down to levels we haven't seen since 
the First World War, essentially will disappear as a factor, 
and that is something that we ought to try for there. You still 
are going to get that effect under any of the scenarios that we 
have been discussing.
    Mr. Hastings. That leads to a potential challenge that we 
have in 10 years or so, when all of the redeemable debt is paid 
down and we are running surpluses. What is the government--how 
do we react to that?
    Mr. Daniels. A very important issue, as Chairman Greenspan 
and many others--it gets here a lot faster than 10 years. As 
cash piles up, if and when cash piles up in Federal hands for 
which there is no prudent use, one of two things can happen. 
Someone will think of an imprudent use, like more spending, 
which would be a danger, or as you are beginning to hear the 
rumbles now, people who would like to see the Federal 
Government keep its hands on all of that extra money so no 
problem, we will invest it in the private economy.
    There is a real fundamental disagreement and a good debate 
we may have 1 day before that long as those surpluses continue 
to accumulate, and I think the President's position would be, 
is, that is not a good idea at all, the Federal Government to 
own a large part of the private economy.
    But there are voices who see it otherwise, and as the 
surpluses accumulate, I think that debate will start in 
earnest.
    Mr. Hastings. There is one other option, too. That is 
further reduction on the taxes of the American people, because 
obviously you are overpaying. So I certainly hope that would be 
a part of that discussion.
    Thank you very much.
    Chairman Nussle. Mrs. McCarthy.
    Mrs. McCarthy. Thank you, Mr. Chairman. Thank you, Mr. 
Daniels, for your patience with all of us.
    You know, I listen to all of my colleagues on both sides of 
the aisle. I have a hard time sitting here because I am 
probably one of the most--consider myself fairly conservative 
on an awful lot of issues.
    But anyway with that being said, I sit here and I think the 
Federal Government does have an important role for this 
country. We talk about tax refunds and things like that, and I 
think everybody certainly does like them. But if we didn't have 
the moneys we wouldn't be able to take care of our veterans, we 
wouldn't be able to take care of transportation, which is so 
important for this country. We wouldn't be able to take care of 
the health care needs that this whole country needs. That is 
what the Federal role is.
    Unfortunately, those costs do go up and we do have to 
account for that. I sit on the Education Committee, and we 
bipartisanly worked hand in hand, Republicans and Democrats and 
certainly with the administration, to pass a really good 
education bill. Now, the President's budget was $7 billion, and 
still continuing to work with the President. Our bill came out 
on the floor with a $5 billion increase over what the budget 
was for 2002. From my understanding from the colleagues of the 
Senate it is even double that, I believe.
    Because I believe in education so much and I do believe 
that the Federal Government does have a strong role, because 
there are States that just don't have the money to put into 
education, if we are going to make education, as I agree with 
the President that we should be doing and I was thrilled to see 
him talking about it during the whole August recess, that I am 
concerned when we start talking about not having the kind of 
moneys that we are going to need.
    What does it look like in the future, and that is not even 
talking about IDEA, which a majority of us here in the House 
certainly want to fully support, because that was a mandate 
that we have never fully succeeded our obligation as far as I 
am concerned. I think the American people would agree with all 
of us that we have to make sure the funds are there. I am 
asking, what does the administration see in the future as far 
as appropriations for education?
    Mr. Daniels. I think the President would look forward to 
steadily increasing investment in education, and obviously 
proposes that for this year. I would expect that the budget 
resolution will probably--I am sorry, that the appropriations 
coming out of the resolution or under the resolution will come 
back with perhaps more than he proposed, that we can probably 
work that out. There is room to do it.
    Likewise, I would hope for the future--as I say, we see 
escalating revenues, escalating surpluses, and we ought to 
consider ourselves fortunate to serve in a time like this. I 
mean, there always will be problems and we always will find 
something to wrestle and argue about. But a very few years ago 
the idea of a balanced budget was thought to be a hopeless 
mirage and now we have shot past balanced, and 160, $170 
billion of surplus.
    We do have the wherewithal to deal with our problems as we 
agree which are the most important, and there is certainly that 
agreement about education. So I would look to an increasing 
Federal level of support.
    Mrs. McCarthy. Just to follow up a little bit, because 
certainly with the balanced budget, you know we pay as we go 
and somewhere you are going to have cuts. My concern is where 
are those cuts going to come from? I mean----
    Mr. Daniels. I don't give up that easy. Because we have 
increasing revenues, tens of billions of dollars of new 
revenues coming in each and every year. That should accommodate 
that, plus, you know, some--if by cuts you mean trying to 
identify old spending that is not as valuable as the new 
spending, we ought to be able to find some of that. And, think 
of the numbers we worry over and haggle over, a billion, a few 
billion dollars, 10 billion. Ten billion dollars is one-half of 
1 percent. What business couldn't find one-half of 1 percent 
somewhere if it had an urgent, important need, for instance 
education, to devote it to.
    So I think that we can do those things and we ought to 
resolve together to do them.
    Mrs. McCarthy. I thank you.
    Chairman Nussle. Mr. Culberson.
    Mr. Culberson. Thank you, Mr. Chairman.
    Mr. Daniels, in the brief time I have got with you, I first 
of all want to thank you and the President for your focus on 
the fact that the taxpayers of this country are paying on 
overcharge, and your focus on ensuring that we maintain a 
balanced budgeted is tremendously important for the continued 
economic growth of the country and vitally, vitally important I 
think for the long term in this Nation.
    I wanted to ask you, of course the terminology we use in 
any debate is vitally important, not only to make sure that we 
are accurately framing the debate for our own purposes as 
policy makers, but also for the listeners, for the American 
taxpayers.
    I wanted to follow up on some of your comments earlier 
about the tax overcharge because that is indeed what it is. Of 
every $100 that the Federal Government spends, how many of 
those dollars come in as a result of tax collections? Ninety-
nine out of a hundred dollars or--tax dollars collected from 
the American people?
    Mr. Daniels. Well, if I understand your question, 
Congressman, at present you would say a dollar fourteen came in 
for every dollar spent, more or less.
    Mr. Culberson. Right. But essentially virtually all of the 
money the Federal Government spends is as a result of tax 
collections is my point.
    Mr. Daniels. Yes, sir.
    Mr. Culberson. Therefore I wanted to ask, because I notice 
in your presentation today, in all of the documents that you 
have given to us you refer to a budget surplus. I think that is 
confusing to a lot of people because in fact it is a tax 
surplus.
    As Chairman Nussle has correctly pointed out in all of his 
presentations, you will note all of the documentation produced 
by the Budget Committee refers to the surplus as a tax surplus. 
I think that is an accurate statement, wouldn't you agree, that 
it is a tax surplus rather than a budget surplus?
    Mr. Daniels. That may be a better term, yes, sir.
    Mr. Culberson. I would encourage you, if you could, ask if 
you and the President, the Office of Management and Budget 
could adopt that terminology, because I think it is very 
important for all of us in Congress as we debate this surplus, 
that we understand that it is a tax surplus, and very important 
in communicating to the public that it is not a budget surplus, 
it is a tax surplus. It is not money that needs to be spent, it 
does indeed represent tax revenue collected from the American 
people, and in that sense it is a tax surplus, and I would ask 
if you could adopt that terminology. Is that something that you 
could do?
    Mr. Daniels. Well, thank you for your suggestion.
    Mr. Culberson. And also I wanted to ask, if I could, Mr. 
Daniels, that from--based on your knowledge of the history of 
the Congress and the budgets that have been proposed over the--
certainly over my lifetime since 1955--of course the best way 
to measure future performance is past history. Haven't the--
when were the first balanced budgets over that--since 1955 when 
were the first balanced budgets passed by Congress?
    Mr. Daniels. Well, you will test my history, Congressman, 
but 1969 I believe. Perhaps in the late 1950's, but 1969. Then 
we lost all contact with that goal for a long, long time and 
then Congress achieved it just in 1997, I guess.
    Mr. Culberson. But it has clearly been a result of the 
Republican Congress, that once the Republican Congress came in 
January 1995 it seems to me is when we turned that corner and 
began to pass balanced budgets?
    Mr. Daniels. I am going to leave causality to this 
committee to debate among itself. I have usually described it 
as a bipartisan achievement, and I think that is probably a 
good way for history to record it.
    Mr. Culberson. Well, I do thank you for your work and I am 
very pleased to support the President's budget and help in any 
way that I can. Thank you.
    Chairman Nussle. Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Director, I want to--so many concerns and so little 
time. So I want to run through a couple of them quickly if I 
can.
    First of all, to focus on the marginal issues, the 1 
percent of this, the 2 percent of that is a little 
disingenuous, because everything we ever discuss around here is 
1 percent of this or 2 percent of that. So therefore--I mean, I 
know your intent is to minimize some of the issues. I 
understand that, and I respect that. But nonetheless, in my 
opinion, it is a little disingenuous, particularly when as we 
just discussed earlier, people at home are getting $300 checks 
or $600 checks or $1.75 checks.
    For most people, most taxpayers, that is less than 1 
percent of their gross income, yet I haven't heard anybody talk 
in terms of the tax rebate in dismissive terms, such as 1 
percent of this and 2 percent of that.
    Therefore I would just as soon get off of the marginal 
issues because they are not relevant to the average person at 
home. We all know that to find one-half of a percent of 
anything in any budget in the government issue, no matter what 
level the government is, is a difficult thing, because so many 
of us have so many different priorities. That is the struggle. 
Can it be done? Sure. Any one of us can do it, but that is not 
the way this government is set up. It is a very difficult thing 
to do.
    As far as the argument that because the trust funds have 
all been treated as such and such, they have always meant 
nothing, we have always done the same thing, and therefore we 
should continue to do the same thing, to me is an incredible 
statement.
    I have only been here in the last couple of years, but I am 
actually very happy to be here in times of surpluses and not 
deficits, because we do have an opportunity to change what I 
consider to be bad past practices, many of them--one of the 
largest of which, in my opinion, is raiding the Social Security 
Trust Fund and is raiding the Medicare Trust Fund. My opinion, 
I understand you disagree. So be it.
    But I think it is an important thing to do, and I think it 
is an important thing to do not because of today's recipients. 
I have never been part of the group that wants to scare anybody 
about today. But I am also concerned about tomorrow. I am 
concerned about myself and my children and my grandchildren yet 
unborn that they have the same opportunities my parents and I 
both have.
    I agree with you, there is no concern about today, but I am 
concerned about tomorrow, and what we do today certainly 
impacts what happens tomorrow.
    So as far as I am concerned, simply because the trust funds 
have all been treated in a bad way is no argument to continue 
doing so, especially when we sit here with surpluses that we 
can do something about.
    As far as the trust funds themselves and how they do it, I 
know that I have no intention of--or no hope of changing your 
opinions. I know that. But on an equal level you have no hope 
of changing mine either. A trust fund at home in my old life, 
when I practiced law, people always saw it as money put aside 
in a sacrosanct box. I know that Social Security is not the 
same thing. But if you did something with trust fund moneys 
that were not intended by the trust fund and you got caught, 
you went to jail. You still do, not used to, still do. And yet 
this government for years has been doing it, and not only does 
no one go to jail, they seem to be proud of it. We have an 
opportunity to change that. We should. We need to.
    And therefore I--it is fine by me if you want to use a 
different term, because it is not a trust fund per se. I know 
that. I respect that. I didn't make up the term. I didn't call 
it that. Call it anything you want to. Call it a specific tax 
source account. Call it a dedicated account, because that is 
all it is, an accounting mechanism. I respect that. I accept 
it. But when you have that account and you use money that comes 
from a specific tax source that is supposed to go to that 
specific account and you use it for something else, anything 
else, you haven't been honest with the American taxpayers.
    I know that we haven't done it. I understand. The President 
himself, and I agree with him. In times of recession or war, 
sure, you have to do some things that are a little difficult. 
We don't have a recession at the moment, thank God, and we are 
not at war, thank God. So that being the case, we shouldn't be 
using that money for anything else. This Congress has been 
clear on that. The President has been repeatedly clear on that. 
I understand that right now we might be in a debate as to 
whether we are or are not, and I am not ready to make that 
debate today, because I know that numbers are numbers and they 
are estimates at the moment. We will know whether we are or are 
not before the end of the year. But right now we are not sure.
    If it is so easy, if it is easy just to wipe away all of 
our concerns about the trust fund by putting more IOUs into the 
trust fund account, I have two questions.
    Number one is, under the President's proposal, how are 
people supposed to invest that money if we take 2 percent of 
their money and put it into stock funds or whatever we want to 
put it into with IOUs? Am I supposed to go buy and invest my 
money with IOUs? I don't think I can call Fidelity up right now 
and say, I really will pay you a few thousand dollars 20 years 
from now if you let me invest right now in the Magellan Fund. 
If that is so easy, why don't we just do it? Or if it is so 
easy to put IOUs in and not worry about it, why don't we put a 
lot more IOUs in right now and print them up? We can go down to 
Treasury right now and print them all up, and put them into the 
trust fund and we don't have to worry about the Social Security 
Trust Fund or the Medicare Trust Fund ever going bankrupt, 
because it is the easiest thing in the world.
    Everything that I have heard today tells me what is the big 
deal? Just put some more IOUs in that trust fund and we never 
have to worry about it. Now, I know that your answers are not 
going to be what I am looking for. I know that. I will tell you 
that everybody I know at home, up until the last couple of 
months everybody I heard or read, now all of a sudden some of 
these so-called pundits, and amazing to me, they are all 
relying on newspaper reporters to tell us what to do. That is 
what we seem to be doing now.
    Up until now everybody was on the same page. The Social 
Security Trust Fund should be sacrosanct, again absent war and 
recession and other extraordinary circumstances. We are not in 
that now. What has changed? What has changed? Why shouldn't 
that fund be sacrosanct? Why shouldn't every dollar of FICA 
taxes, because that is what they are, being paid by Americans 
not be put aside for them, their children, their grandchildren 
forever and ever, amen.
    Mr. Daniels. Well, Congressman, I think we agree on a lot 
