[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
MID-SESSION REVIEW
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JULY 16, 2002
__________
Serial No. 107-33
__________
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
GARY G. MILLER, California BOB CLEMENT, Tennessee
PAT TOOMEY, Pennsylvania JAMES P. MORAN, Virginia
WES WATKINS, Oklahoma DARLENE HOOLEY, Oregon
DOC HASTINGS, Washington TAMMY BALDWIN, Wisconsin
JOHN T. DOOLITTLE, California CAROLYN McCARTHY, New York
ROB PORTMAN, Ohio DENNIS MOORE, Kansas
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 [vacant]
ADAM PUTNAM, Florida
MARK KIRK, Illinois
[vacant]
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, July 16, 2002.................... 1
Statement of:
Hon. Mitchell Daniels, Jr., Director, Office of Management
and Budget................................................. 10
Additional submission of:
Hon. John M. Spratt, Jr., a Representative in Congress from
the State of South Carolina, chart submitted for the record 15
Mr. Daniels:
Responses to Mr. Spratt's questions submitted for the
record................................................. 19
Response to Mr. Bentsen's question regarding a bear
market................................................. 29
Response to Mr. Davis' question regarding H.R. 4758...... 38
Response to Mr. Price's question regarding capital gain
revenues............................................... 41
MID-SESSION REVIEW
----------
TUESDAY, JULY 16, 2002
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:46 a.m. in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Sununu, Bass,
Gutknecht, Collins, Watkins, Hastings, Granger, Culberson,
Brown, Kirk, Spratt, McDermott, Bentsen, Davis, Clayton, Price,
Clement, Moran, Hooley, Baldwin, McCarthy, Moore, Honda,
Hoeffel, Holt, and Matheson.
Chairman Nussle. Good morning. This is the full committee
hearing on the mid-year budget status, mid-session review of
the budget. Today's hearing will examine the Office of
Management and Budget's Mid-Session Review of the United States
Federal budget. I am pleased that, once again, we will have
testifying today the Honorable Mitch Daniels, who is the
Director of OMB; Office of Management and Budget.
I made a commitment to this committee and to the Congress
that we would begin, as a committee, to review these reports.
Some of them are less glamorous and less worthy. In years past
they have not gotten as much attention as they evidently will
receive today, in part because we face so many challenges as a
Nation.
Over the last year our country has weathered a recession, a
terrorist attack and a war; and, at the same time, we have
launched a massive nationwide effort to strengthen our security
at home. Our emergency response to the attacks, paying for the
war and the need to quickly strengthen our homeland security
has created urgent and very necessary spending demands. Couple
those with the spending demands with the recession that was
aggravated by the attacks of September 11 and which caused
lower-than-expected tax revenues, and no one should be
surprised that the Office of Management and Budget would expect
these short-term deficits.
Thankfully, we passed last year's tax relief at just the
right time to soften the blow of the economy and to keep the
economy from getting much weaker. Without that tax relief the
recession would have been deeper and unemployment would have
been higher. But, as beneficial as the tax has been, it is not
enough on its own to get us out of deficits. To do that,
Congress must control spending.
The good news in this report is that we can be back to
balance in 2005 and begin to pay down the publicly held debt
again if, and only if, we control spending and stick to the
plan that has been submitted by the President, passed by the
House of Representatives and deemed to be the budget for the
United States as a result of inaction by the Senate. Only by
controlling spending can we ensure that these deficits will not
be deeper and last longer. Otherwise, the country will return
to the days of deficits as far as the eye can see.
That is why it is so unbelievable to me to see Members
calling for even more spending above the past budget. Some want
to spend $9 billion more than the President next year in fiscal
year 2003 alone. That would translate, just so we are clear, to
$120 billion of new government spending over the next 10 years
alone.
So we have a real challenge facing us with regard to these
budgets.
Let me show you a few charts that I think are important for
this.
First of all, as reported by OMB, the deficit will be $165
billion this year. We will be able to return to surpluses in
2005 and begin at that point to once again add to the
accomplishment of paying down $453 billion of publicly held
debt. We will begin to be able to do that once again by 2005 if
we maintain the spending plan and the discipline of this
budget.
Almost all of the change in the surplus estimates this year
is a result of slower-than-expected revenue collections, and
return to surpluses can only be contingent on sticking to the
House budget resolution.
You can see from this chart exactly what that means as far
as the near-term deficits--$165 billion this year, 109 next
year, 48 in 2004, and back to surpluses to begin to pay down
publicly held debt in 2005.
What is the cause of the deficits? Well, there will be lots
of rhetoric, but the facts still bear out, particularly in the
short term, in 2002 you can see that the tax cut that we
provided last year certainly and deliberately did provide less
revenue to the Congress and to the Federal Government. And
thank goodness that we did, because it was needed in order to
give a jump-start to an economy that was sluggish.
We found ourselves in a good physical position on September
10, in going into this, having paid back $453 billion worth of
debt and having provided tax relief to the American people to
get the economy going. So we found ourselves, even though we
faced a triple threat, on good, sound physical footing.
But what has happened as a result of the weakening economy,
as a result of the cost of the war and as a result of
bipartisan spending and bipartisan stimulus to the economy?
Over 62 percent of the reduction in that surplus is caused by
that weak economy and bipartisan response to the crisis.
The next chart shows that we have a challenge, but it is
not a challenge that we haven't met before. You can see from
the red line that spending has been much higher in years past
according to a comparison to GDP and that receipts have also
fluctuated during that same period of time. But this is not an
insurmountable problem, but it is one that we have addressed in
the past by controlling spending, not by increasing revenue.
That is the reason why we believe that restraining spending is
the key to getting back to those budget surpluses.
We also know that recent--continuing recent spending growth
will lead to perpetual deficits. If we follow the average
spending growth of the last 5 years, from 1998 to 2003, our
discretionary growth of spending was 7.4 percent. You can see
that that will result in deficits as far as the eye can see.
But you can see that if we follow the President's budget path
or the House-passed resolution, that in fact not only can we
get back to surpluses by 2005 but, as you can see there, we
will continue to pay back the publicly held debt.
Now, just so we make it clear, there is another possible
plan on the table. We have seen from the minority leader Dick
Gephardt the plan that he put forward, particularly with regard
to defense, to calls for increased spending in a number of
different programs, as well as the prescription drug benefit
that was proposed just 2, 3 weeks ago by the minority leader.
If we pass the so-called Democratic plan, either the one that
was proposed and yet not passed in the Senate or the one that
we were able to cobble together from the proposals here in the
House, there would be perpetual deficits over and above the
average growth curve that we have experienced the last 5 years,
again not paying down the debt and dipping much further into
trust funds far into the future.
So why did the 10-year surplus estimates drop so sharply?
Again, if you look at it from the 10-year plan, using the $5.6
trillion figure that was used by OMB and CBO and others over
the last couple of years, you can see that, yes, $1.5 trillion
of that was deliberately reduced in taxes for the American
people. But the economy and our own spending took as much of
that, if not more, and that has been the largest cause in the
10-year drop to the estimates of surpluses.
You can see from the next chart that we have provided for
you exactly the specific numbers both in 2002 and through the
next 10 years exactly where that would come from. The economic
slowdown in revenues being, over the next 10 years, $1.442
trillion worth of the reduction in the surplus, as well as $227
billion of that in a bipartisan way in addressing the economic
slowdown from Congress.
Now there are factors that have been without any control.
Some of it we have controlled. That is the line there that you
see from the February, 2001, baseline surplus to the February,
2001, baseline-less legislation. Certainly, we have
deliberately made some choices, much in a bipartisan way; and
that has resulted in part of the reason why we find ourselves
in deficits. But you cannot forget the context of the economic
slowdown and the unanticipated changes to the surplus, which
amount to about $1-trillion less in revenue as a result of this
economic slowdown.
Finally, the House budget resolution assumes that the total
appropriations should not exceed $759 billion for the fiscal
year. Increased base levels of government spending will make
balanced budgets unachievable in the near term. Deficit
spending will reduce and will reverse the progress we have made
on paying off the national debt, and that is why we have to
stick to that. We have paid off $453 billion, and we can go
back to that by 2005 and continue to pay down that debt if we
stick to our plan.
A couple of things just for context. You cannot have a
discussion about this--and I have heard quite a bit of debate
on the floor during the prescription drug bill, during the
increase of the debt ceiling, during a number of debates. We
have forgotten what happened last September. In fact, here,
many of my colleagues discuss--you would think September 11
didn't happen, so we put up what might be called a Democratic
September calendar for last year. We are out of context here,
folks.
That is September 11, and yet it seems as though the tax
cut is getting blamed for everything. I find it troubling that
we cannot put it in the context of September 11, the war,
terrorism, and what was I think a bipartisan spirit of
accomplishment in addressing the emergency, in addressing
homeland security, in addressing the war. Much of that has
brought us into the----
Mr. Hoeffel. Would the gentleman yield?
Chairman Nussle [continuing]. The deficits that we----
Mr. Hoeffel. Will the gentleman yield?
Chairman Nussle. Yes. I would be happy to yield, although I
think typically in opening remarks we--I think in a spirit of
bipartisanship we have not interrupted the speakers. But I
would be happy to yield. Do you have a question?
Mr. Hoeffel. I agree with the chairman, in a spirit of
bipartisanship----
Chairman Nussle. Does the gentleman have a question?
Mr. Hoeffel. No, I have a statement.
Chairman Nussle. Well, then all members would be given the
opportunity to enter a statement in the record at this point if
they care to, as we have always done as a practice in this
committee.
Mr. Hoeffel. Well, I have two questions for the chairman.
Chairman Nussle. Alright. I would be glad to try to answer
them.
Mr. Hoeffel. Does the Chair mean to suggest by that
September calendar, the Democrats have some less feeling about
what happened on September 11?
Chairman Nussle. Absolutely not.
Mr. Hoeffel. Then what is the purpose of that calendar?
Chairman Nussle. I will be happy to describe--does the
gentleman have another question?
Mr. Hoeffel. I do. Do we ever get to hear from the witness,
or do we have to hear a very partisan presentation by the
Chair?
Chairman Nussle. Well, my understanding is that there will
not be a partisan presentation by the Democrats today?
Mr. Hoeffel. I am just wondering when we get to hear from
the witness, Mr. Chairman.
Chairman Nussle. Well, I appreciate that, and I appreciate
your coming to the hearing for that purpose, and there will be
ample opportunity to do this. This committee has now met for
now a month in anticipation of this review, and I would be
happy to describe and answer both the gentleman's questions.
First of all, I am tired of hearing the partisan remarks on
the floor that seem to forget that September 11 happened. In
fact, if you view floor debate over the prescription drug bill
alone, you will find no context in the debate over raising the
debt ceiling to September 11. All you hear is a tax cut that
happened a year ago, that was voted on in a bipartisan way, and
there was bipartisan support even from members of this
committee. But you don't hear that context about September 11,
and you cannot in my humble opinion--and you may differ with
that opinion.
And no, I am not suggesting that you don't care about
September 11 or terrorism or the war. We have all voted in a
bipartisan way to address that. But you cannot in my opinion
discuss this mid-session review of our Federal budget without
the context of September 11. It is impossible to discuss this
without the context of September 11, and as long as the
Democrats in this Congress continue to blame only the tax cut--
and, yes, we deliberately lowered taxes, and we would do it
again to address the economy as we did in a bipartisan way
subsequent to September 11.
But if you continue to have the drumbeat of blaming the tax
cut for the fact that we find ourselves in this situation, and
forget that the economy has become worse as a result of what
happened in September, and forget the bipartisan addressing of
the war and homeland security as a result of that, then I will
continue to show this calendar that seems to demonstrate that
there are people around here that seem to forget that September
11 has happened. You cannot have this context today without
describing what happened on September 11.
Does that answer the gentleman's question?
Mr. Hoeffel. I wonder if the chairman would tell us which
members by name have forgotten that September 11 has occurred?
Chairman Nussle. We will review the record of the debt
ceiling increase and the votes, what I think is an
irresponsible vote to not address what happened in September by
increasing and allowing us to make some borrowing--short-term
borrowing with a plan to get back on solid footing. I would be
glad to review with the gentleman the context that was debated
on the floor during the debt ceiling increase, if the gentleman
would like. But we are going to move on at this point in time.
Mr. Hoeffel. I would suggest that none of us claimed that
September 11 didn't happen, Mr. Chairman; and I think that the
reports that Mr. Daniels has brought forward indicate that
increased spending on the war might be $600 billion over the
next 10 years and the tax cut $1.5 trillion. Those numbers
speak for themselves. Nobody is arguing September 11 didn't
happen. But I think, if this committee is going to be able to
deal with the return of deficits, we have got to do so in a
bipartisan way. In my short service here, this committee has
become more and more partisan, and I am afraid today's activity
just makes that point even stronger.
Chairman Nussle. Well, I will take back my time and just
report to the gentleman that, obviously, your service on this
committee has been short. Because this committee has been,
obviously, one of the necessary partisan committees, necessary
for a reason. We differ on what we need to do at this point in
time in our history. We have a plan that we voted on, and this
is also the context for today. We have a plan. Where is your
plan? Where is the plan from the Democrats in the House? Where
is the plan from the Democrats in the Senate?
We are in a crisis. We are facing a war and economic
recession and an emergency, and it is only going to get deeper
if we don't have a plan to address it. But the House has a
plan. The President has a plan. When you have a plan, then we
will talk, then we will have a discussion, then we will have
more votes. But as long as you don't come forward with a plan,
don't tell me about who is being partisan.
It is easy to sit on the sidelines and snipe. It is easy to
sit on the sidelines and say, somehow, ``I told you so last
year,'' which is what we heard during the debt discussion on
the floor. I told you so, that we are going to have to raise
the debt?
I told you so seems to indicate that you knew that
September 11 was going to happen. How could you possibly--how
could anybody possibly know that?
So the context of today that we find ourselves in is
directly related to September 11 and only a responsible
governing party would come forward with a plan, and that is why
we have done so.
Mr. Hoeffel. Would the chairman yield?
Chairman Nussle. So I would say--so I will take back my
time and conclude by just saying that we have to do something.
We have got to act. The House has acted; we have passed a plan.
We have passed the President's plan. I am going to stick with
the President; we are going to control spending, and we are
going to enforce it.
Let me end by saying this: we have some appropriations
issues that are coming up. The supplemental to start with,
which is 4 months late, in my opinion, in addressing the needed
contingencies that we face, the war and homeland security. We
have got to get our work done, and we have got to get it done
now.
The President has given us a number. The House has passed
the appropriate supplemental. The Senate has got to get off the
dime and start acting and realizing that the President is going
to veto anything above $28.8 billion--period. And this
committee and other members of this House are going to help the
President enforce that if he cares to use a veto.
It is the spending that is going to get us in more trouble
if we don't start enforcing the budget and the budget plan that
we have.
So I went longer than I expected, and I apologize to
members. I wanted to at least give the opportunity to have the
interruption and to answer the questions, which I am happy to
do; but I thought it was important to lay out the context here,
because you cannot have this discussion without a little bit of
context.
Mr. Davis. Would the chairman yield?