more than you might assume. Let me just touch three things. 
Number one, if there ever were a raid on the trust funds, I, 
this administration would be entirely with you in seeking to 
find out who did it and why? If somebody came to me tomorrow 
and said, we just checked, the Medicare Trust Fund doesn't have 
$234 billion, it has $224 billion, what would we do? We would 
start a criminal proceeding to find out who did it. That is not 
going to happen. Never will. And I tried to explain earlier why 
it is not related to how much surplus we finally run.
    You say we should not use the money for any other purpose. 
Well, we do use the money. We use the money to pay down debt, 
which is something we all agree on. We are only talking about 
how much of that is the right amount to pay.
    Lastly, I would simply associate really with your last 
comments, and I think the President would, too, that the 
details will be very difficult to work out. It is really--it is 
exactly the direction that the President has suggested, that at 
least some of the FICA taxes people pay ought to be theirs. 
They ought to own them in a way that they do not own them 
today. Those FICA taxes your constituents pay go right----
    Mr. Capuano. Excuse me. Explain to me, if there is no money 
in the trust fund, how can they own an IOU? Is that what you 
want them to own?
    Mr. Daniels. After reform?
    Mr. Capuano. If you get everything you want.
    Mr. Daniels. The President has not chosen a plan. There is 
a commission looking at a variety of ways to do it. But the 
principle that you raise is one that the President has 
endorsed, and that is that a piece of any--of a worker's 
contribution would go not to the Federal Government to be used 
for debt reduction or any other purpose, but that a piece of it 
would go to an account owned by that person, just as, you know, 
millions and millions of 401(k) plans and so forth exist in the 
private sector, to be invested at the discretion of that 
person.
    Mr. Capuano. I don't mean to be argumentative, Mr. 
Director, but a 401(k) is real cash, real money in a real 
account. It is not IOUs that I pick up the phone and I call my 
broker on, it is real cash. You have been spending all morning 
telling me that the trust funds don't have real cash in them, 
all they have is IOUs, which I understand.
    Mr. Daniels. Well, you are making the arguments for the 
President's reform of Social Security, and I thank you for it. 
You are making exactly the right argument.
    Mr. Capuano. If the President wants to get cash in those 
accounts in the Social Security Trust Fund, we are on the same 
page. What we do with that cash once it gets there is a 
different issue, number one. Number two is why can't we start 
now? So we only get to get cash in the account if and when the 
President gets everything that we wants? Other than that there 
will be no cash in the account at any point in the near future?
    Mr. Daniels. No. My only question here is, you know, who is 
we? It ought not be--the we who is deciding what to do here 
ought to become the American people individually, one family by 
one family. They ought to be--the President would say, at least 
for a part of the Social Security system, they ought to be 
empowered to own that and to decide, they decide, not all 
powerful trustees somewhere in Washington decide, how that 
money should be invested. It would grow more quickly than the 
promises those bonds represent.
    So I would associate very much with the spirit of what you 
are saying. And obviously the details are very tricky and--but, 
you know, thank you. I think that you have illuminated a very 
really important difference between the system that served us 
well for a long time and the system we need for the future.
    Mr. Capuano. You may have missed the point, that I also 
illuminated the problem that we have right now. We don't have 
to wait for any changes in the Social Security system, we could 
do it right now.
    Chairman Nussle. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    Mr. Daniels, let me see if I can kind of follow up on what 
the Congressman is talking about. The way I understand it the 
Social Security Trust Fund is the proceeds of all of the amount 
of money that has been collected for some period of time. What 
the new plan is to take the proceeds from the Social Security 
Trust Fund and pay down the debt, the public debt I guess or 
private debt, and then there is an IOU then from the Federal 
Government to the Social Security Trust Fund. Is that fact 
correct?
    Mr. Daniels. That is correct, Congressman, that the funds 
until very, very recently were used to pay the ongoing costs of 
government, to pay for defense or the FBI or, you know, to run 
the national parks. When Congress achieved a true--a balanced 
budget and began to--and finally built it to the size that it 
is today, there has been an agreement to use those extra moneys 
to pay down the national debt. That is what--we have talked 
about that quite a lot today.
    Mr. Brown. What kind of return does the Social Security 
Trust Fund receive from that IOU?
    Mr. Daniels. It receives a standard Treasury rate, in the 
neighborhood of 5 percent I guess right now.
    Mr. Brown. Then how----
    Mr. Daniels. Maybe a little less than 5. I am sorry.
    Mr. Brown. Because I have always heard that we are getting 
something like a 2 percent return.
    Mr. Daniels. This may be referring to what a worker can 
expect in terms of the return on the money. Workers send money 
in for their careers. That goes out the door, at least all that 
is needed goes out the door to pay the retirees of that day. 
When you compare what the worker after retirement receives from 
today's Social Security system, the way it is set up, compare 
that to what they paid in all of those years, you get a very, 
very poor return. Probably less than 2 percent for most people. 
However, on in the future, if we don't change the system, it 
will be less than zero.
    Mr. Brown. OK. I guess that is one of the things that I 
kind of committed to come up here to try to be sure that those 
recipients were going to be getting a better return on their 
investment, be it investing stocks or some other instrument. 
And that would certainly try to expand on that and trying to 
fulfill that commitment.
    You don't see any further enhancement of that return, be it 
the Treasury bill rate or some other rate? I mean, I don't have 
any problem with the philosophy of doing that because my Keogh 
plan and my IRA, I have got it with a savings and loan, but I'm 
not sure that dollar is not sitting in that savings and loan; 
they have taken that money and invested it out, and it is maybe 
a loan or some other instrument out there.
    So I don't think that money is sitting there, neither would 
I ever believe that the Social Security trust fund had money in 
it. If it didn't have that money working, it wouldn't get any 
return. Is that correct?
    Mr. Daniels. Yes, sir. Almost half of the surplus, the 
increase in the Social Security trust fund this year will come 
from the interests it accrued as opposed to FICA taxes in, 
minus benefits out. Almost half of it will come from the 
interest. So it gets credit for interest on the bonds that sit 
there.
    Mr. Brown. That would be my goal, to enhance that return to 
much greater than the 2 percent.
    Mr. Daniels. By moving it into different----
    Mr. Brown. I am proud. As I went around my district, the 
tax surplus check that came back to me, I carried it around in 
my pocket because I like to keep it close to my heart, because 
I think unprecedented in the history of this nation that we 
sent a refund check back. I don't know if we ever did it 
before.
    I am grateful for it. The people I talk to in my district 
are happy that they are getting those checks. And I tell you, I 
guess it is good that they are getting them in sort of 
incremental stages too, rather than getting it in one big 
flash, because now they all got something to expect.
    Mr. Daniels. I am glad you reminded me, because I am pretty 
sure Mrs. Daniels is carrying it close to her heart, because I 
haven't seen ours yet. I think it was due last week.
    Mr. Brown. Thank you very much.
    Chairman Nussle. ``Stimulate'' is the key word here. There 
is more economic growth if you go out and spend that thing, 
Henry.
    Mr. Matheson is next. Well, if you will yield, Mr. Holt.
    Mr. Holt. Mr. Brown, I would be happy to help you get that 
money into the economy if you need some help with that. Mr. 
Daniels, thank you for coming and bearing with us.
    I would like to follow on some of the questioning from Ms. 
McCarthy.
    First of all, I think you have looked at the CBO report. I 
want to make sure I understand the--in the way CBO and OMB has 
dealt with the President's education--or with the education 
budget numbers.
    What do they include? And in general terms, what do you 
include that they don't include?
    Mr. Daniels. Yes. There is an important difference. They, 
CBO, will not assume policy that Congress has not enacted, as 
they should not do. So they will have taken--Dan can correct me 
if I misspeak in any way. I believe they will have taken the 
final level for 2001, whether it is education or anything else, 
and inflated that to a so-called current services level.
    We arrive at ours through a different way, which is to take 
the President's proposal, which was for an increase, and apply 
it to our number as though Congress had passed it. So, in an 
area where the President proposed a significant real increase, 
like education, we would have a higher number than they would. 
There could be areas where the President proposed no increase, 
and their number would look higher than ours.
    Mr. Holt. Now, you probably know that the House 302b 
allocations for education are roughly $4 billion above the 
President's request. Now, the President's request also removed 
some funding, the Department of Labor and the Department of 
Health and Human Services. And right now in the Appropriations 
Committee, they are putting some of that back in, I am told.
    Now, that seems that it will leave us with maybe a billion 
dollars or so to devote to education, which is several--3 or $4 
billion short of what has been authorized this year under the 
Elementary and Secondary Education Act, ESEA. I think I heard 
you say to Mrs. McCarthy that you are sure we can find some 
money to do better than the President's budget, maybe not 
everything that is in the House authorization, but somewhat 
better. Did I hear you correctly on that?
    Mr. Daniels. Yes, you did.
    I mean, I think the starting point here is, one thing we 
are very assured of is there will be substantially more 
education spending this year than in any year past. The 
President's proposal alone would get you there. Secondly, the 
budget resolution does have room for $5.6 billion more than the 
President requested. The reason for that is that we had 
requested or suggested an emergency reserve. We thought it 
would be a--a prudent way to budget in advance for what we 
thought was the sort of an average projection of what we might 
have next year in unforeseen spending, true emergencies.
    Congress did not agree. That amount of money was left in 
the budget resolution totals. And I am sure a good piece of it 
will find its way into education, that being high priority for 
so many Members.
    Mr. Holt. This will be possible, as I understand it, 
because some of the Medicare surplus, the HI surplus, will be 
available for general purposes. I mean, that is what the 
numbers show, you know, and just 6 months ago, or less than 
that, we met in this room and we heard that we could have it 
all.
    You said that we could fund national priorities like 
education, and you could preserve Social Security and Medicare 
surpluses, and give the American people a very large tax cut 
and pay down the debt. At that same time, many of us, most of 
us here in the House were talking about lockboxing, so to 
speak, the Medicare and Social Security funds.
    The President had previously said that he approves 
lockboxing, the lockboxing of Medicare and Social Security. And 
although I--I couldn't find the phrase from your testimony--
subsequently the Secretary of the Treasury has said, we have 
dedicated every dollar of Social Security and Medicare money to 
come in to pay down the public debt so that we are honoring the 
idea that Social Security and Medicare money should be used 
only for those purposes.
    So you are now saying, though, that some of that Medicare 
money can be used for education expenses, not just to pay down 
the debt? In other words, you pay down the debt a little more 
slowly?
    Mr. Daniels. Well, of course, as we see it, all Medicare 
money and 50 billion more is needed just to pay for Medicare, 
not for any other purpose. So this is sort of a conceptual 
difference that we have talked about many times. Those are the 
facts about Medicare's revenues and its costs.
    One fine point, the President never has spoken to a 
Medicare lockbox ever. Not this year, not in his campaign. He 
has always taken the viewpoint that I just expressed, that we 
should recognize the reality, which is that Medicare does not 
run a surplus or anything close to it.
    Now, on the--a point about what was--what seemed to be the 
state of play a few months ago, I think you are quite right. I 
guess my observation would be that as Congressman Spratt led us 
through the change in the picture over those last few months, 
46 billion, more or less, is the number attributable to the 
change in economic circumstances, to the drop-off due to the 
economy, and that right there more than explains the fact that 
the surplus now is only as big as Social Security's surplus, 
not bigger than Social Security's surplus, the Part A as it 
seemed a few months ago.
    Mr. Holt. Although, as Mr. Spratt made clear earlier today, 
that is not just technical adjustments or economic downturn, it 
is mostly decisions that have been made here in Congress with 
the blessing of the President.
    Mr. Daniels. Right. Without quarreling with that, I am just 
saying that the 46 billion that is economic downturn, exceeds 
by $12 billion the Medicare Part A surplus for this year. So 
just trying to answer your question about the--why the change.
    Mr. Holt. OK. Well, so that the--the lockboxes that we were 
talking about earlier, you called them a fiction then, and you 
still think that is a fiction. I guess you did say that it was 
a fiction that might stop people from spending money, and now 
it seems to me that you are violating even that fiction and 
making this Medicare money available to be spent on other 
purposes.
    Mr. Daniels. Well, to repeat myself, I think all of the 
Medicare money is spent for Medicare. Every penny. And we are 
still very committed, the President is very committed to 
spending restraint. So nothing--simply calling it as we see it 
about the--how this really works, what really does and doesn't 
affect the trust funds and so forth, has nothing to do with the 
President's commitment to restraining spending and preserving 
enormous surpluses like the one we see for this year.
    Mr. Holt. Thank you, Mr. Daniels.
    Chairman Nussle. Mr. Matheson.
    Mr. Matheson. Thank you, Mr. Chairman.
    Mr. Daniels, you have been in that seat for a long time, 
and answered lots of question. We both made it. No, maybe one 
more. Sorry about that. I just had three items I wanted to run 
past you quickly.
    First, I just want to associate myself with the comments of 
Mr. Clement earlier about, I am also on the Transportation 
Committee, and while I think there are a number of factors in 
terms of our economy and economic growth that are clearly 
beyond what the Federal Government does, there is one activity 
that I did--do think is critical, that is, commitment to 
maintaining our transportation infrastructure, in terms of 
highways, aviation and our ports.
    Being a member of that committee, I think there is real 
bipartisan support in being committed to maintaining that 
infrastructure. So I just wanted to associate myself with Mr. 
Clement's comments earlier.
    Secondly, the issue of trying to be responsible about 
spending. It is an issue that we have a number of us talk about 
today. I really think that it is--the challenges are a 
bipartisan challenge. I don't think one party or the other has 
any big hold on being good or bad about spending.
    As we move forward in trying to be intelligent and 
responsible with our spending, you mentioned, in terms of 
making recommendations about spending to Congress, that the 
President will be a participant if necessary. You mentioned 
that in your opening comments.
    I am curious if there is a sense of what is necessary? When 
is that point going to be made where the administration is 
going to come up with additional specific spending 
recommendations to work with Congress in that effort?
    Mr. Daniels. Well, I think you can look for new spending 
recommendations in January of 2002.
    There won't be any additional spending recommendations, I 
don't imagine, for this year. We will have, I think, a fresh 
and probably fairly lengthy set on both the growth and the 
redeployment side for the budget that is a few months ahead of 
us.
    Mr. Matheson. To the extent we have passed legislation, for 
example, in the House, we passed an energy bill just before we 
went on recess. It contained a number of additional revenue 
adjustments that affect our budget situation. It did not 
include any offsets at the time from the House version, and I 
know we got to go through the Senate process, so I don't want 
to get ahead of things too much.
    When legislation such as that moves through Congress, would 
the administration like to see offsetting spending or 
adjustments to offset the costs of those new pieces of 
legislation?
    Mr. Daniels. Well, often, yes, that would be most welcome.
    The bill that the House passed is substantially above 
anything the President had requested. So if the Senate had a 
similar view, we would have to work together to look for 
offsets.
    But, you know, like you, I don't know where we are going 
there.
    Mr. Matheson. One last item that I just wanted to mention. 
We all know the uncertainty of projections. You certainly know 
that in the job you are in now, and know that from the business 
world as well. It seems to me that in terms of when we make 
plans for the future, 1 year, let alone a 10-year budget, that 
with the uncertainty associated with the projections, maybe 
there ought to be a little margin for error.
    What are your thoughts about how we ought to be looking at 
that, and should we be incorporating some margin for error in 
our budget projections?
    Mr. Daniels. I not only think so, but I believe that we 
have. The budget, as we presented it, had a trillion dollars, 
so-called contingency reserve for the--and then I think that we 
were pretty direct in saying that we assumed that a substantial 
portion of that would go to--at this point, unknown new needs, 
Medicare reform and defense and so forth.
    One reason to project things that way was to the guard 
against misses on the down side. And that we still have a 
multi-hundred billion dollar uncommitted number there, and I 
think that is prudent, probably should be a part of each long-
term budget.
    Mr. Matheson. That is what I wanted to follow up on. I 
remember the contingency when we looked at the budget 
resolution. Does the mid session review analyze where that is 
today, based on the changes in our projections?
    Mr. Daniels. Yes, sir. It is about $575 billion. This is 
after a couple of important decisions. The biggest one is the 
defense increase. Starting with the proposal this year and then 
assuming that flows all of the way through, that is $200 
billion there. Also the next biggest one, I think, would be the 
Medicare increase that I referred to earlier.
    So those are two refinements beyond what we had proposed in 
April that used the first piece of that uncommitted number.
    Mr. Matheson. Just to recall, that contingency did include 
Medicare trust fund as part of that contingency, is that a 
correct statement?
    Mr. Daniels. Well, it exceeded the amount of the Medicare 
Part A trust fund that we expected to have at the end of the 
period.
    Mr. Matheson. Thanks, Mr. Chairman.
    Chairman Nussle. Ms. Clayton.
    Mrs. Clayton. Thank you, Mr. Chairman.
    Thank you for your patience and your explanations. I want 
to follow up on that budget resolution as well. You are right, 
you had recommended in the President's budget, a $1 trillion 
reserve. The budget resolution that we passed out of Congress 
had a reserve for a number of important issues that both the 
President and the Congress had included education, Medicare, 
the defense and agriculture.
    Now, that $1 trillion has now been reduced, I think you 
said, to $575 billion; is that correct?
    Mr. Daniels. Yes, ma'am.
    Mrs. Clayton. Just before we adjourned for our recess, the 
Agriculture Committee, passed a bipartisan bill, based upon 
your projection and based on the budget resolution. In the 
reserve account for agriculture, which included both year 2001, 
2002, the amount came to about $78 billion. Taking the 
supplement out for year 2001, left $73 billion. Now, in your 
report and your testimony, both in the mid-session review as 
well as your individual testimony, you cite that now we are not 
a part of that reserve. You say that agriculture must find an 
offset for that which we included in the reserve.
    Which is it? Were we a part of that reserve? And, if we are 
not now, how do you plan to recommend the offset for the 
agriculture bill that has been passed out of the committee?
    Mr. Daniels. That is an important question, but the 
uncommitted funds that Congressman Matheson was just drawing 
our attention to are seven to eight times the amount of sort of 
the target reserve that was marked off for agriculture.
    We are not going to know for quite some time what a new 
farm bill will look like, let alone what it will cost. One has 
started in the House. They haven't started in the Senate. The 
farm bill doesn't expire until the end of next year, over a 
year from now. So I don't have any doubt that, just as happened 
this year, that the needs of America's farmers will be met, and 
again, certainly over the longer term, there is more than ample 
room to do it.
    Mrs. Clayton. I appreciate that answer, but it doesn't 
really answer the question. The question is given in your 
statement in the mid-session review. You are now saying that we 
need to have offsets in order to meet the needs of the American 
farmers. My question is where are those offsets going to be 
proposed if they are not part of the reserve?
    Mr. Daniels. We don't know that we have incremental costs 
yet----
    Mrs. Clayton. I beg your pardon. We don't know if we have 
incremental----
    Mr. Daniels. You haven't passed a farm bill. The Senate 
hasn't passed a farm bill. We don't know whether the $27 
billion that is in the baseline for next year will be the right 
amount or not. So we look forward to working with the Congress 
on this issue. The bill--and the only clue we have as to what 
might be in prospect, the bill that has moved a little bit in 
the House committee would add $2 billion in outlays to 2002, a 
very manageable amount if that happened to be the case. The 
Senate may have something entirely different in mind.
    Mrs. Clayton. Perhaps I didn't make my statement clear 
enough. I wasn't talking about the agriculture appropriation 
for year 2002. I was talking about the farm bill that presumed 
to use $73 billion over 10 years of the 78 that was a part of 
the reserve.
    Mr. Daniels. Right.
    Mrs. Clayton. Five of those seventy-eight has already been 
allocated and approved, and the President has signed for a 
supplemental. That leaves us 76. I was not talking about the 
current agriculture appropriation. I was talking about a 10-
year farm bill.
    Mr. Daniels. Yes, ma'am. If it turned out--we won't know 
for a long time. If it turned out that the additional cost of 
that bill were something like $73 billion, that would be in 
contrast, by our numbers, $575 billion that is uncommitted and 
available.
    Mrs. Clayton. So we would need an offset. We are to go to 
the floor next week. So the question the Rules Committee will 
have for the Agriculture Committee, would be should it be taken 
out of the $575 billion, or is this offset somewhere else?
    Mr. Daniels. I think, and I haven't looked at the term you 
are talking about, but the only place in which an offset would 
come into play is if it had a 2002 effect beyond what could be 
accommodated in this year's resolution.
    Mrs. Clayton. I see. So that only applied to this year's 
appropriation and not to the reserve of the $73 billion?
    Mr. Daniels. That is right. We would have to look at this 
year by year.
    Mr. Spratt. Would the gentlelady yield?
    Mrs. Clayton. Yes, I will.
    Mr. Spratt. Could I redirect the gentleman's attention to 
table 1, page 4. There you derive the $575 billion number that 
you keep referring to. Of that amount, $537 billion is a 
Medicare surplus. That leaves a $38 billion residual, which is 
not much of an offset for anything; so what you are telling the 
gentlelady is if she is willing to spend the Medicare surplus, 
you might be able to use that; however, the word ``offset'' 
connotes something different. It connotes that we come up with 
a new source over and above what is in the budget, a new 
revenue source or a new spending cut that will mean no effect 
on the bottom line.
    So I think we need a clarification. When you say that the 
farm bill will have to be offset, do you mean that some of this 
$38 billion residual can be used for that purpose, or if you 
want to dip into Social Security and Medicare at least, you can 
use it, or that you must find a new offset, a new spending cut, 
so that there is no impact on the bottom line?
    Mr. Daniels. I think offsets would refer to the year 2002, 
and that if it would take us above the budget resolution and 
therefore----
    Mr. Spratt. The budget resolution as a reserve has 
anticipated that up to $70 billion will be spent on this bill. 
That money was reserved. The Chairman was given authority to 
make the allocation.
    Mr. Daniels. Let me say it has nothing to do with Medicare 
Part A as far as we are concerned. That may be a self-
limitation that Congress wants to continue----
    Mr. Spratt. You mentioned $575 billion. Of that 575, $537 
billion is Medicare. So there is only $38 billion left over.
    Mr. Daniels. I said that is a limitation that some Members 
of Congress may want to impose. We don't see it that way for 
the reasons we have discussed----
    Mr. Spratt. It is a limitation of the budget resolution. 
That is the way the resolution is drawn. The Chairman can 
increase the allocation for the farm bill, but he cannot 
encroach upon Medicare. So all he has got is $38 billion.
    Mr. Daniels. I recognize that is where his authority is 
limited. Congress would have to act, as it always can, to make 
the spending possible, and in this case we would agree.
    Mrs. Clayton. Mr. Daniels, would you say that the 
administration will honor the budget resolution which we passed 
out of the House?
    Mr. Daniels. Yes, ma'am. We would like to work with the 
Congress and the appropriations process to do just that. It 
would be a great thing, by the way, for this committee and its 
Senate counterpart if we did see it through in that way so that 
the resolution did form the framework under which spending 
finally did occur and was contained.
    Mrs. Clayton. Well, the Agriculture Committee is working 
with that assumption. They are working under the guidance of 
the budget resolution, and they took it in good faith that they 
had $78 billion, 5 of which they spent, and the other 73 they 
have allocated over the next 10 years. If we are now being told 
that we don't have that amount, that means that we are not 
working on the framework of the budget resolution.
    Mr. Daniels. If the Congress sometime between now and the 
end of 2002 passes a new 5-year farm bill that adds that kind 
of spending, the moneys there, we will have to work together to 
accommodate it, but the revenues certainly look to be there far 
more than enough to afford it.
    Mrs. Clayton. And it is there excluding Medicare 
expenditures?
    Mr. Daniels. Well, the way we look at it, yes, because 
Medicare money is come and gone before these surpluses are ever 
accumulated.
    Mrs. Clayton. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Spratt?
    Mr. Spratt. I just wanted to refer you to table 3 instead 
of table 1 because it shows that most of the $575 billion, 
including Medicare, occurs in the outyears, particularly the 
last 2 or 3 years. In the near term the non-Social Security 
surplus is a billion dollars next year, $2 billion the 
following year, and $6 billion in 2004. There is very little 
there to play with.
    Mr. Daniels. Well, there is if we are completely inert 
about the 1.9 we start with and just, in fact, leave it there 
and inflate it, but that would not be our intention.
    Chairman Nussle. Mr. McDermott for one question.
    Mr. McDermott. Just one question. I picked up this 
morning's newspaper, and I read that the leadership in the 
House was pushing capital gains cuts. What is going to be the 
White House's position on that?
    Mr. Daniels. The President has said he is open-minded about 
it. It was obviously not part of his plan, his tax relief plan 
of this year, and so for the moment he is taking an open 
stance.
    Mr. McDermott. It is being pushed as a stimulus to the 
economy for this year. You are saying it wouldn't work this 
year? Is that what----
    Mr. Daniels. No, I am not saying that. The President said 
he is open-minded, and he would listen to the Congress to see 
what the sentiment was. It certainly reflects, as members of 
this committee on both sides did, a concern to make government 
do all it can do within its limits to get the economy going and 
sustain it, and I think that is what animates that suggestion. 
The President hasn't ruled it out, hasn't ruled it in.
    Mr. McDermott. What would be your recommendation if he came 
to you and said, Mitch, what should I tell them?
    Mr. Daniels. As of this morning, I would say the rebates 
are only halfway out the door. The latest rate cuts have only 
recently occurred. My personal view is that we should take a 
little time and see how the economy is responding. Meanwhile we 
should look at all options, and this is clearly one that might 
give us a better chance of a real strong and ongoing recovery.
    Mr. McDermott. So we might see capital gains before the end 
of the year?
    Mr. Daniels. I can't project. I can only report to you what 
the President said.
    Mr. McDermott. The door is not closed--is what you are 
saying?
    Mr. Daniels. He did not close the door, no, sir.
    Mr. McDermott. So it could happen?
    Mr. Daniels. That has a lot to do with both sides of the 
Members of Congress, what both sides are prepared to do, but 
yes.
    Mr. McDermott. OK. Thank you.
    Chairman Nussle. I was counting, by the way. That was 
seven, just so we are----
    Mr. McDermott. I had to----
    Chairman Nussle. Reel him in. I understand.
    Mr. Daniels. Those are called follow-ups, Mr. Chairman.
    Chairman Nussle. Mr. Daniels, you have been extremely 
generous with your time, and we appreciate the chance to 
question you and the administration on these figures, and we 
appreciate the time you have spent with the committee today.
    Mr. Daniels. Always a pleasure.
    Chairman Nussle. Thank you.
    The committee will continue now with its second panel, and 
we are honored again to have the cause of the government 
shutdowns--I am joking, of course--the very distinguished 
Director of the Congressional Budget Office, Dan Crippen, who 
has been before our committee before.
    While the Director is taking his chair, one of the 
interesting observations that I have heard made about the 
situation we find ourselves in goes in part to what we were 
just discussing, and it will be my first line of inquiry with 
the Director, and that is that in years past, the way the 
budget process worked, once the budget was passed, that was the 
budget, no ifs, ands, or buts. There wasn't any mid-session 
corrections, no adjustments, no changes, no consideration of 
changes.
    For instance, the just completed line of inquiry with 
regard to the farm bill is a good illustration of that. The 
budget is still controlling, and there is nothing in the mid-
session review that changes that or changes the authority that 
the Chairman has. The numbers were locked in by that budget 
resolution when we passed it on the floor of the House, and, in 
fact, all committees and departments of government, the 
Congress, are able to, as a result of that, make decisions 
based on that resolution into the future. It is only this year, 
as I understand it, is the first time where any consideration 
of a mid-session review has begun to point us possibly in a new 
direction for fiscal restraint. I am not suggesting that is 
bad. I actually think that is good, but it does show as an 
example some of the confusion that is out there.
    There is nothing in this mid-session review that changes 
one iota of the budget technically. We may as Congress make a 
different determination of what we should do based on these 
predictions and projections, but there is nothing in the budget 
that has changed as a result of these projections.
    We welcome you, Dr. Crippen, to the panel again, and we 
welcome your testimony. Your entire testimony will be part of 
the record, and you may summarize. Welcome.

  STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET 
                          OFFICE (CBO)

    Mr. Crippen. Thank you, Mr. Chairman. Maybe given the 
numbers we have and the hour of the day, we should recess to 
the cafeteria. I think I have a high enough credit limit on my 
credit card, that I could buy lunch.
    Chairman Nussle. As long as it is not a Pentagon credit 
card, it will be just fine.
    Mr. Crippen. I know better than that with this committee, 
yes.
    Mr. Chairman, I will take the opportunity to not give you 
my prepared statement, but just make a couple points very 
quickly so we can move on.
    I think one of the two biggest unknowns in our forecast and 
one of the reasons they change so much is growth in 
discretionary spending. It is simply a fact that we assume and 
are told to assume, frankly, that discretionary spending will 
be at this year's level plus inflation for the course of our 
baseline. Because appropriations are made on a yearly basis, 
the baseline may not be terrific, but it is probably the best 
that we can do. If spending were to grow differently from 
inflation, it would certainly leave you with a different long-
term surplus number. If it grew at 8 percent a year, for 
example, it would add another $2.5 trillion to spending over 10 
years or subtract that amount from surpluses if it grew less 
than inflation, obviously it would show larger surpluses.
    Secondly, and the object of much discussion today, of 
course, are the unknowns about economic performance. In the 
economics profession, we are notoriously bad about calling 
turning points in the economy. We missed this one as much as 
anyone else, but it has always been that way. That doesn't give 
you much comfort, I am sure, but I think because there was some 
discussion about 1981 that it may be interesting to spend 30 
seconds looking at that.
    CBO presented an analysis of the President's budget in 
1981. We suggested there would be in 1983, for example, a 
deficit of about $59 billion; a small number by today's 
standard, but pretty large by the standards of today. What 
turned out to be true was a deficit of about $200 billion, over 
$200 billion actually, so four times our estimate. The reason 
for the difference was largely economic. CBO, along with most 
of the rest of the world, did not foresee the coming severe 
recession in 1981 and 1982 nor the rapid decline in inflation 
that caused revenue collections to drop precipitously.
    We can advance to close to current day. Last year at this 
time the cover of our midyear report showed what we thought 
were the primary contributors to the change in the fiscal 
outlook from deficits to surpluses. The primary contributor, in 
our view, was a change in the economy. Productivity and 
economic growth were higher than we had foreseen as late as 
1997. Similarly, today, we have a change in the short-term 
outlook, certainly, that has caused a diminution in the 
surpluses for the near term, 2002 in particular. If you change 
the adjustment for corporate revenues, put them back in the 
year in which they normally would have been collected, about 
half of the change in 2002 is economic, and the other half is 
legislative. Obviously those ratios change dramatically by the 
end of the period; over the 10 years about 20 percent of the 
diminution is due to economics and 80 percent is due to the 
legislative changes that have been made.
    So it all goes to say that our forecasts do change more 
than we would certainly like them to. The two biggest unknowns 
are discretionary spending and performance of the economy.
    Lastly, Mr. Chairman, I will do what I have done here 
before. I have a chart that I drag around that begs the 
question about what happens sometime after this 10-year period. 
We are only looking at the next decade in the forecasts we have 
been discussing. Frankly, when our generation retires we will 
witness the largest shift the Federal budget has ever 
experienced. We will double the number of recipients for 
retirement programs at the federal level and more than double 
the spending for those retirees.
    Something dramatic must happen here. We are currently 
collecting 20 percent of gross domestic product (GDP) in 
revenues and spending about 18 percent. The national average, 
the historical average in tax collections since World War II, 
has been about 18 percent. To maintain government as we know it 
today and make room for this more than doubling of expenditures 
for retirees, we will have to make some very big changes in the 
not-too-distant future. Those changes may include increasing 
taxes by 10 percent of GDP or thereabouts, cutting other 
spending, which would virtually eliminate the rest of the 
government, or borrowing a great deal of money again. That 
ability to borrow 10 percent of GDP a year is probably 
questionable over a very long period, but those are the kinds 
of choices before us, and we need to keep them in mind.
    Despite much of the discussion about trust funds, as all 
the committee has heard me say before, I am a bit agnostic 
about trust funds. They clearly have some import in the outlook 
here, but the important questions are how much in resources are 
we transferring from the productive to the retired economy, and 
how big is the economy? To the extent the trust funds can 
affect those two factors, they play a role, but to the extent 
they don't, they are an accounting mechanism. Let me give you 
one quick example before I quit.
    In 2015 or thereabout, about the time I am eligible to 
retire, my kids won't be paying quite enough in payroll taxes 
to cover my benefits. Now, the trust fund will be in fine shape 
and have interest payments coming into it and eventually plenty 
of bonds to be turned in through my entire life presumably. But 
what happens in 2015 with the current trust fund is that the 
Social Security Administration, figuratively speaking, will go 
to the Treasury with a coupon and say, pay us the interest. In 
order for the Federal Government to generate that cash, it has 
essentially three options: Cut spending and other programs, 
raise taxes, or borrow the money. So under the current 
situation the Treasury will have to come up with cash to 
actually pay me my benefit.
    Now, think of an alternative scenario in which there was no 
trust fund, there were no interest payments for that trust 
fund, simply payroll taxes and spending were out of line. If 
when I went to cash my check the Social Security system didn't 
have enough money, the Treasury would be faced with those same 
three options. They would have to raise taxes, cut spending, or 
borrow from the public. So with or without a trust fund, come 
2015, the fiscal consequences may be quite similar, and the 
economic consequences as well. The actuarial accounting of the 
trust fund is an important element, but it is not one that will 
necessarily help or hurt this picture. What is important, 
again, is the size of the economy and how much we are 
transferring to the retirees.
    With that, Mr. Chairman, I will quit.
    Chairman Nussle. Thank you, Director.
    [The prepared statement of Mr. Crippen follows:]