Chairman Nussle. With that, I would be happy to yield to
Mr. Spratt for any opening comment he would like to make. And,
just so we are clear, I ask unanimous consent that all members
be allowed to put a statement in the record, as we typically do
at this time. Members are allowed to do that. Unless there is
an objection, that will be so ordered.
Mr. Spratt.
Mr. Spratt. Mr. Davis.
Mr. Davis. Mr. Chairman, if I could have 30 seconds. I just
wanted to respond to what was said to Representative Hoeffel,
because I think we are moving to the point.
Mr. Chairman, you are perfectly correct in asking for a
solution instead of ``I told you so.'' ``I told you so'' is
very easy here. But all you need to do is to schedule for a
markup the Moore-Spratt-Moran-Davis bill, which received a
vote--a version of which received a vote on your side of the
aisle which represents one attempt at a solution. So I would
urge you at another hearing to schedule that. It represents our
attempt to come up with a solution to dig out of the hole.
Thank you.
Chairman Nussle. I would be happy to--would the gentleman
yield? We gave you an opportunity to offer that during the
budget markup, and nothing was offered.
Mr. Davis. No, we did offer a Moran-Davis trigger. This is
a version that we----
Chairman Nussle. A trigger.
Mr. Davis [continuing]. Developed in response----
Chairman Nussle. That is a trigger.
Mr. Davis. No, Mr. Chairman. This is not a trigger. It is
something in response to the concerns you have raised. But if
you would schedule that bill for a hearing, that would present
an opportunity to debate on the merits one attempt at a
solution on our side that we think represents a potential for a
bipartisan support.
Thank you, Mr. Spratt.
Mr. Spratt. Mr. Chairman, thank you for yielding time; and,
Mr. Director, welcome again. We appreciate your coming to
testify.
Let me say that our role is not to be contentious, but it
is to be critical in the sense we are the outside directors in
this organization, and it is our role and our responsibility to
ask searching questions about real concerns we have with the
report you have brought to us today.
I will stipulate from the outset that the deterioration in
the surplus that we have seen since April of 2001, going from
$3 trillion to minus a deficit of $1.968 trillion between
April, 2001, and July, 2002, is attributable to many factors--
terrorists, tax cuts, and a slowdown in the economy, partially
a recession. I readily stipulate to that.
My problem with the report that you have sent up today, the
bottom line that you presented us with, is that 4, 5 months ago
in February of this year, the estimate of the deficit for this
year was $106 billion. Today, it is $165 billion. That is a 60
percent calculating mistake in 4 to 5 months.
To put it in today's context, if a CEO or a CFO were to
report that his expected earnings or losses were going to be X
and 4 months later acknowledged that he was off by 60 percent,
the stock would plummet.
If you look through the book that you have sent to us, the
Mid-Session Review, it appears that 80 percent of the
deterioration in the deficit is assigned to economic and
technical factors. Since you are assuming that the economy has
gotten better since February, all of that has to be laid at the
doorstep of technical miscalculations, which is highly
technical and difficult to discuss. But that is an enormous
amount in the space of 4 months. So that gives us pause as we
pick up this report and start to look at it.
OMB blames the recession largely. I believe you said in the
summary sheet to this Mid-Session Review that the recession,
quote, ``erased two-thirds of the surplus;'' but since February
you have assumed a substantial increase in the GDP, the gross
domestic product.
If we could have chart 10. This reflects the increase in
the higher projection of GDP. This is one of the reasons you
are able to claim a turnaround in several years in the budget.
You are assuming that GDP growth will be significantly higher
by at least $150 billion, growing to $250 billion over the next
10 or 12 years.
So while you assign the problem to the recession, in fact
you are looking at a pretty robust recovery, and we have still
got a problem. We have still got a budget that is in the Social
Security surplus and eating into the surplus of the Social
Security accounts every year for the next 10 years for as far
as this forecast reaches.
You also paint a very bleak picture in your report of tax
collections, revenues actually being collected by the
Government. I think you called the drop in personal revenue tax
and personal income taxes a precipitous drop, as steep as any
that you have seen at OMB in years. Yet when we look at your
revenue assumptions, if you see the little curlicue on this
chart that is now being displayed, the assumption is that tax
revenues in a short period of time, between now and 2004, 2005,
will rebound to their previous level. There will be an uptake,
a decided increase in tax revenues.
Yet when we read through this booklet--and you question
whether or not we will see again the phenomenon of a three-fold
increase in capital gains tax revenues, a 150-percent increase
in exercise stock option revenues, whether we will see that in
the first decade of this century as we saw it in the last
decade of the last century. One is left in real doubt when you
read your report. Nevertheless, we are left in even greater
doubt as to whether or not that uptake in revenues can be
achieved unless you have a recurrence of those phenomena that
pumped and drove revenues in the 1990s.
There is one thing missing from your report, interestingly
enough. Last year when you did the ``Blueprint for a New
Beginning'' and then did the Mid-Session Review, within the
first few pages you had declared your support, you had embraced
what you called a bipartisan commitment to stay out of the
Social Security surplus, to get the budget out of the Social
Security surplus. Now that we were able to do it, we lay that
down as one of the first principles and one of the key
objectives of our budget policy.
I have read your whole Mid-Session Review. I can't find
anything in it where that goal is laid down, where any kind of
plan or any kind of prospect of getting out of the Social
Security surplus is held out.
This chart shows how much of the revenue, how much of the
Medicare trust fund--all of it--will be consumed over the next
10 years; how much of the Social Security trust fund--$1.9
trillion will be consumed--a substantial invasion of these
trust accounts. A 10-year period of time to devise a workout
plan so we can get back on the track of staying out of Social
Security, using the trust fund solely to buy up debt held by
the public. There is no prospect, no plan. Apparently, you have
forsworn, given up, that particular goal. At least I can't find
it in the Mid-Session Review.
Now you can counter with some credibility that the economic
downturn and terrorism have put that goal out of reach. But in
this particular report, this Mid-Session Review, you actually
propose--on top of the tax cuts that have already been enacted
last June--you actually propose another $540 billion in
additional tax cuts.
You could say that the invasion of the trust account today
is due to the fact that we were bushwhacked by terrorists and
surprised by a recession that we didn't think was coming, but
we know what the results of that recession and terrorism and
the previous tax cuts are: They put us in the Social Security
trust fund eating up that surplus for the next 10 years. If you
add $540 billion in new tax cuts on top of that, you can't
assign that to some supervening cause like the terrorists. You
can't assign it to inadvertence. It is intentional, if we carry
out this budget plan on invading the Social Security trust fund
by another $540 billion.
So where is the goal we all embraced last year as a
bipartisan objective?
OMB says that your projections assume spending restraint.
If I can have chart 11. Basically what I was able to glean from
what I read about your other statements last week and this
report itself, you seem to be supporting what you call a 2-
percent increase in domestic discretionary spending, a limit of
2 percent over the next 10 years. Let me show you how this
works out according to our calculation.
The top line there shows total discretionary budget
authority. This year, $688 billion; next year, $757 billion.
Now that is a big increase, but we have to keep in mind $48
billion is there for defense. There is homeland defense there
that wasn't even named and identified in previous budgets. That
accounts for a lot of it. And there is a farm bill that has to
be accommodated in there, too. No, it is not. It is not
discretionary spending. I beg your pardon. Most of that is
entitlement spending.
Nevertheless, most of the increase from 688 to $757 billion
was for things that the administration saw and both parties in
Congress supported.
Now if you propose that domestic discretionary spending be
held to 2 percent, here is what will happen: First, you have to
back out defense from total discretionary. Then, in fairness,
you have to back out homeland security. That leaves $348
billion for other government operations. To make that domestic,
you have to back out international spending, foreign aid, and
you have to add transportation, because that is not in the
tally, contract authority or obligation limits.