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

    Mr. Chairman, Representative Spratt, and members of the committee, 
I am pleased to be here today to discuss the current outlook for the 
budget and the economy. Last week, the Congressional Budget Office 
(CBO) released The Budget and Economic Outlook: An Update, which I will 
summarize today.
    Recently enacted legislation and the continued sluggish behavior of 
the U.S. economy have reduced the projected Federal budget surpluses 
for fiscal year 2001 and future years. CBO projects that the total 
budget surplus in 2001 will be $153 billion $122 billion lower than CBO 
estimated in May. About two-thirds of the decrease results from new 
legislation; one-third comes from a weaker economy and other factors. 
Despite that drop, if the $153 billion surplus materializes in 2001, it 
will equal 1.5 percent of gross domestic product (GDP), the second 
largest surplus as a share of the economy since 1951.
    Because of the smaller total surplus, CBO now projects a small on-
budget deficit for this year. (The on-budget accounts exclude the 
spending and revenues of Social Security and the Postal Service). If 
current tax and spending policies are maintained and the economy 
performs as estimated, CBO projects small deficits or surpluses in on-
budget accounts for the next 4 years; however, steadily increasing on-
budget surpluses reemerge by the middle of the decade. The projected 
surpluses would allow all public debt that is available for redemption 
to be retired by 2010.
                           the budget outlook
    For the 5 years from 2002 through 2006, CBO projects surpluses 
totaling $1.1 trillion, which come almost entirely from off-budget 
accounts (see Table 1). For the 10-year period through 2011, CBO 
estimates that under current policies, surpluses will total $3.4 
trillion. Social Security makes up about three-quarters of that total. 
In 2010, the on-budget surplus reaches 1 percent of GDP, and the total 
surplus grows to 3 percent of GDP. Those estimates should be viewed 
cautiously, however, because future economic developments, technical 
estimating errors, and future legislative actions could produce 
substantial deviations a point that CBO discussed in detail in its 
January report on the budget and economic outlook.
    Total surpluses for the 2002-2011 period are $2.2 trillion less 
than CBO projected in May, when it last published its budget baseline 
(see Table 2). New legislation accounts for $1.8 trillion of that 
decrease, and changes in the economic forecast account for another $0.3 
trillion; the remainder stems from other changes (technical ones not 
directly driven by new legislation or by changes in the components of 
CBO's economic forecast).
    The Economic Growth and Tax Relief Reconciliation Act of 2001 
(Public Law 107-16) is estimated to reduce revenues by $70 billion in 
2001 and nearly $1.2 trillion over the 2002-2011 period. That law 
changed numerous tax provisions, including lowering income tax rates, 
establishing a 10 percent tax bracket, increasing tax credits for 
children, repealing the estate tax, lessening the so-called marriage 
penalty, raising the limits on contributions to retirement accounts, 
and enhancing education incentives. In addition, the law increases 
outlays for refundable tax credits by $4 billion in 2001 and $88 
billion between 2002 and 2011.
    Many of the provisions of P.L. 107-16, especially the ones with the 
greatest impact on the budget, phase in over time. Moreover, most of 
the provisions expire at the end of calendar year 2010. Extending all 
provisions through 2011 would reduce revenues by an additional $255 
billion over the 2002-2011 period.
    Other legislation will also increase projected outlays through 
2011. Providing additional assistance to farmers will increase spending 
by $5.5 billion in 2001, and the 2001 Supplemental Appropriations Act 
is projected to boost spending by $83 billion from 2002 through 2011. 
Because legislative changes will leave less money available to reduce 
outstanding Federal debt, interest payments will increase by $413 
billion over the next 10 years, CBO estimates.
    Lower projections of economic growth over the next few years, along 
with other revisions to the economic forecast, will diminish surpluses 
by $283 billion between 2002 and 2011, according to CBO's projections. 
(Those revisions reflect changes in the economic outlook since January, 
when CBO last updated its economic assumptions). In addition, technical 
changes will reduce surpluses by $177 billion.
    In the Administration's Mid-Session Review, the Office of 
Management and Budget's (OMB's) baseline budget projections are 
similar, though not identical, to those presented by CBO. For 2001, OMB 
estimates a small on-budget surplus, whereas CBO estimates a small on-
budget deficit. In each year of the projection period, CBO's estimates 
are lower than OMB's overall, CBO's figure for total surpluses from 
2002 through 2011 is $445 billion less. Although that discrepancy may 
seem large, it results from differences of just 1.0 percent in total 
projected revenues for the period and 0.7 percent in total projected 
outlays.
                          the economic outlook
    CBO has revised its economic forecast to reflect the weakness in 
the U.S. economy during the first half of 2001. Although economic 
activity has slowed to a crawl, CBO believes that the economy will 
narrowly avoid recession and recover gradually next year. CBO now 
expects that the levels of both nominal and real (inflation-adjusted) 
GDP will be lower in 2001 and 2002 than it anticipated in January. CBO 
also has raised its estimates of the unemployment rate and long-term 
interest rates for the next few years and lowered its estimate of 
short-term interest rates.
    CBO's current forecast assumes that growth of real GDP will average 
1.7 percent this calendar year and 2.6 percent next year for both 
years, those rates are about three-quarters of a percentage point lower 
than CBO estimated in January (see Table 3). CBO's projections do not 
incorporate the annual revisions to the national income and product 
accounts published by the Commerce Department's Bureau of Economic 
Analysis at the end of July, which were released after CBO's forecast 
was completed. Incorporating those revisions could move budget 
projections in either direction but probably not by very much.
    Inflation, as measured by growth in the consumer price index for 
all urban consumers, is 0.4 percentage points higher for 2001 and 0.2 
percentage points lower for 2002 than the estimates in the January 
forecast.
    Short-term interest rates are projected to be lower in the next few 
years than CBO previously anticipated, but long-term rates are expected 
to be slightly higher. Interest rates on 3-month Treasury bills are 
forecast to be about a full percentage point lower for both 2001 and 
2002 than the levels estimated in January. However, the interest rates 
paid on 10-year Treasury notes are projected to be between 0.3 and 0.4 
percentage points higher than previously anticipated.
    CBO does not forecast fluctuations of the economy beyond 2 years. 
Instead, it extends historical patterns in the factors increases in the 
labor force, rising productivity, and the rate of national saving that 
underlie the growth of potential GDP. After incorporating those 
patterns, CBO makes economic projections that extend three to 10 years 
out.
    For 2003 through 2011, CBO projects that growth of nominal GDP will 
average more than 5.2 percent a year and that growth of real GDP will 
average 3.2 percent levels slightly above those estimated in January. 
According to CBO's projections, inflation in the 2003-2011 period will 
average 2.5 percent, which is similar to the rate that was anticipated 
last winter. Interest rates over the period will average 4.9 percent 
for 3-month Treasury bills and 5.8 percent for 10-year Treasury notes, 
CBO projects figures that are also similar to January's projections.
    CBO's economic projections incorporate the effects of the recently 
enacted tax legislation. In the short run, the rebate of taxes payable 
on income earned in 2001 may help counter the economic slowdown by 
encouraging consumer spending. In the long run, the impact of the new 
tax law on GDP is uncertain, but any effect is likely to be small. 
Analysis of the law's economic effects is complicated by the sunset 
mechanism built into it, which establishes expiration dates for all of 
its provisions. People's expectations about the law's expiration in 
2011 could affect their decisions about consumption, work, and saving 
over the next 10 years. For the purposes of its economic projections 
but not for its budget calculations CBO has ignored the expiration.
    Like all forecasts, CBO's forecast is very uncertain, and economic 
activity could be significantly slower or faster than CBO currently 
expects. Indeed, economic indicators released since CBO's forecast was 
completed in July suggest a weaker economy than assumed in the 
projections, though the nature of economic activity (weak business 
investment offset by moderate consumer spending and spending on 
residential structures) is close to CBO's expectation. In light of 
additional weakness in construction spending and in the manufacturing 
sector, the latest estimate for the second quarter of this year 
indicates that output growth was only 0.2 percent, rather than the 0.7 
percent first estimated. And indicators for July, the first month of 
the current quarter, suggest that growth may be less than CBO assumed 
because of much weaker business investment. Short-term interest rates 
in the current quarter are also likely to be lower than assumed in July 
because the Federal Reserve cut its intended Federal funds interest 
rate another 25 basis points in August.
    Much of the uncertainty about medium-term growth involves the pace 
of investment in information technologies. The increase in the growth 
rate of overall productivity in the late 1990's resulted both from 
greater amounts of capital per worker, mainly in the information 
technology sector, and from more rapid growth in total factor 
productivity (reflecting both labor productivity and capital), probably 
in large part the result of innovative uses of information technologies 
throughout the economy. The question now is what the pace of investment 
in information technologies will be over the medium term and the extent 
to which those investments will lead to significant cost savings in 
other sectors of the economy.
    The economic perspectives of OMB and CBO are generally quite 
similar, but the differences in those outlooks still account for a 
large part of the difference between the two agencies' budget 
projections. The Administration's current economic projections 
anticipate stronger near-term growth than CBO's projections do, with a 
sharp improvement in economic conditions by the end of this year. As a 
result, corporate profits in the Administration's forecast return to 
recent levels almost immediately, and the unemployment rate remains 
below 5 percent (see Table 4). By contrast, in CBO's forecast, profits 
remain weak in the near term, and the unemployment rate rises to 5.2 
percent by the end of 2002. After 2002, the Administration's 
projections of nominal GDP and of tax bases (such as corporate profits 
and wages and salaries) remain slightly stronger than CBO's. Throughout 
most of the period, the Administration anticipates significantly lower 
interest rates on Treasury securities than CBO does, although the 
implications of that difference for the budget are limited at a time 
when publicly held debt is being paid down.

                                                       TABLE 1.--CBO'S BASELINE BUDGET PROJECTIONS
                                                                    [By fiscal year]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                      Actual                                                                                                     Total,
                                       2000    2001    2002     2003     2004     2005     2006     2007     2008     2009     2010     2011   2002-2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 IN BILLIONS OF DOLLARS
Revenues:
    Individual income taxes.........   1,004   1,015   1,039    1,079    1,123    1,175    1,223    1,286    1,360    1,440    1,528    1,717     12,970
    Corporate income taxes..........     207     149     210      195      215      247      253      265      278      292      307      321      2,584
    Social insurance taxes..........     653     694     727      761      794      838      880      923      967    1,016    1,066    1,119      9,092
    Other...........................     161     152     158      160      175      178      187      189      196      204      203      185      1,833
                                     -------------------------------------------------------------------------------------------------------------------
      Total.........................   2,025   2,011   2,134    2,196    2,307    2,438    2,543    2,663    2,801    2,952    3,103    3,341     26,479
        On-budget...................   1,545   1,503   1,602    1,638    1,723    1,822    1,897    1,985    2,089    2,204    2,319    2,518     19,795
        Off-budget..................     481     507     532      558      584      616      647      679      712      748      785      823      6,684
Outlays:
    Discretionary spending..........     615     647     689      717      737      759      774      789      812      833      853      878      7,842
    Mandatory spending..............   1,032   1,092   1,181    1,243    1,313    1,387    1,454    1,531    1,625    1,724    1,831    1,961     15,249
    Offsetting receipts.............     -81     -89     -92     -109     -112     -107     -112     -119     -125     -132     -139     -148     -1,196
    Net interest....................     223     207     179      174      168      155      139      121      101       78       58       50      1,223
    Proceeds earned on the balance         0       0       0        0        0        0        0        0        0        0       -7      -29        -36
     of uncommitted funds\1\........
                                     -------------------------------------------------------------------------------------------------------------------
      Total.........................   1,789   1,858   1,958    2,024    2,106    2,194    2,254    2,323    2,413    2,502    2,596    2,713     23,083
        On-budget...................   1,458   1,512   1,600    1,656    1,726    1,802    1,850    1,906    1,983    2,057    2,134    2,235     18,948
        Off-budget..................     331     346     358      369      380      392      405      417      430      445      462      478      4,135
Surplus or Deficit (-)..............     236     153     176      172      201      244      289      340      389      450      507      628      3,397
    On-budget.......................      87      -9       2      -18       -3       21       47       78      106      147      184      283        847
    Off-budget......................     150     162     174      190      204      224      242      262      283      303      323      345      2,549
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
 
\1\ ``Uncommitted funds'' is CBO's term for the surpluses that remain each year after paying down publicly held debt available for redemption. CBO
  assumes that those funds, which accumulate from 1 year to the next, earn proceeds at a rate equal to the average interest rate projected for Treasury
  bills and notes.


                                          TABLE 2.--CHANGES IN CBO'S PROJECTIONS OF THE SURPLUS SINCE MAY 2001
                                                        [By fiscal year, in billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                      Total,     Total,
                                   2001     2002     2003     2004     2005     2006     2007     2008     2009     2010     2011   2002-2006  2002-2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Surplus as Projected in        275      304      353      400      437      508      578      641      718      806      883     2,002       5,629
 May 2001......................
Changes:
    Legislative:
        Tax act\1\.............      -74      -38      -91     -108     -107     -135     -152     -160     -168     -187     -130      -479      -1,275
        Other\2\...............       -7      -10       -8       -7       -8       -8       -8       -8       -8       -9       -9       -41         -83
        Debt service\3\........        *       -4       -9      -16      -23      -31      -41      -53      -65      -79      -92       -84        -413
                                ------------------------------------------------------------------------------------------------------------------------
          Subtotal.............      -81      -52     -107     -131     -138     -174     -201     -221     -241     -274     -230      -603      -1,771
    Economic...................      -25      -48      -54      -50      -40      -31      -23      -16       -9       -6       -5      -224        -283
    Technical\4\...............      -16      -27      -20      -18      -15      -13      -13      -16      -17      -18      -19       -93        -177
                                ------------------------------------------------------------------------------------------------------------------------
          Total................     -122     -128     -182     -198     -192     -219     -238     -253     -268     -299     -254      -920      -2,232
Total Surplus as Projected in        153      176      172      201      244      289      340      389      450      507      628     1,082       3,397
 August 2001...................
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
 
NOTE: * = less than $500 million.
 
\1\ The Economic Growth and Tax Relief Reconciliation Act of 2001 will reduce revenues by $1,186 billion and increase outlays by $88 billion between
  2002 and 2011.
\2\ Mostly the 2001 Supplemental Appropriations Act, along with recent legislation that provides additional funds in 2001 for agricultural producers.
\3\ Reflects only the change in debt-service costs resulting from legislative actions. Other effects on debt-service costs are included under economic
  and technical changes.
\4\ Changes not directly driven by new legislation or by changes in the components of CBO's economic forecast.


         TABLE 3.--CBO'S CURRENT AND PREVIOUS ECONOMIC PROJECTIONS FOR CALENDAR YEARS 2001 THROUGH 2011
----------------------------------------------------------------------------------------------------------------
                                                                         Forecast       Projected Annual Average
                                                                   ---------------------------------------------
                                                                      2001      2002     2003-2006    2007-2011
----------------------------------------------------------------------------------------------------------------
Nominal GDP (Billions of dollars):
    August 2001...................................................   110,366    10,876   \1\ 13,355   \2\ 17,145
    January 2001..................................................    10,446    11,029   \1\ 13,439   \2\ 17,132
Nominal GDP (Percentage change):
    August 2001...................................................       4.0       4.9          5.3          5.1
    January 2001..................................................       4.7       5.6          5.1          5.0
Real GDP (Percentage change):
    August 2001...................................................       1.7       2.6          3.2          3.2
    January 2001..................................................       2.4       3.4          3.1          3.1
GDP Price Index (Percentage change):
    August 2001...................................................       2.3       2.3          2.0          1.9
    January 2001..................................................       2.3       2.1          1.9          1.9
Consumer Price Index\3\ (Percentage change):
    August 2001...................................................       3.2       2.6          2.5          2.5
    January 2001..................................................       2.8       2.8          2.6          2.5
Unemployment Rate (Percent):
    August 2001...................................................       4.6       5.2          5.2          5.2
    January 2001..................................................       4.4       4.5          4.7          5.2
Three-Month Treasury Bill Rate (Percent):
    August 2001...................................................       3.9       3.8          4.9          4.9
    January 2001..................................................       4.8       4.9          4.9          4.9
Ten-Year Treasury Note Rate (Percent):
    August 2001...................................................       5.3       5.6          5.8          5.8
    January 2001..................................................       4.9       5.3          5.6          5.8
----------------------------------------------------------------------------------------------------------------
SOURCE: Congressional Budget Office.
 
NOTES: The August 2001 values for GDP and its components are based on data from the Bureau of Economic Analysis'
  national income and product accounts before the annual revision in July. Incorporating those revisions, which
  occurred after CBO had completed its forecast, could move budget projections in either direction but probably
  not by very much. Percentage changes are year over year.
 
\1\ Level of GDP in 2006.
\2\ Level of GDP in 2011.
\3\ The consumer price index for all urban consumers.


     TABLE 4.--COMPARISON OF CBO'S AND THE ADMINISTRATION'S ECONOMIC
            PROJECTIONS FOR CALENDAR YEARS 2001 THROUGH 2011
------------------------------------------------------------------------
                                  Forecast      Projected Annual Average
                             -------------------------------------------
                                2001     2002    2003-2006    2007-2011
------------------------------------------------------------------------
Nominal GDP (Billions of
 dollars)
    CBO.....................   10,366   10,876    \1\13,355    \2\17,145
    Administration..........   10,364   10,937    \1\13,553    \2\17,488
Nominal GDP (Percentage
 change)
    CBO.....................      4.0      4.9          5.3          5.1
    Administration..........      4.0      5.5          5.5          5.2
Real GDP (Percentage change)
    CBO.....................      1.7      2.6          3.2          3.2
    Administration..........      1.7      3.2          3.3          3.1
GDP Price Index (Percentage
 change)
    CBO.....................      2.3      2.3          2.0          1.9
    Administration..........      2.3      2.2          2.1          2.1
Consumer Price Index\3\
 (Percentage change)
    CBO.....................      3.2      2.6          2.5          2.5
    Administration..........      3.3      2.7          2.5          2.5
Unemployment Rate (Percent)
    CBO.....................      4.6      5.2          5.2          5.2
    Administration..........      4.6      4.8          4.6          4.6
Three-Month Treasury Bill
 Rate (Percent)
    CBO.....................      3.9      3.8          4.9          4.9
    Administration..........      3.8      3.9          4.3          4.3
Ten-Year Treasury Note Rate
 (Percent)
    CBO.....................      5.3      5.6          5.8          5.8
    Administration..........      5.2      5.2          5.2          5.2
Tax Bases (Percentage of
 GDP)
    Corporate book profits..
        CBO.................      7.9      7.5          8.0          8.1
        Administration......      7.7      8.9          8.9          8.0
    Wages and salaries......
        CBO.................     48.6     48.9         48.4         48.1
        Administration......     48.1     48.2         48.6         48.1
------------------------------------------------------------------------
SOURCES: Congressional Budget Office; Office of Management and Budget.
 
NOTES: CBO's values for GDP and its components are based on data from
  the national income and product accounts before the July 2001
  revision. Percentage changes are year over year.
 
\1\ Level of GDP in 2006.
\2\ Level of GDP in 2011.
\3\ The consumer price index for all urban consumers.