When you do all of that, when you make those adjustments--
if I am wrong, I want you to tell me so in your testimony. By
our calculation, that is not a 2-percent increase in domestic
discretionary. That is a minus four-tenths of 1 percent
decrease in nominal spending. And for all of the ideas of this
projection, that would entail a decrease in real spending for
domestic homeland.
So the President is talking about more for education. He is
talking about more for medical research. How do you pay for it
out of a budget that is crimped in this manner?
There is one other thing that is not mentioned in your
report that was prominent in last year's debate and the year
before. We discussed at great length just how much debt we
could actually pay down. Mr. Nussle just talked about the
reduction of $453 billion in national debt, but most of that
occurred through the year 2001, which was largely on the other
guy's watch.
You have to read to the very last page of your report to
get to the answer, but on the last page of your report you
finally display the bottom line. The bottom line for this
budget is, in terms of debt held by the public, $3.32 trillion,
$3.529 trillion at the end of this year. That will go to $3.655
trillion next year, $3.718 trillion the next year, and drop
back to about $3.67 trillion the following year.
The prospect of paying off any substantial share of the
debt held by the public simply isn't here. It doesn't work.
So, these were two of my key budget goals. We had
bipartisan consent to them, and from all I can tell by this
Mid-Session Review they are totally off the table. They are
beyond reach. We can't accomplish them anymore. There is no
plan for it, and there is no prospect of it.
So these are the reasons that we have problems with what
you presented to us today, the budget reports you presented to
us today. In all good faith and all fairness, these are the
reasons we will be asking you some searching questions as we go
through the day.
Chairman Nussle. Thank you, Mr. Spratt.
Welcome, Director Daniels.
Mr. Daniels. Thank you, Mr. Chairman.
Chairman Nussle. We appreciate your willingness to come
forward and to discuss the mid-session review from OMB today,
and you may proceed as you see fit.
STATEMENT OF MITCHELL DANIELS, JR., DIRECTOR, OFFICE OF
MANAGEMENT AND BUDGET
Mr. Daniels. Thank you. I was rather enjoying the
foregoing. Quite often, the spectator part of these experiences
is more fun.
I will let the report stand as our testimony. Let me just
make a few comments and respond to a couple of the important
questions, particularly that Congressman Spratt just raised.
I think we are closer together here in our analysis of the
situation than rhetoric may sometimes suggest.
First, let me just make a couple observations. It is very
interesting and important to note that just 6 months ago we
were very much in error on the low side in terms of the
economy. Past budgets over all the years have frequently been
faulted for rosy pictures in which economic growth was assumed
to be better than it was likely to be. In this case, the
reverse mistake was made, if you could call it a mistake. In an
attempt to be cautious and conservative, we estimated 0.7
percent for this year; and now that has been raised by two full
percentage points. Our estimate is still a little under the
private sector consensus, but we did miss on the cautious side
by two points.
Now, interestingly and importantly, despite that fact,
revenue did not run better than expected, which history would
have taught us to expect. It ran substantially worse. And we
talk about what we think is an important new phenomenon or
growing phenomenon at the margins of the Federal budget. That
is to say, income tax payments related to the stock market.
I think our report is properly candid and modest about the
difficulties of forecasting and, in particular, the new
uncertainties about revenues, which again ran counter to
history. Historically, there was a reasonably fixed
relationship: economic growth up, revenue is up. Here we have
had economic growth up much more than was expected. The
recession, thank goodness, seems to have been milder, shorter
than anyone forecasted, including us. But revenue is still well
down.
So we acknowledge a lot of uncertainty, at least at the
margins of the $2 trillion in Federal Government revenue; and
to us it really means we have got to be all the more careful
about what we can control. And what we can control, of course,
is what the Federal Government spends. We think that the choice
is relatively clear. We can adopt a course the President has
recommended of modest spending growth--not cuts, not freezes,
but modest spending growth over the near term gives us the
prospect, a fighting chance to get back to balance, or we can
continue on a business-as-usual path.
I have illustrated on this chart that is in this document
what 10 more years of the recent run rate would mean, and the
difference between that path and the President's recommended
path is $2 trillion. Here, too, we think the message is just
unmistakable. The budget submitted in February is entirely
consistent with this point of view. It suggests that we must
address the Nation's new, suddenly different priorities for a
stronger defense, war fighting and what we now call homeland
security. But, having done that, we need to depart from
business as usual with regard to the rest of government's
activities, at least while we surmount this challenge.
I would point out that the 2 percent growth that the
President suggested for non-defense and non-homeland security
this year is not some unattainable fantasy. In fact,
discretionary spending rose by less than that for several years
in the early part of the last decade. In fact, the 50 States
collectively in this country right now, as the Governors meet
together out in the West, have restrained their spending, when
you add them all together, to 2 percent. This is nothing that
cannot be done in either public life or family budgeting for
that matter, and so we think that it is an entirely responsible
thing to ask for.
Let me address not all but a couple of--several important
points that Congressman Spratt made.
A second way to look at the revenue shortfall is simply to
note that, because we are reasonably close--historically,
reasonably close to a balanced budget, the deficits we are
looking at, no one is happy about and least of all me. But
often, when they are measured against GDP, they are much
smaller than those that we have known in the past; and, for
that reason, a miss of $60 billion is--another way to say it is
2 to 3 percent of total revenues, not an infrequent occurrence.
In terms of GDP growth, we do believe that the forecast
moving forward, Congressman, are again cautious and
conservative. We are at or below the Blue Chip consensus, both
in the immediate future and in over the time line. Of course
this could be wrong, in some years will surely be wrong, but we
are working with the best and we think the most responsible
numbers that we can.
You mentioned the revenue assumptions going forward. It is
very important to watch these regularly. We have been through
now a whipsaw of surprises. In the late 1990s, they were happy
surprises. We now, I think, can see it traced in large measure
to the explosive growth in the stock market. The misses were
very, very large, but happily they were--more money came in
than was anticipated, and now we have the mirror image of that.
But the growth coming out of the recession is actually
smaller than was experienced in the recovery from previous
recessions as we looked back at those.
Lastly, I would just say that it is important that you
bring us back to the question of debt reduction and the
question of achieving that by regaining surpluses at or above
those attributable to Social Security, and these remain an
important goal. And as suddenly as they became attainable--they
were never attained, of course, until very recently. And as
suddenly as they became attainable once, we hope they will
become reachable again.
Chairman Nussle. Thank you, Director Daniels.
Let me begin by going back to what I started with. If I--to
Mr. Hoeffel or anybody else, and I mean this sincerely--if I
offended you, I apologize. And I mean that. That is heartfelt.
I obviously do not believe that there is anybody--there is
no one who could ever forget what happened that day. What
troubles me about the debates I heard, particularly with regard
to the debt ceiling, was that the context seemed to be only
pointed toward the tax cuts.
As Mr. Spratt indicated, he would be willing to stipulate
that the economy had a fairly large impact on where we find
ourselves today. Certainly we would also stipulate very
deliberately that the tax cut also was deliberately envisioned
to reduce the revenues that were coming to the Federal
Government so that they could be in the pockets of people so
that we could stimulate the economy.
My only reason for bringing this up is that--and I have not
seen it by members of this committee, but I have seen it from
other Members that seemed to forget the impact to the budget--
we have not forget September 11. No one could possibly do that.
So if I misstated that and offended the Member, I apologize. I
just can't believe Members would come to the floor and debate
what happened or why we would need to increase the debt
ceiling, as an example, and do it out of context of September
11. That is the reason I brought this up today.
So I mean sincerely to apologize if in fact that offended
you, because I meant nothing, as the gentleman may have taken
it, to indicate that you or anyone else would have forgotten.
I would yield to the member.