    Chairman Nussle. So let me just make sure I get this 
straight because while this is not a long-term liability 
discussion today per se as has been pointed out, certainly 
decisions we make today have impact. Is there anything that we 
can do today in the budget to affect that chart that you are 
showing right there involving Medicare, Medicaid, and Social 
Security? Is there anything on the spending side, anything on 
the debt side; is there anything on any side that we can do 
within the budget to change those three green, red, and blue 
lines from going where you are projecting them to go?
    Mr. Crippen. In the simplistic view of the world, there are 
only two moving parts. One is how much you are transferring, 
that is, the level of benefits, and clearly you could choose to 
cut those at some point in the future; the other one is the 
size of the economy. There may be actions you can take to help 
economic growth. We talked about one this morning, the current 
rebate might help, but there also may be spending programs that 
you might think would help economic growth; maybe education, 
for example.
    I am not here to make policy recommendations. I am simply 
saying that what is most important is our use of tax revenues 
in this context to help the economy grow, because that is 
ultimately what is going to be the source of the financing for 
my generation's retirement. We will be taking the production of 
our children, what they are making at that time, and whether we 
finance it through taxes or borrowing or some other means 
doesn't matter much. We are going to be taking their production 
and consuming it. So the size of the economy is ultimately the 
most important single piece of this puzzle. Anything you can 
do, therefore, to help economic growth now and in the future is 
helpful to this outlook.
    Chairman Nussle. To follow up on something my good friend 
Mr. Capuano was inquiring about before, my understanding is 
that the current accounting process is one that Congress came 
up with; in other words, we have instructed Treasury on what to 
do with the money that is coming into Social Security and 
Medicare. They don't get to make independent decisions down 
there, and while it may be a popular view that a trust fund--
and my constituents have the same popular view, that a trust 
fund exists someplace just like their savings account or some 
kind of a safety deposit box where they can stick away some 
dollars, or a Mason jar or whatever you want to call it. That 
doesn't exist. Unless and until Congress changes, reforms, 
modernizes, whatever words you want to use, the Social Security 
and Medicare Systems, that is the way it is going to be, and it 
is up to Congress to make the decision and determination of 
those changes. Am I in the ballpark?
    Mr. Crippen. Sure. Again, those changes, I would suggest, 
whatever they are, need to be measured against the metric here 
of whether they help or hurt economic growth. Simply changing 
the money around--for example, some of the proposals we have 
seen in the past for private accounts--may or may not help 
economic growth. If the Federal Government had to borrow to 
finance those private accounts, for instance, the net effect on 
the national savings rate would probably be zero or something 
like that; therefore, they would have very little effect on the 
outlook in the future in this way of looking at the problem.
    It is not a matter of raising the rate of return to the 
trust funds or somehow changing the asset allocation. Rather it 
is how we are going to finance these changes--how big will the 
economy be at the time that we are going to be demanding these 
resources from our kids.
    Chairman Nussle. The other two questions I have, first of 
all, generally speaking, where do you differ from Director 
Daniels? As you heard him testify today, are there areas as you 
listened--you were here for the whole testimony, and I 
appreciate your doing that and listening to the Director. Would 
you give us your advice, based on being our congressional 
analyst, and independently so, on where you may differ with OMB 
on the testimony that he provided and the analysis he provided 
for us this morning?
    Mr. Crippen.In the short run, there is a slight difference, 
as Director Daniels pointed out, in our estimates of economic 
recovery, how quickly it takes place and how robust it will be. 
We aren't as optimistic as OMB is, which has a big effect on 
the short-term outlook. In the long run we differ slightly in 
our forcasts of economic growth and, therefore, of revenue 
collection. OMB is a little more optimistic than we are. In 
addition, the Director said, we at CBO think that Medicare 
spending is going to grow faster than OMB does currently. All 
together it is by something like $450 billion or so, a little 
more than that, I guess, that OMB would have surpluses larger 
than we would over that same period. There are some ups and 
downs in revenue, but in the main CBO thinks the economy is 
going to grow slower, so the government will collect fewer 
dollars, and Medicare is going to grow faster and cost the 
government more.
    Chairman Nussle. Thank you.
    Mr. Spratt.
    Mr. Spratt. Dr. Crippen, thank you very much. Let me ask 
you, how much confidence do you have in your forecast?
    Mr. Crippen. Oh, just a great deal.
    Mr. Spratt. Seriously----
    Mr. Crippen. That is a little hard to answer. What we 
attempted to do was give you our best estimate of what we see 
now. Even since January that outlook has changed, in part 
because of the economy and obviously because of legislation. So 
one has to be cautious about these numbers. Clearly the farther 
out we go and the fact that we now have a 10-year outlook where 
in the old days we had a 4- or a 5-year outlook makes them even 
less certain. We don't pretend to know a great deal beyond the 
first few years to the extent we know those years. Things like 
large demographic changes, we can predict and use those in our 
projections. In terms of the economic performance, we 
essentially assume that the last 5 years will look like the 
first 5, and we don't pretend to be able to call not only turns 
in the economy, but any real change in performance out there--
we will have to catch up to it as it happens.
    Mr. Spratt. Specifically when do you foresee the economy 
beginning to grow again?
    Mr. Crippen. Later this year and next year
    Mr. Spratt. Calendar year?
    Mr. Crippen. Yes.
    Mr. Spratt. Like November-December?
    Mr. Crippen. We are seeing some positive things happen in 
the economy now. Whether that translates into more than 2 
percent real GDP, we won't know for a few months, but we are 
certainly suggesting that next fiscal year, which starts in 
October, we will have growth of around 2.6 percent in real GDP.
    Mr. Spratt. As opposed to 3.2 percent assumed by the Office 
of Management and Budget?
    Mr. Crippen. Right.
    Mr. Spratt. There is something called the blue chip 
indicators. It is a composite of 50 different economy 
forecasters nationwide. Where does your 2.6 percent put you on 
their scale?
    Mr. Crippen. We are a little bit below the current average 
of the Blue Chip for growth.
    Mr. Spratt. They would come out at about 2.8 percent, and 
you are at 2.6 percent.
    Mr. Crippen. Correct.
    Mr. Spratt. OMB at 3.2 percent, where would this be on the 
blue chip scale?
    Mr. Crippen. They are within the total range of the 50, but 
they are in the top 10 percent or so. They are above average in 
terms of the Blue Chip.
    Mr. Spratt. I haven't seen the blue chip chart, but I have 
heard it said they would rank number 8 among the 50 
forecasters, definitely at the high end of the assumption.
    Mr. Crippen. But within the range of the----
    Mr. Spratt. You said yesterday in your testimony before the 
Senate that as new evidence comes in every day, if anything, 
your current forecast, if it were done again last night, would 
have been somewhat more pessimistic.
    Mr. Crippen. I think that is right. Certainly in the short 
run we were looking at something like 1 percent real growth 
last quarter, and then it came out at preliminary 0.7 and then 
finally at 0.2. So we certainly would not be quite as 
optimistic in the short run. We didn't change from January, and 
I do need to emphasize this, and I know you know this, but we 
haven't changed our long-run outlook very much. We still 
believe that the economy can grow at over 3 percent real GDP a 
year after we get out of this downturn, but certainly in the 
next month or 2 it looks worse than we anticipated back in 
January and even in May.
    Mr. Spratt. Director Daniels has taken some of the indices 
of your forecast, such as the growth rate, and said really we 
aren't that far apart, and in the near term the numbers are 
fairly similar. But you just measured one difference between 
CBO's forecast and OMB's forecast when you indicated there is 
about $450 billion in available surpluses more in their 
forecast than in your forecast. Is that the correct number?
    Mr. Crippen. That is about right. I would have to tell you 
to look at our summary report. The first table will tell you 
precisely, but that sounds about right for the difference 
between the two. That sounds like and is a fair piece of 
change, but, of course, over the 10-year period it is something 
like a 1 percentage point difference in revenues and half a 
percentage point difference in outlays. So it is not a lot.
    Mr. Spratt. Much of that occurs in the outyears, too?
    Mr. Crippen. Sure.
    Mr. Spratt. Let me ask you and make clear to everybody what 
kind of baseline forecast you have done. You call this a 
current services baseline, and when you do a current services 
baseline forecast, what you do is you take discretionary 
spending, the spending that we appropriate every year in 13 
different appropriation bills, and you simply increase the 
total spending in each of those accounts every year by 
inflation, nothing more. So that doesn't provide anything for 
initiatives. It doesn't provide anything for programs that are 
singled out for sizable increases, like defense or education or 
NIH. If you want to increase those, you have to decrease 
something else. Basically what you are providing is enough 
money in real terms to run in place that have the same spending 
power in discretionary spending each year as you had the year 
before; is that correct?
    Mr. Crippen. That is correct.
    Mr. Spratt. For the record, let me make clear to everybody 
what that does not include. For example, if we could put our 
``eye chart'' up here, even if taking this fairly Spartan 
baseline, adding only inflation, nothing else, keeping real 
spending for discretionary purposes constant, what you show in 
your forecast is that Medicare will be invaded next year to the 
tune of $36 billion. In other words, we will have to use the 
money coming into the Medicare Trust Fund, almost all of it; 
$38 billion surplus, $36 billion will have to be spent, almost 
fully consuming it. The next year all of the Medicare surplus 
in 2003 will be consumed, and we will have to dip into the 
Social Security surplus to the tune of about $18 billion. The 
next year, 2004, the Medicare surplus will be fully spent, and 
there will be about a $3 billion invasion of the Social 
Security surplus. This is with no new initiatives or anything 
like that, just inflation only. Now, this does not include any 
additional amount for Medicare prescription drugs, does it?
    Mr. Crippen. No, it does not.
    Mr. Spratt. That would have to be added on, and to the 
extent it was added, whether it is $190 billion or $300 billion 
or something in between, the bottom line would worsen.
    Mr. Crippen. It would. I would say on pharmaceuticals that 
in all the estimates we have done heretofore, we assume that 
the benefit could not be in place before 2004 or 2005, so most 
of that would be in the latter half of the decade.
    Mr. Spratt. It would take a while to get a program like 
that up and running even if it were passed tomorrow. You just 
heard our colloquy about the farm bill. This also doesn't 
include anything additional for a new farm program----
    Mr. Crippen. Right.
    Mr. Spratt [continuing]. Which could be as much as $74 
billion if the Agriculture Committees get their way and we 
carry out this budget resolution. It doesn't include anything 
for the increase we have all included for NIH. That will have 
to come out of some other program if we don't provide 
additional funds for it.
    Mr. Crippen. If you provide more than inflation, yes.
    Mr. Spratt. The same thing for education. It is inflation 
only, but no major initiatives, and it doesn't include anything 
also for offsetting extension of expiring tax provisions.
    Mr. Crippen. That is correct.
    Mr. Spratt. The administration notes in the report they 
sent us that this year we will have about four or five very 
popular tax concessions in the Tax Code whose applicability 
will expire unless we renew it. You assume nonrenewal, that 
they will expire, and the revenues they used to offset will no 
longer be offset and will recover those revenues in the future. 
We will have higher revenues because those things expire.
    Mr. Crippen. If they are not renewed, yes.
    Mr. Spratt. If they are not renewed. So your budget, 
therefore, won't accommodate most of the things we have been 
talking about in terms of increasing defense and increasing 
education and providing prescription drugs for Medicare. All of 
that would have to come below that bottom line and would worsen 
the invasion of Medicare and Social Security.
    Mr. Crippen. Certainly without other offsetting changes of 
some kind, that is right.
    Mr. Spratt. Right.
    Let me ask you one thing about your chart there, your layer 
chart. Let me make a point, too. One reason we have been able 
to accommodate the increase thus far, those three entitlement 
programs, is that we have had a significant, some would say a 
dramatic, decrease in what we spend as a percentage of GDP on 
discretionary funded programs.
    Mr. Crippen. Particularly defense, yes.
    Mr. Spratt. Particularly defense. But in 1962, we were 
spending 12.3 percent of our GDP on discretionary programs. 
Defense was a good share of that, but there were other 
programs, too. This year we are spending 6.3 percent, about 
half of what we were spending 30 years ago, which is pretty 
phenomenal and has helped allow these programs to grow without 
throwing the budget completely out of kilter.
    Another significant factor is that this year the total 
Federal budget will be 18 percent of GDP. In 1984, 1985, at the 
peak of the Reagan defense build-up, it was 23.5 percent. So we 
are about 5.5 percentage points lower as a percent of GDP. GDP 
is $10 trillion, $11 trillion. That is $500 billion less 
spending than if we were taking the same wedge out of the 
national pie as we were in the mid-1980's. That is pretty 
significant in the way of decreasing spending.
    In addition, if you want to mitigate this problem, which is 
certainly a problem for the long run, one thing you can try to 
do is grow the denominator, grow the GDP.
    Mr. Crippen. Exactly.
    Mr. Spratt. If we can diligently use the trust fund 
surpluses to buy down existing outstanding national debt, at 
least buy it back and convert it into trust fund debt, we can 
add $3 trillion plus to net national savings over the next 10 
to 12 years, and that will add to capital formation, should 
lower the cost of capital, should lower the interest rates, and 
should boost the economy; should it not?
    Mr. Crippen. It should.
    Mr. Spratt. So if we can enlarge the denominator, we can 
decrease this fraction----
    Mr. Crippen. Absolutely.
    Mr. Spratt [continuing]. Of GDP----
    Mr. Crippen. What you are suggesting, Congressman, is what 
I have been trying to suggest as well. That is the more 
poignant debate about Social Security and Medicare in the baby-
boom era is what the policies are that we ought to be pursuing 
to boost economic growth. Clearly one of them might be to pay 
down debt. There could be others, but I am suggesting it is not 
so much which side of a line you are on and what a trust fund 
balance looks like, because this picture occurs whether or not 
there are trust funds at all in some ways. So what is most 
important is to have a debate about economic growth and what 
policies are best to pursue for that.
    Mr. Spratt. Even though we are teetering on a recession, do 
you think it is wise to stay this course at least with respect 
to the Social Security Trust Fund, and that is to try to use 
the trust fund exclusively for debt buydown?
    Mr. Crippen. I don't know, Congressman. Again, the 
economics profession has a lot of suggestions, but no 
conclusions, about how one would best promote economic growth 
at this point. It may not be that paying down debt is the ideal 
policy if we maintain growth at this fairly anemic rate. You 
may want----
    Mr. Spratt. If we have a true recession or a deeper 
recession----
    Mr. Crippen. Or if we don't recover much. I mean, 2 percent 
real growth is as close to recession as you would ever want to 
be without getting there. So it may be that the Congress would 
want another policy. Rather than paying down debt by $150 
billion, you might want a policy that didn't pay it down as 
much and perhaps spent more or did other things to help boost 
the economy.
    Mr. Spratt. Let me go back to the chart here, which 
basically lays out the budget as you see it. The point I was 
making earlier is we have got two phenomena here side by side. 
In the near term we have a cyclical downturn in the budget. It 
is not the entire effect, obviously, by OMB's calculations. 
Using their numbers, it is just 38 percent of it, but basically 
in the year 2002, 2003, we pull out of this slump, return to a 
fairly significant rate of growth. You have 2.6 percent. They 
have 3.2 percent. The economy starts chugging along then, but 
we still see some degradation in the bottom line for a number 
of years to come, at least on the on-budget surplus and the on-
budget surplus excluding Medicare Trust Fund. Would you agree 
these are two distinct problems?
    Mr. Crippen. Yes. Absolutely. Well, they are distinct in 
the numerical formulation of them. They are not distinct in 
that they are both a function of economic growth, that is, or 
lack of it. The more we can grow the economy, the better our 
forecast will look next year and in 10 years, and the better 
this fraction will look in 30 years. So in that sense they are 
related, but as our cover shows on the report, if the 
definition of the problem is diminution of surpluses, then 
clearly in the short run, over the next few years, the economy 
has the biggest effect. In the long run it is legislation that 
has passed, the tax bill and others, that has changed the 
outlook for the surplus.
    Mr. Spratt. Your total estimate of the economic and 
technical factors since January comes to about $250 billion 
over 10 years?
    Mr. Crippen. Over the 10 years it is about 20 percent. In 
fact, I think Chairman Conrad said yesterday that 21 percent of 
the change in the outlook comes from the change in our 
economics. In the short run, next year, as I said, if you 
adjust the corporate payment back to where it was supposed to 
be or should have been or was, you then get about half of the 
change, 40 billion, due to economics and 40 due to the----
    Mr. Spratt. And the balance, the rest of the change, comes 
from enacting policy changes, namely the tax cut?
    Mr. Crippen. The tax cut, the supplemental appropriation 
that has been enacted, adds about $80 billion over that time 
period. There are a smattering of other spending. There is 
outlays in the tax bill as well, refundable tax credits and the 
change in debt service, that is 80 percent of the change over 
the next 10 years.
    Mr. Spratt. Thank you very much.
    Mr. Hastings. Thank you, Mr. Chairman. I walked in just 
when Chairman Nussle was asking you about the areas that you 
differed, and I heard--let me make sure I get this correct--
that you differ in the short-term economic recovery, OMB is 
different than you are, and in the long-term economic growth; 
is that correct?
    Mr. Crippen. That is right.
    Mr. Hastings. Both of those affect revenues primarily; is 
that correct?
    Mr. Crippen. Yes.
    Mr. Hastings. How much? Give a percentage of when you talk 
about--maybe I should ask it this way: When you build in those 
two, economic recovery and the long-term economic growth, how 
do you factor spending into that, or can you factor spending 
into that?
    Mr. Crippen. I am not sure. There are certainly some 
spending programs that are affected by the economy, 
unemployment compensation, for instance.
    Mr. Hastings. Let me put it this way: Another difference 
between--you may have said this in your opening remarks, and 
Director Daniels alluded to it, but they are basing their--the 
revenues that you both have are essentially the same. The 
difference is in the spending side. The reason why, and, again, 
correct me if I am wrong, is because you take current policy 
today and extrapolate that to the future, correct?
    Mr. Crippen. That is right.
    Mr. Hastings. OMB in their projections look at some policy 
changes that they are suggesting, making the supposition, that 
the Congress will make some of those changes that they want, 
and, therefore, you will have a different spending level. Is 
that essentially correct?
    Mr. Crippen. The primary difference between us and OMB, 
Congressman, in spending over the 10 years is not so much the 
discretionary baseline, which I think is what you are alluding 
to, but more the Medicare spending. We are assuming that 
Medicare is going to grow faster than OMB assumes.
    Mr. Hastings. You are also assuming that Medicare will grow 
under current policy.
    Mr. Crippen. Right.
    Mr. Hastings. You are not taking into consideration some 
changes that the Congress may or may not change. The President, 
of course, has strongly suggested and a lot of Members of 
Congress have suggested that we need to make some changes. That 
is true with Social Security, too, by the way.
    Mr. Crippen. Correct.
    Mr. Hastings. So I guess what I am getting at is that the 
notion that one Congress cannot bind another Congress, although 
we respect policies that prior Congresses have made, and if 
people want to change them, we will change them, but I think 
there is certainly a growing awareness around the country that 
Social Security needs to be changed, and, in fact, it was part 
of a Presidential campaign for the first time I have ever 
heard, and as a result there is a blue ribbon commission that 
is going to have a recommendation. And Medicare, there was a 
blue ribbon commission that existed a couple years ago, and 
nothing has happened.
    The point I am making is awareness is out there that some 
of these programs need to be changed, and that can affect in 
the long term then the spending that you would project as to 
what the demands are in the future; is that correct?
    Mr. Crippen. Absolutely. You have given me an opening here 
to say one of the things that I would have said if I read my 
opening statement. That is our numbers, our baseline, is 
predicated on a whole set of rules that we generally follow, 
but it is not, to be sure, a prediction of what the next 10 
years will be. In some ways it is artificial. Saying this is 
the equivalent of an assumption that Congress won't meet for 10 
years or that we will have no change in policies for 10 years, 
which is obviously not going to happen.
    So this is not, strictly speaking, predictions of outcomes. 
It is the best estimate we have of what the current law would 
produce.
    Mr. Hastings. Right. That is the point that I think needs 
to be emphasized.
    I find it remarkable that your numbers and OMB numbers on 
revenue projections in the short term were virtually identical. 
They may change for those reasons that you said, but any time 
that you try to estimate revenues beyond 1 year, it is a very 
inexact science. I think everybody would acknowledge that. It 
is especially true when you are trying to estimate what 
expenditures would be, because there are going to be some 
changes in policies, and we don't know. It has been alluded to 
on some other policies that have passed out of committees. 
Those haven't passed the full Congress yet. They haven't been 
signed into law, and there may be some changes as we go down 
the line on that, but I want to make the distinction that from 
a revenue projection standpoint, you are pretty much on line. 
You obviously differ with OMB simply because you are dealing 
with the status quo on spending, and there are certainly some 
people that want to change some of the programs that will 
affect that spending. Is that a fair analysis of----
    Mr. Crippen. Yes. The biggest single thing, as you 
suggested, is revenues, and the biggest factor is that we are 
slightly slower and less optimistic on growth over the next 10 
years.
    Mr. Hastings. What it boils down to, I guess that is the 
challenge that the Congress as a whole has. There are some that 