Mr. Hoeffel. Thank you, Mr. Chairman. I thank you for your
comments; and if I said anything that was offensive to you, I
apologize to you.
We all can agree that September 11 and the war spending
that ensued, the economic downturn and the tax cuts have all
combined to reduce revenue. The question is, what do we do
about it? And I know we need to move together to try to figure
that out. I thank the chairman for his comments.
Chairman Nussle. That is the point of what I was getting at
when I talked about partisanship. We have differences of
opinion of where to go from here, and that is fine. I don't
consider that to be partisan in a negative sense. It is fine
for you to have a difference of opinion or for all of us to
share a difference of opinion of what to do at this point.
My struggle is, as the chairman of the committee and trying
to shepherd through a budget and then to try to enforce it is
that when you don't see alternatives--clear alternatives, not
triggers, with all due respect to some who have proposed them--
and it is fair to propose them. But if you don't have a
comprehensive plan, it becomes difficult to see the light at
the end of the tunnel. Now you may not like the light at the
end of the tunnel--some may call it a train--but the point is
that, without a plan, we can't even have the next discussion.
And that is what today is all about.
Director, thank you for your testimony. You mentioned the
things that we can control and the things that we cannot
control. It is clear that the projections, we are going to get
them wrong. I don't like that. I have said this to the Director
of the Congressional Budget Office. I will say it to you. We
have got to get better at projecting. To understand that they
are outside of our ability to predict the future is certainly
understandable, but they have ramifications for making
decisions.
In that regard, then, you have to hang your hat, you have
to have an anchor in the storm, and that anchor is what you can
control, those things that you are able to anchor to.
The budget that the President submitted that you obviously
wrote and helped to craft, which by and large is the budget, as
I understand it, that was passed by the House, is that still
the budget that you and the President endorse and will stick to
as we move through this process of this particular legislative
session and into the future?
Mr. Daniels. It is, Mr. Chairman.
Chairman Nussle. The President has submitted a supplemental
now almost 4 months ago. The House passed a version of that
supplemental, not identical but a version of it, which, as I
understand it, spent $28.8 billion in necessary emergency
spending for 2002. Is that the level at which the Office of
Management and Budget and the President intend to support as
you continue to move through negotiations?
Mr. Daniels. It is the maximum. Yes, sir. The President did
indicate that it was acceptable at the time the House passed
it, to be precise, 27-1, and the spending he asked for on a
contingent emergency that he might or might not spend above
that of about 1-7. Having indicated that was acceptable, he in
good faith has stuck to that position.
I have to tell you that it has been by now 117 days since
he submitted that request. There are only 70-odd days left in
the fiscal year. We know more than we did now, and we have
fewer days left than we expected. If we were submitting that
request today, it would be somewhat smaller. But in the
discussions with those who are responsible in the
appropriations process, he has stayed in good faith at the
position he took when the House acted.
Chairman Nussle. Understanding that the details within the
number itself of 27-1, with the contingency to 28-8, is left
for you and the President and the negotiators from the House
and the Senate to work out the details, is the President
prepared to veto anything above $28.8 billion in the
supplemental for 2002?
Mr. Daniels. Yes, he is.
Chairman Nussle. Then I will report to you as well that we
have secured enough votes in the House of Representatives to
sustain such a veto, and we are willing to do so. We don't want
it to get to that point. In some respects, presenting the
President with a bill to veto suggests a certain degree of
failure on our part in the first instance. But in the second
instance, just so we are clear, not only has the President
indicated his willingness to veto a bill above that level of
$28.8 billion but that the House has enough votes to sustain
such a veto.
Just for context again, and we have heard some discussion
already today about the need for maybe some additional spending
in some of the domestic programs, what would happen if we went
above $28.8 billion, let's say, by a billion or $2 billion?
Give us the ramifications particularly in the out-years as we
try to get back to some ability to pay down the publicly held
debt.
Mr. Daniels. I have heard it said frequently, that what is
all the fuss over the mere 3 or 4 billion on the supplemental,
a mere 11 is about the difference, at least, in terms of the
2003 bills. My first observation is that most Americans would
find that a strange question. In Indiana, where I live, we
don't use ``mere'' and ``billions'' in the same sentence very
often.
But this is--even by Washington's standards--real money.
The compound nature of that is illustrated over here on this
chart, the 3, 10, $20 billion that was spent this year does
compound over time, because we have proven generally unable to
root these things out of the base of Federal spending, and we
are going to work hard on this.
One answer to many of the questions raised today, of
course, is that we--as we become serious about identifying
those Federal activities that don't work well or have outlived
their time, we will free up more assets for those things that
are important or essential to do.
So, finally, I would say that I do believe that the
American public and your colleagues are looking for signals
that there must be boundaries; and we cannot add to every
single bill that comes along because of the way in which it
quickly compounds to create the kind of problems that we all
want to avoid.
Chairman Nussle. Just--my final question is, how much of
that supplemental could still be spent this year? How much of
that 2002 supplemental of $28.8 billion, now that it has taken
117 days and may even take a little longer--how much of that
can practically physically be spent by the agencies and
departments that need those resources this year?
Mr. Daniels. The majority can still be spent. In some
cases, the agencies have been postponing major investments. The
Defense Department has been using other funds that it would
like to replenish, the operations and maintenance area, for
example. But by no means all of it can be spent. For that
reason, we think there is plenty of room for an agreement; and
I must say I am very encouraged that there will be one.
A veto is not the President's preferred outcome. I think
you indicated it is probably not yours or any of the members
here. And I am very hopeful that we won't get anywhere near
that. You know, the important thing is to fund the essential
business of fighting the war and getting a homeland security
infrastructure established to defend the lives of Americans. It
is too bad we have lost the time we have. I hope we can get to
a real quick resolution this week.
Chairman Nussle. Thank you.
Mr. Spratt.
Mr. Spratt. Thank you, Mr. Chairman.
Mr. Director, I would like to put in context and try to get
some understanding about what the actual cost of homeland
security actually is.
Now I have got a chart in which we have tried to include
all of the things that have happened since 9/11 that are
related to and associated with 9/11. Once again, this is not to
be contentious. I would just like to get it settled and see if
we can get a common baseline to talk about.
Do you have a copy of the chart there, Mr. Director?
Mr. Daniels. Well, I can see it on the high-tech equipment
here.
Mr. Spratt. Well, this is the simplest way of saying it.
But look first at the chart; and, Mr. Chairman, I would like to
ask unanimous consent that the chart be made part of the
record.
Chairman Nussle. Without objection.
[The information referred to follows:]
Mr. Spratt. This chart shows that on the stub on the left
we have included the $40 billion emergency supplemental.
Obviously, that stemmed from 9/11. We have included the Air
Transportation Stabilization Act, the PATRIOT Act, the Victims
of Terrorism Relief Act; and we add all of those up. Then in
pending legislation we include the supplemental, an increment
for DOD to fight the war on terrorism over and above their
regular budget, which we calculated something in the range of
$20 billion a year.
These are outlay numbers, so it takes a while to build up
to $20 billion. But that is our initial amount for that
increment, a small amount already included in the President's
budget and an allocation for homeland security over and above
what we were already spending on that rubric on 9/11.
When you add all of that together, we get $554.6 billion
from 2002 through 2011 for that 10-year period of time, 2002
included. Does this comport with your calculation of what these
costs would be?
Mr. Daniels. I would agree that all these are included, Mr.
Spratt. As far as it goes, I don't know that it captures in the
near level alone the out-years, what may lie ahead of us. But I
agree that all of this should be counted.
Mr. Spratt. Could you take--I don't want to put it in front
of you and ask you to stipulate to something this complicated
just off the seat of your pants. But could you give us an
answer as to whether or not this is a broad approximation of
likely cost associated with post 9/11 expenses that OMB would
stipulate?