believe that government ought not to grow as fast as it had in 
the past. I am in that category. There are others that feel 
that government should grow much faster. I think that the good 
news out of all this is that if we live within the budget and 
the revenue that we have, then our challenge is to obviously 
prioritize that spending, which is obviously a challenge every 
time Congress meets. So thank you very much.
    Mr. Brown. [Presiding.] Thank you, Doug.
    Mr. McDermott.
    Mr. McDermott. Thank you, Mr. Chairman.
    Dr. Crippen, you don't disagree with any of the figures on 
this chart, do you?
    Mr. Crippen. I don't think so. I can't see it, I must 
confess.
    Mr. McDermott. I thought I would test your eyesight first 
before we give you the driver's test.
    Mr. Crippen. OK.
    Mr. McDermott. These were taken right out of your book; so 
I think you would stand by them if you could see them. The 
question, then, I have is this: The President in his State of 
the Union message said unequivocally, ``To make sure the 
retirement savings of America's seniors are not diverted to any 
other program, my budget protects all 2.6 trillion of the 
Social Security surplus for Social Security and for Social 
Security alone.'' now, that is one quote, and then yesterday or 
today actually in the New York Times, the Congressional Budget 
Office says that the government will almost certainly be forced 
to dip into Social Security revenues later this year to cover 
shortfalls created by the sinking economy and by the $1.3 
trillion tax cut that Mr. Bush pushed through the Congress last 
year. That reflects, I think, the fact that you show dipping 
into the Social Security.
    Now, I would like to hear you explain what you will tell 
Members of Congress who are forced in this next election to 
explain why the President said one thing and did another. How 
are they going to put a positive spin on that? Can you give me 
a positive spin that would work?
    Mr. Crippen. Fortunately that is not my job, but I will 
try.
    Mr. McDermott. Remember this is a 30-second commercial.
    Mr. Crippen. I don't know that you can. The $8 billion for 
this fiscal year 2001 we are in that we are saying would be 
across this line is an estimate as well as the line is an 
estimate. We are going to come very close, I think, one way or 
the other, pretty close, to being on the line. That is not the 
Medicare line that some of you would like to see as well, but 
certainly on Social Security we are going to be very close. It 
is, as I have been saying, $8 out of 2,000, and these are all 
estimates, and we won't know ultimately for several months 
after Treasury finally racks it all up where it all came out.
    Mr. McDermott. So you would basically be saying, trust us, 
it will all work out?
    Mr. Crippen. You are very close.
    Mr. McDermott. Do you know how much the people trust the 
Congress or the President?
    Mr. Crippen. Or our numbers.
    Mr. McDermott. Or your numbers.
    Mr. Crippen. It is not so much trust us, it will all work 
out, but if that is your objective to be zero or hit this line, 
you are going to be very close on one side or the other by a 
few bucks out of 2,000; so in that sense it is not a big deal.
    Mr. McDermott. We had a little session before this meeting, 
and we talked about this, and I asked a question there, and I 
didn't get an answer; so I am asking you how can anybody with a 
straight face talk about this situation without talking about 
the tax extenders? I sit on the Ways and Means Committee. The 
likelihood of us not passing that tax extender for research and 
development, R&D tax credit, is absolutely zero. That is going 
to pass. We passed $33 billion for energy of which $9 billion 
is covered in this budget. The other 24--where do people think 
that is going to come from except from borrowing against these 
reserves that are sitting in--or they just won't say it; is 
that it?
    Mr. Crippen. I don't know that they have an opinion one way 
or the other. Maybe it is just not saying it. Fortunately those 
of us who have never been elected to office don't have to make 
those decisions, but clearly there are things in the offing 
that could change this outlook and could make it worse, as 
Congressman Spratt has so eloquently pointed out. Nothing up 
here is concrete, neither our forecast nor the future. You 
don't have to pass the energy bill----
    Mr. McDermott. Let me tell you what I think we are going to 
pass. That is the farm bill. As I said earlier, I was out in my 
family reunion out there and picked up the newspaper in Aurora, 
Illinois, and the front page story is that it isn't going to be 
a 175 bushels an acre, it is going to be 125, and the farmers 
are hurting. So we are going to have to come up with the money 
for that farm bill.
    I know you guys are more skilled than I am in finding 
places to grab a little here and shift a little something here. 
What kind of budget gimmicks are--I mean, we grabbed next 
year's revenue. So we are not going to do that, that 30 million 
or $15 million or how much advanced corporate taxes. Where are 
we going to find that money except in these trust funds?
    Mr. Crippen. Fortunately I don't have to answer that 
question, but let me give you an example, which is not a 
recommendation. The other day we were looking at the effect of 
the final regulation on the current Medicaid--some call it a 
scam--but how the States are being over paid. They are paying 
more to nursing homes for benefits, and the nursing homes are 
giving them money back, and in turn they are collecting more 
from the Federal Government. Despite the regulation and your 
legislation to try to mitigate that, it is going to cost the 
Federal Government 6 or $7 billion a year for the next 10 years 
while that goes on; so that alone would be enough to pay for 
the farm bill.
    Now, that is not the answer to everything that is up there 
in red certainly, and we are not here to make policy 
recommendations, but there are some things at least that one 
might look at.
    Mr. McDermott. So you are saying by--overpayment by 
providers in Medicare and Medicaid would be places you could 
find some of this money?
    Mr. Crippen. This one in particular I am alluding to is 
where the States have colluded with local governments who are 
running nursing facilities and inflated the payments that the 
Federal Government is giving to the States.
    Mr. McDermott. ``colluded'' is a pretty strong word.
    Mr. Crippen. It is probably justified in this case because 
it is pretty deliberate.
    Mr. McDermott. Would it be Justice Department action, do 
you think?
    Mr. Crippen. I don't know about that. It is probably within 
the guidelines of current payment policy. It is just a loophole 
that they are exploiting. That is not a solution to the overall 
problem you cite, but there are potentially things one could 
look at, and some of them in your committees.
    Mr. McDermott. I bet you are looking forward in the next 3 
months to figure out how we do it, right?
    Mr. Crippen. Absolutely.
    Mr. McDermott. Thank you very much.
    Mr. Brown. Thank you.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Dr. Crippen, the one chart I wish we had here and we don't, 
but I think it is the best chart you all publish, and that 
fishtail or that fan chart you had back in February or January 
that showed where the surplus can go to the good or the bad, 
because I have to say, even though I haven't always agreed with 
all of your analyses, that I think the CBO has gone out of its 
way to qualify its statements and to qualify its assumptions. 
In fact, I think you all said that when we were looking at the 
10-year projections earlier this year, that you said there was 
a short-term margin of error of something like 1 percent or .9 
percent of GDP plus or minus 50 percent over the 1-year period 
and 2 percent of GDP over the 5-year period, and you weren't 
willing to make the bet for the 10-year period, and you at 
least have been proven out that you all are sufficiently risk-
averse in that regard.
    I want to go back to your conversation with Mr. McDermott, 
and you made a comment, a very telling comment, and this isn't 
directed at you, about saying that we are not elected, you 
being the CBO. We are elected. All of us are elected, and the 
President is elected as well. And we go out and we run our 
campaigns, and we talk to our constituents and the people that 
we would like to hire us so that they could be our 
constituents, and we make promises to them, and we make 
promises about what we are going to do, what taxes we are going 
to cut, what spending programs we are going to enact, what 
sacred cows we are going to protect.
    The President is in this as much as the Congress is in 
this. In the last election round, everybody went out and said, 
yes, we can cut taxes; and they said, we can have a 
prescription drug program; and they said, we can increase 
defense spending; and we can take care of the agriculture 
sector of this economy and are going to increase the amount of 
education because we think that is important; and we are going 
to protect the Social Security and the Medicare Trust Funds and 
put those off limits. We are going to make it all work out and 
still have something left over to show for it.
    In fact, now we know that you all are correct in saying, be 
very careful on using those long-term assumptions, because they 
may not turn out that way. What is most frustrating to me about 
this whole situation is the fact that the administration can go 
out there and make these promises and then, when they can't pay 
for the promises, they come back and they point their finger at 
Congress and they say it is Congress that has to keep a lid on 
the spending, when most of the spending that is being asked for 
is by the administration.
    The President was the one who went out there on the 
campaign, and the President is the one who came up here to 
Capitol Hill and said we can have all of those programs. Now 
his numbers don't add up and now we are being told, well, if 
you use our numbers maybe it will work. But using your numbers, 
which, as you know, we have had many fights over whether to use 
CBO or not. If we use CBO as the arbiter, we see--or I can 
see--just barely, that if you add the President's own requests 
in there, the numbers don't add up.
    Now, you got into some macroeconomic issues as it relates 
to the trust funds and the question of does it really matter if 
we spend the Medicare surplus or the Social Security surplus? 
The impression we got from Mr. Daniels today was: It really 
doesn't matter. It doesn't matter really at all, and the fact 
is we are still running these surpluses.
    You made comment that it--whether there was money there or 
not, when one comes to the Treasury window with the bond from 
the Medicare Trust Fund, the HI Trust Fund, or the Social 
Security Trust Fund, Treasury still has to figure out a way to 
come up with that money and they have basically three options. 
I don't disagree with that one bit.
    Isn't it true that it is a question as to how much 
outstanding debt there is that a nation has, that that has an 
effect on the nation's and its economy's ability to redeem that 
bond?
    So given the fact that, rather than using the surpluses to 
pay down public debt, we in effect are borrowing, because we 
know at some point the trust funds will have to be redeemed. If 
we have a higher level of public debt than we otherwise would 
have had we paid down the debt, we are in effect borrowing.
    It would appear to me, based upon your mid-session review, 
that is what the administrations's budget does. It is borrowing 
against the trust funds to spend today, whether for the tax cut 
or not.
    I look--as I was reading this last night on the plane 
coming back into town, in a section entitled The Long-Term 
Macroeconomic Effects of the Economic Growth and Tax Relief 
Reconciliation Act of 2001, and I am not saying these are your 
words, but your department says--talks about effects on 
national savings.
    It says, in contrast, if a tax cut was financed by 
increasing government borrowing to cover current spending, it 
goes on to talk about that, in the future, this would have a 
negative effect on the growth and GDP because you would have 
higher interest costs, higher debt costs.
    Now, in the short run that may not matter, and perhaps that 
is what Mr. Daniels is talking about. We have a responsibility, 
I believe both us in the Congress as well as the executive 
branch, to think not just about the short run but to think 
about the medium term and to think about the long run as well.
    So I guess my question to you is, is it really an 
appropriate long-run policy when we are concerned about whether 
or not we are going to be able to sustain that chart, let alone 
what reforms may be necessary to do that, that we in effect are 
increasing the leverage, not decreasing the leverage by 
borrowing to pay for current spending today?
    Mr. Crippen. The totality, I think, of the box you referred 
to in this chart and your point is--it is not so much I believe 
that it is going to be easier to borrow in the future because 
we have less public debt, and we are talking about a few 
percentage points of GDP one way or the other--there is 
certainly, we assume, a limit to how much a government can 
borrow, although Japan's activities make one wonder what that 
limit might be. Nonetheless, there is a limit. It is more 
important in our view that the paying down of debt, as you 
cited from this box, could help economic growth, and that will 
therefore help this picture and also help make it easier to 
borrow if we get to that point in the future.
    What I would suggest is that what side of these lines you 
are on by a few billion dollars probably doesn't matter much. 
Our conclusion on the economic effect of the tax bill is that 
some pieces of it that would probably help economic growth, 
others might deter it and, in the net, it would have not much 
effect at all, in part because it is small, relative to the 
economy. That is, we hope and expect the economy will produce 
about $150 trillion of goods over the next 10 years. This tax 
cut is about 1 percent of that, $1.35 trillion or a bigger 
number if you would like; and so it is relatively small against 
that picture as well.
    So the effects are going to be relatively minor at this 
point. Again, the important thing that I would emphasize is 
that what we need to be debating more than which side of these 
projections we're on or how those projections come out is 
rather what policies might best help economic growth. I mean, 
that, of course, in the short run we have the current downturn 
which we would like to do something about if we could, but, in 
the long run, it is the economy that is the trust fund for 
these intergenerational programs.
    Mr. Bentsen. I would hope--I don't think that either of us 
would agree that we would want to mimic the Japanese in their 
approach to macroeconomic policies or fiscal policies. At the 
same time, I guess I would submit to you that by borrowing 
today and extending debt when it is otherwise not necessary, we 
are--and I think you all bear this out--we are crimping the 
ability for sufficient long-term economic growth to support the 
very programs that we both agree can only be supported through 
faster economic growth.
    Mr. Crippen. Again, I would suggest that no one knows what 
is the optimum. One might, though, given the current economic 
weakness not want to pay down more debt. It just may be more 
contractionary than would be good for the economy now.
    Similarly, there may be policies that the Congress and the 
government would want to or could pursue that would help 
economic growth as much or more than paying down debt. The 
object, I would suggest, at least relative to this long-term 
problem, is not so much debt per se, but the effects that it 
can have, as you suggested, on the economy and what other 
policies you might have as alternatives.
    Spending on education, for example, might be something that 
would be worth doing and, indeed, a way to make good on the 
promises in the future of those programs by growing the 
economy.
    Mr. Bentsen. Thank you.
    Mr. Brown. [Presiding.] Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Crippen, I have got to go back to that Trust Fund. You 
gave three options which I agree with. It ignores the fourth 
option that pretty much--for all intents and purposes I look at 
the Social Security Trust Fund or the concept of one as just 
another pension system. It is a different kind of pension 
system.
    Other pension systems are funded at some level of funding, 
which it is a legitimate item as to how much it should be 
funded. This one is not. It is funded with IOUs.
    I would argue that a fourth option should be, when we can 
afford it again, all of the caveats that we have said before, 
to create an actual cash balance trust fund, knowing that, as 
Mr. Brown has said earlier, not saying that the cash would sit 
there and we debate later on where it should go, but at the 
same time have a cash balance trust fund that would create a 
fourth option, that I think for the most part most Americans, 
including me, number one, thought we always had and, number 
two, would like. That makes us more comfortable with our future 
and the future of our children.
    So though I respect and agree with you on the three options 
that are currently available, I would vehemently argue that you 
and us together, that all of us have to start thinking about a 
fourth option, as to whether it is worthwhile and how do we get 
there and what do we do with it when we are there.
    That being the case, I think that turns much of the 
discussion we are having right now into a different discussion, 
one that I think that the American people in the long run would 
be happier about, but that is a political discussion as well.
    I also wanted to talk about the comments you made on page 
34, which you just talked about, namely the economic stimulus 
aspect of the tax cut we just went through.
    It was amazing to me during that debate how many people 
said it was an economic stimulus and how few people actually 
understood what that meant. I actually appreciate the fact that 
you have now said that, for all intents and purposes, it is 
not. It is not a bad thing. It is not going to hurt the 
economy. Any impact that it has is minimal at best.
    That being the case, I would also agree with you that any 
amounts of money we have, we should--every decision that we 
make, other than a few basic government things, should be based 
on how do we grow the economy. I would strongly argue that what 
we just did with these 1.358, 2.2 trillion--pick the number--
would have been much better used in some other fashion as to 
have stimulated or at least attempted to stimulate the economy 
through things like R&D, through things like any other numbers 
of things that are clear--at least clearer, I should say, to 
being economic stimulus.
    I would hope that you--that your agency, I assume. Will 
continue to look at the impacts of this tax cut and tax policy 
in general relative to economic stimulus, because it is 
critically important.
    Mr. Crippen. Yes.
    Mr. Capuano. I want to talk a little bit about a couple of 
things that are in your report that I have been very concerned 
with. Kind of detailed numbers, I apologize. Number one is the 
numbers you have in productivity and the comments you make 
relative to investments and the impact that it has on the 
productivity.
    I was a little confused as to whether you thought the 
productivity was going in the right direction or not. My 
concern has been over the last year almost is that--the lack of 
investment in software and hardware, number one. The drawdown 
on inventories with no backup orders to push it is really going 
to push down future productivity.
    You say it is going down, but are you still--I guess you 
said some changes were made in the last couple of weeks. Do you 
still feel the same way?
    Mr. Crippen. Yeah. We are still fairly optimistic. We 
lowered our trend rate of productivity by two-tenths of a 
percentage point since May, in large measure because we see 
less capital investment, as you suggested, and therefore 
productivity won't grow quite as quickly.
    Certainly there has been an overhang, but we think that it 
is going to be worked off in the next year or so, if not 
sooner. Inventories have drawn down and stabilized. In fact, 
even in the current data it looks like we are having more 
investment in telecommunications, for example, than we have had 
in any year prior to 1999.
    Investment is only down considerably based on the last 
couple of years. It is not all that comforting, but we still 
believe that many of the underlying changes that increased 
productivity over the last few years of the 1990's are going to 
survive and continue.
    As I said in yesterday's hearing in the Senate, probably 
the single biggest risk to our economic forecast is whether we 
can continue to grow in productivity at about two and a half 
percent, and we believe that we can.
    In the 1960's and 1970's, we saw productivity increases 
much greater than this. It is only the more anemic growth of 
the 1970's that we are now countering. It is not historically 
out of bounds to think that two and a half percent is possible, 
and given the technology we believe that it will happen.
    Mr. Capuano. So I would--well, I am not going to argue with 
you. My concern is actually on the document you produced here. 
I think those expressed my concerns, is that the numbers are 
not now and have been in the last several years--are a little 
historically out of whack.
    I am not arguing with you. I am not capable of it. 
Nonetheless----
    Mr. Crippen. That is certainly the biggest risk in our 
economic forecast.
    Mr. Capuano. The only other question I had really had to do 
with some real detailed stuff. I was going through the monthly 
Treasury statements, and the last one I had is July.
    Mr. Crippen. That is always dangerous.
    Mr. Capuano. It is dangerous, but it also raises some 
serious issues to me. The two issues that were most concerning 
to me, number one, is the $12.5 billion one-time income on the 
sale of electromagnetic spectrum that will not be repeated. 
Absent that, there would be no doubt from anybody that we are 
in deficit right this minute to a huge tune. Yours would be 
more than double, and even the OMB director would be hard 
pressed to find other gimmicks to override that. That is a one-
time item that is not going to be repeated. That is of great 
concern to me.
    Mr. Crippen. In fact, may never be realized, because of 
court cases. But----
    Mr. Capuano. Which is--I wonder what will happen with the 
accounting gimmicks once it is not realized, but that is an 
argument for tomorrow.
    The other question I have, and I guess today is not the 
day, but I do want to ask you or your agency at a later time 
about the payments to the Social Security Trust Fund. I mean, 
this year they are already down just in July. Just the 
transfers are down almost a billion dollars.
    It is of concern to me, since the revenues aren't down and 
the payments out aren't down, but the transfers into the Trust 
Fund are down. I guess I wouldn't normally be concerned, except 
for the accounting gimmick that we are going through right now 
which--I am not arguing with the gimmick. It is as good as any 
other gimmick. But it is a one-time gimmick that will come back 
to bite us next year. No one wants to talk about it, but it 
will, because all gimmicks do.
    I am wondering and I am getting concerned that that is not 
a similar gimmick, that they are just not going to pay into the 
fund to increase this year's bottom line to make it look better 
than what it really is.
    I am not asking you to answer that now. I am kind of giving 
you warning that I will be asking and hopefully you will be 
able to educate me and enlighten me and calm me down a little 
bit.
    Mr. Crippen. I don't know about the latter, but I will try.
    Mr. Brown. Thank you, Mr. Capuano.
    Mr. Crippen, thank you very much for coming. I know this 
dialogue will continue for a period of time. We certainly all 
would like to see the economy improve. In fact, I think the 
stock market is even down today. We would like to see all of 
that come about.
    I feel good about the tax cut. I have got my $600 check in 
my pocket. I am going to try to spend it before the week is up.
    I really do believe that--I think your analogy is good. It 
is only going to be probably less than 1 percent of the total, 
you know, gross national product. So I don't see how that can 
cause the deficit which everybody has talked about.
    So I feel very good about it. I believe the economy will be 
regenerated and I think those revenue, you know, expectations 
will be met.
    I appreciate you coming and sharing your items with us 
today.
    Mr. Crippen. Thank you.
    [Whereupon, at 2:15 p.m., the committee was adjourned.]

                                
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