Mr. Daniels. I regret to say it is probably a minimum cost.
There are categories here which could well grow. Let's hope
they don't. But there are categories here that certainly could.
Obviously, defense, we don't know what direction things may
take. We obviously are now looking to defend against threats
that seem larger than they did.
And ditto for homeland security. We believe this rapid and
very forceful recommendation the President has made will
certainly create the platform for an effective homeland
security infrastructure, but I don't know for sure that it
won't need even more.
Mr. Spratt. Well, this accounts for about 12 percent, if
this computation is correct, about 12 percent of the
deterioration in the budget since January, 2001. If you could
give us a response for the record, both to the accuracy of this
chart, areas where it might grow and the percentage
calculation, we would appreciate it. I just wanted to put it in
context.
Mr. Daniels. I would be glad to.
Mr. Spratt. In addition to that, I said in my opening
statement that a 60 percent estimating error over a period of 4
to 5 months is pretty substantial. Eighty percent of that is
sort of assigned to a nebulous category called economic and
technical factors, which the general public doesn't understand
and neither do we unless somebody breaks it down for us.
As I indicated, we don't think you can include any
technical adjustment for the economy in the period between
February and July, because you actually increased your estimate
of GDP growth from then to now. So all of that has to be
assigned to technical factors, which would mean the technical
factors are probably close to 100 percent wrong over that short
period of time. How do you account for that? Number one, can
you verify that for me? In a response for the record, can you
give us a breakout of how much is technical and how much is
economic?
Mr. Daniels. Sure thing, Congressman.
I guess my answer would be, I think you are using the wrong
denominator. You know, I think especially when we are talking
about the revenue of the Federal Government, the extent of the
miss--and I am not any happier about it than you are. I tried
to write about that pretty candidly in the report. But I think
that the fair denominator is the total revenue base, which is
$2 trillion. So the miss is 60 over 2 trillion, not 60 over
the--as I said, historically small projection of $106 billion
deficit.
Let me take you back. In days of yore, the Federal
Government was running deficits of $250 or $300 billion. You
would have said that $60 billion miss was relatively small if
you looked at it your way. I would have said it was relatively
large, because total revenue at the time was a lot smaller than
it is now.
So, again, we highlighted the revenue change; and you
appropriately do, too. I just think in fair perspective it is
not as huge a miss as you were suggesting.
Now, let me come at it from a slightly different direction.
When you talk about technicals and so forth here--and I agree
with you. I try to de-jargon our reports. And these are--our
friends at Treasury do these estimates, as you know, and do the
best job I know humanly possible; and we use their terminology
when I can't get away with slang.
But I will say this: This miss was much larger when you
look at it compared to its real source and all--it is
entirely--almost entirely attributable to, as we talked about,
to non-withheld income which is, loosely speaking, that related
to the market, but also does include proprietorship income and
so forth. But it is heavily influenced by capital gains, mutual
funds, perhaps the income from incentive pay related to the
market; and that was transformed dramatically.
It is not the largest factor at all in the Federal revenue
picture, but it became very important this year because it fell
through the floor.
Mr. Spratt. You mentioned in your testimony that there has
been a substantial drop this year in tax collections. You were
just referring to it again. In your testimony or in the summary
page you handed out with your statement last week, you
indicated that individual income taxes were down a total of
$121 billion--and that accounted for the lion's share of the
$124-billion decline in taxes. In fact, if you looked at the
whole year, there has been a decline of about $180 billion, has
there not, total tax revenues collected?
Mr. Daniels. That sounds about right.
Mr. Spratt. Now, let us get to our chart here. You spent a
lot of time explaining the qualitative change in tax revenues
due to the fact that we can't expect the continuing boom in
capital gains revenues and in exercise stock option revenues or
in stock rent. Yet, could you tell me how then you account for
that uptake in revenue growth, which appears to be taking you
right back to the plateau you were on less the amount of the
tax cut? If we can't count on the capital gains taxes, we can't
count on the exercise of stock option tax revenues, if we have
to back those out or normalize those, how do we get back to
that revenue growth rate of 8 percent which you appear to be
assuming in your forecast here?
Mr. Daniels. These are good questions, Congressman. I am
asking the same ones, and we will keep pressing back on this.
But let me give you the answer or the reason that I believe
this is responsible now.
You are right that the revenue review forecast--I think it
is 8.6 or something, year-end increase, that is much smaller
than the--I think it is roughly a 14-percent average increase
coming out of recession. In recession, always revenue is
suppressed substantially. So the comparison coming out is
positive. This forecasts a much less rapid rate coming out than
we have seen in the past.
I asked the question. Alright. Fine. This was a pretty mild
recession. We thought it was going to be worse than it was, and
I think for that reason it might be accurate to expect less
than the historic recovery.
But I quite agree with you. We don't know. We have learned
I think how much more volatile in an era in which more
Americans have been deriving more of their income from what I
will call stock market related sources than ever in our
history, we have learned how much more volatile Federal revenue
can be, and we have all got to work carefully on this together
to understand this better.
And it takes me back to the central point. Let us control
what we can control, which is the rate at which we spend the
public's money. Let us make sure that it is coming in before we
commit to spend it.
Mr. Spratt. Mr. Director, there is another place where you
make a major assumption, almost a heroic assumption, that
accounts for the claim you are able to make that by 2005 the
unified surplus, including Social Security, will be out of the
red and back in balance; and that is, you are assuming a 25-
percent increase in corporate profits between 2004 and 2005 in
the year 2004. That is a pretty substantial assumption.
Mr. Daniels. We don't know. Obviously profits were driven
way down last year. It was another major reason for the drop in
revenues. My colleague Glenn Hubbard is testifying this week
that over the last two quarters corporate profits are up 26
percent, but I think that the common forecast for this year is
more like 14 percent. So profits do seem to be recovering but I
quite agree with you.
Mr. Spratt. You have got the ``bounce-back'' effect this
year. We are coming out of a recession; so normally you get a
fairly high percentage. I would assume we are planed out, we
are growing normally then. The only thing that would be a boost
to profits, an abnormal boost, that year would be the
expiration of the accelerated depreciation provision.
Mr. Daniels. Yes, sir. That is probably a set that would be
a central factor in why that spike occurs in that year.
Mr. Spratt. So this assumes it will expire? You are not
calling for the extension of the accelerated depreciation
provision?
Mr. Daniels. No, sir, we are not. Congress may want to
reexamine that as it arrives, but the President is not calling
for that. He did call, you are quite correct, for a targeted
approach to investment. It seemed to be a remaining problem or
a major problem in the recession we were experiencing, and he
is appreciative that the Congress agreed on that surgical
approach, but it is and was from the beginning designed to be
time limited.
Mr. Spratt. Let me direct your attention to the chart that
is now on the screen because it shows another major assumption
that is buried in the detail of this budget; that is, not all
of our gross domestic product is subject to taxes. Certain
entities earn things and they are exempt from taxes, and we
have assumed, CBO and OMB both in the past have assumed, that
the increasing cost of health care and employer-provided health
care insurance premiums would make less and less a share of GDP
subject to taxation.
As recently as a few months ago, last year at least, you
were assuming the curve that is on the lower side there which
was consistent with previous forecasts. This was the likely
decline expected in GDP principally because of the share of
income attributable to health insurance premiums.
Now without much fanfare, you had to dig this out of the
detail, there is a substantial jump there of about 2 to 3
percentage points of GDP, a small percentage change but a huge
base upon which it is applied, and in the long run over time it
has an enormous effect on revenues. How do you justify that?
Mr. Daniels. I think you will feel better about this when
CBO comes out, Congressman. It is a perfectly appropriate
question to ask and it comes from a timing and we were not able
to resolve in a different fashion, but although they have
signaled very, very publicly a change in their long-term
outlook, the Commerce Department's Bureau of Economic Analysis
will not formalize that or publish an official number until the
end of the month. CBO will take that into account. We have
adjusted this, which is, I would call it, the interacting
variable, an attempt to be accurate.
What I am saying is that we were not free to use what we
think is the new BEA estimate and still deliver this report on
time. One option was to hold this report and deliver it late,
incorporate their new estimate, and these lines would have come
essentially together, or to take what we know from their public
statements and make an adjustment to try to make the end
product revenues as accurate as we could. And I do think that
our revenue forecast, at least as it is impacted by this
variable and CBO's, will be close.
Mr. Spratt. Does this mean you expect a decrease in the
employer-provided health insurance premiums?
Mr. Daniels. No, sir, it does not.
Mr. Spratt. What does it mean then?
Mr. Daniels. This is a highly technical area. Can I submit
something for the record for you on this?
Mr. Spratt. I would appreciate that. I have three more
questions that I would like to submit for the record, and I
will hand them up to you. Thank you very much.
[The information referred to follows:]
Mr. Daniels' Responses to Mr. Spratt's Questions Submitted for the
Record
Question: Please provide for the record a year-by-year breakdown of
the economic and technical changes to the 10-year budget baseline,
separating the economic factors from the technical factors as has been
done by past administrations. Please show separately this economic and
technical breakdown for the baseline changes (i) from February 2001 to
August 2001, (ii) from August 2001 to February 2002, and (iii) from
February 2002 to July 2002.
Answer: Although the Mid-Session Review document did not separate
the economic and technical factors, more detailed backup was provided
to your staff that shows the breakout for the changes since the 2003
budget for our policy estimates. Attached is a similar breakout for the
baseline changes. This breakout is based on information collected from
each agency that provides estimates for the Mid-Session Review. We do
not centrally collect detailed information from the agencies explaining
changes between the Mid-Session Review and the following budget. We
calculate policy changes based on Budget Enforcement Act scorekeeping
and define the residual change as economic and technical factors.
The split between what is defined as economic assumptions and
technical reestimates is not precise. In general, economic changes are
defined as changes that come directly from the economic assumptions
developed by Troika (Treasury, the Council of Economic Advisors, and
OMB) and distributed to the agencies. All other estimating changes are
considered technical and are determined by the Treasury Department.
Furthermore, the distinction between economic and technical changes is
especially misleading in the circumstances where a significant revision
in the underlying data is anticipated.
Question: (Part one) Please provide the analysis that lies behind
your claim that costs associated with September 11 account for 19
percent of the deterioration of the 10-year surplus. The Democratic
staff of the House Budget Committee calculates that such costs account
for no more than 12 percent of the budget deterioration, an analysis
that will be provided to you. Please highlight any costs not included
in the analysis by the Democratic staff of the House Budget Committee.
(Part two) Please provide the analysis that lies behind your July 12
claim that (i) the recession erased two-thirds of the projected surplus
for 2002-11, and (ii) the tax cut accounted for less than 15 percent of
the change in the projected surplus for 2002-11.
Answer: Relative to the February 2001 baseline forecast, 9 percent
of the swing from a projected surplus to a projected deficit is
attributable to the tax cut. Similarly, including debt service, 29
percent of the reduction in the projected 2002-11 surplus is due to the
tax cut. Table 2 of the Mid-Session Review was correct in its
presentation of these figures. However, the initial Mid-Session Review
preview press release was not correct with respect to the effects of
the recession, and was subsequently corrected and reissued as soon as
the error was detected. The recession erased nearly two-thirds of the
2002 surplus, not the 10-year surplus as stated in the press release.
For 2002 and 2003 combined, the costs of security and the war
account for 10 percent of the surplus deterioration. Obviously, since
neither the scope nor the duration of the war is known at this time, we
are unable to provide 10-year forecasts of the costs of security and
the war. Your table, which holds spending constant in real terms after
2003, is probably the minimum amount that will be required.
Question: Congressman Spratt presented a chart titled ``Taxable
Portion of GDP'' and asked for an explanation of the 2-3 percentage
point increase in the taxable portion of GDP in the administration's
current economic projection compared with the projection used for the
fiscal year 2002 Mid-Session Review. He also asked if the higher
taxable portion was due to an assumption that employer-provided health
insurance premiums would decrease over time.
Answer: Most of the increase in the share of taxable income
occurred in the projections made for the fiscal year 2003 budget. This
upward revision reflected several factors including a new macroeconomic
forecast, the incorporation of information for the third quarter of
2001 that showed a faster growth of GDP incomes than of GDP output, and
an upward revision to the historical data for taxable income that was
not available at the time last year's Mid-Session Review projection was
finalized. CBO also made an upward adjustment in its projection of
taxable income shares in its January 2002 forecast.
The changes made between the fiscal year 2003 budget projection and
the fiscal year 2003 Mid-Session Review were relatively small. The
largest increase reflects the incorporation in the Mid-Session Review
of the temporary 30-percent expensing provision of the Job Creation and
Worker Assistance Act. This provision will lower taxable corporate
profits through 2004 and raise them beginning in 2005.
In addition, as I noted in my response to the committee on July 16,
the issue of how to project taxable wages and salaries in the fiscal
year 2003 Mid-Session Review posed a dilemma in light of statements
from the Bureau of Economic Analysis, the source of the historical
wages and salaries data, that it expected to make a significant
downward revision to wages and salaries that would be published after
the Mid-Session Review was to be released. One option was to base the
wages and salaries projection on the existing official, but errant,
data. The second option was to guess at the size of the forthcoming
downward revision and base the projection on that guess. We chose the
first option, which is consistent with prior practice, and Treasury
made a ``technical'' downward adjustment to individual income tax
receipts to take into account the error in the data. The important
point is that the projection of receipts would be the same whichever
option was chosen. That is because the projection of the growth in
future individual income tax receipts depends only on the projected
growth rate in wages and salaries, not the level of wages and salaries.
The projected share of employer-provided health care insurance
premiums in GDP is projected to increase and has not changed
appreciably since last year's Mid-Session Review.
Chairman Nussle. Mr. Sununu.
Mr. Sununu. Thank you, Mr. Chairman. I won't hold you at
fault for not knowing exactly what the percentage payment of
employer sponsored health insurance premiums will be in the
year 2008. I can appreciate the fact that you don't have all
that information at the tip of your----
Mr. Daniels. I do. I just didn't want to take the
committee's time.
Mr. Sununu. Touche. To that point when I first came here,
we were forecasting 5-year budgets and that was always a cause
for concern to me because I don't know and I don't think anyone
on this committee knows what GDP will be in the year 2005 or
2006, and now we have seen a number of charts today looking at
forecasts and projections for revenues and GDP and corporate
profits 10 years out. We are looking at 10-year budget numbers,
and I have a very healthy--what I think is a very healthy--
scepticism about this sort of thing, and I will not quibble
with you about what OMB or CBO or good economists are
projecting corporate profits to be in the year 2004, 2005. I
think where their kind of forecasting is concerned, the best we
can hope for is to take a good guess, make a good estimate of
our overall level of economic activity and then based on policy
try to estimate what percentage of that economy is going to be
collected in tax revenues. So tax revenues as a percent of GDP,
we look at spending perhaps as a percent of GDP, we look at the
growth rates and make the best estimates we can.
Even more important though, I reflect on the fact that the
title of this hearing today is ``Mid-Session Review'' for this
current economic year 2002, and I want to look at 2002, the
budget picture in 2002 specifically. I think that is a little
more revealing, especially when we hear discussion and debate
and even a little rhetoric about the tax cuts. I look at the
Mid-Session Review and I see where the Budget Office projected
in August 2001 a surplus, a unified surplus of $176 billion,
and today you are making a projection of unified deficit for
2002 of $165 billion. I do the math. I see that the change in
our budget picture is approximately $340 billion.
Is that an accurate reflection of what you are presenting
today for fiscal year 2002, the change in our budget picture
between August 2001 and today for this fiscal year?
Mr. Daniels. Right.
Mr. Sununu. Three hundred forty billion dollars. Of that
340 billion, the change in the fiscal picture for 2002, what
percentage is a result of the tax relief legislation we had
signed into law last year?
Mr. Daniels. Fourteen percent.
Mr. Sununu. Fourteen percent. So the change in the budget
picture which is significant, dramatic, the chairman made clear
as a result of economic downturn after September 11, some
additional spending, of that entire change in the picture, 86
percent is due to a number of factors, 14 percent is due to the
tax relief legislation signed into law, correct?
Mr. Daniels. That is correct, Congressman, with this
possible proviso that that is a static way of looking at life,
which presumes that every dollar of the rebate checks Americans
received generated not one cent of additional economic activity
or additional tax payments, and we may never resolve exactly
what the so-called dynamic or feedback effect is, but I don't
think anyone believes it is zero.
So I do believe, although you are quite right that it is
only 14 cents on the dollar of change in the deficit picture,
it was the most important 14 cents. There is a lot of economic
testimony, and just common sense tells us it probably helped
shorten and make more moderate the recession we had and
probably will help us recapture the lost tax revenues more
quickly.
Mr. Sununu. Now, the static effects of that tax relief
package have been included in the forecasts that you are
presenting us today, correct?
Mr. Daniels. Yes. Only static. We do assume, I always say,
the one answer we know is wrong which is zero, that leaving
more money in the pockets of taxpayers and businesses generates
no greater activity but that----
Mr. Sununu. I would like to talk more about that because
there are a number of additional provisions of the tax relief
package that are included already in the forecast that will
begin to take place over the coming years. Could you talk a
little more about the economic effect of those reductions in
marginal rates and of course ultimately the elimination of
death taxes that hit small businesses disproportionately?
Mr. Daniels. The President thinks this is very important to
long-term growth, and nothing is more important to our budget
than sustained long-term growth. I will point out that the
gradual nature of the tax relief as it was passed means that it
does not have much effect in the near term. If Congress decided
it was wise, of course the President would not agree, but
someone could suggest stopping the next few steps in the tax
cut, but it wouldn't do anything about the deficits. It is a
trivial amount of money compared to what we are talking about.
It would also have, I think, the effects of unfairness. Tax
relief was much about fairness as well as economic growth.
Fairness to parents of children, the child deduction through
ending the marriage penalty and so forth. He also mentioned the
death tax. So those debates may continue and of course can be
resumed by people who would like to try to repeal parts of the
tax relief, but what everyone should understand for purposes of
this discussion is it doesn't have much of anything to do with
returning us to balance or not because the big effects are in
the out-years.
Mr. Sununu. One final question. I know Chairman Greenspan
is testifying in the other body today, but in your opinion, do
you think that making the provisions of that tax relief package
permanent for individuals and working families on the marriage
penalty, on the elimination of death taxes, would making all
those provisions part of permanent law improve the level of
certainty and confidence in the economy as we move forward?
Mr. Daniels. Yes. The President does support that. Once
again, its effects for purposes of this discussion are many,
many years out, but I think we have all learned how important
confidence and certainty is through the events of recent months
in the market movements and the rest, and this is a major
reason in addition to fairness and then assuring families that
the tax code will remain fair after it has been made more fair,
a good reason to establish the permanence of that relief now.
Mr. Sununu. Thank you, Mr. Chairman.
Chairman Nussle. Mr. McDermott.
Mr. McDermott. Thank you, Mr. Chairman. This may have been
an unfortunate time to bring up this subject in this committee,
but this liberal paper from Richmond, the Richmond Times
Dispatch, says ``U.S. leads in cooking the books,'' and a quote
here from Bill Frenzel, an old Republican, is ``If you look at
the books of the corporate world, even the fraudulent ones,
they are less subject to manipulation than the Federal budget
is.''
I would suggest that one of the things we argue about here
over and over again, and I wrote the budgets in the State of
Washington in 1983 to 1987, so the worst of the Reagan years,
we established something called a revenue forecasting committee
that was made up of Republicans and Democrats and the
Governor's people, and we came up with one estimate and we
lived with whatever that estimate was. The biggest thing we are
arguing about here is manipulation back and forth between the
House and Senate and all the assumptions and everything else. I
think the reason why I am pleased the chairman is having this
hearing is that it is good for us to have an opportunity to
prepare for the ``I told you so.''
Now, if you put up that chart, the ``Skating on Thin Ice''
one, this is what we said the last time we showed you, left no
margin for error, just left no margin for error whatsoever, and
for us to be accused now of saying that is just an ``I told you
so,'' where was your plan? It's pretty thin; so I want to lay
out the future.
Go to slide 7 because I want to show that one. It is the
``Mid-Session Review numbers are not credible.'' This is the
outline for when Mr. Spratt is chairman of this committee next
year and we have to deal with the mess created by this
administration and this policy. In this one you have optimistic
GDP growth. There is no reason for it suddenly to jump up. You
say well, ``we are correcting the error from before.'' Oh,
thank you very much. I see. Now you need the money; so you are
going to bring some around. The highest share of GDP-assumed
taxation, Mr. Spratt went into that in length, and then you
say, well, you know, let me send up a written review of why it
is that health costs and whatever--just the fluff in here.
The next one, ``Medicare baseline is more optimistic than
the CBO.'' Now, all of us know what you are doing to Medicare.
You are trying to make it privatized and get to a voucher
system. There is no mystery around here. So you keep
underestimating or overestimating the baseline.
There is no fix for the AMT. I sit on the Ways and Means
Committee and it is just incredible to me that people could be
sitting out here with serious faces saying you are not going to
have to fix the AMT when you have got half the people having to
figure their income tax twice. You are going to have a change
in this place and we all know it, but no one will even talk
about it.
Then we come to the interesting ones. Here is the ``Assumed
expiration of depreciation benefit in 2004.'' Now, every time
we talk about letting a tax thing expire, you call that a tax
increase. The likelihood of this House letting anything expire
is simply in my mind zero because they couldn't stand to raise
taxes; and then you have omitted the extra cost of the House
Medicare bill; and you have omitted the costs of the
President's proposed spending; and there is nothing in here for
national disasters.
So when you have taken a budget and you have inflated the
amount of money you have and then you don't spend things that
we know we are going to spend, it is absolutely predictable
that we will be back here 1 year from now with Mr. Daniels
explaining away with a new set of--I mean I hope we don't have
to have another war or terrorist attack so you can blame it all
on that, but you started out this biennium or this
administration with an estimate that was inflated and you spent
it all. You didn't leave yourself one nickel in case a problem
came along, and I don't know why you do that. That is my
question. What is the purpose of all these optimistic things
when you know what has happened?
It seems, I suppose, a little strange for me to talk
conservatively, but I don't know why you make conservative
estimates and say in the light of what is happening we can't
expect we are going to get more revenue. We have gotten less
revenue now than we thought and suddenly we are jumping up and
we are going to get more revenue so I would like to know what
the basis--you have got seven or eight things here you can pick
on to explain why you did what you did.
Mr. Daniels. Great. Thanks, Congressman. Let me go through
them. First of all, the margin for error, actually I know it
has been a while, but if you were to go back and read last
year's budget, you would see the forecast that was made, which
was entirely consistent with the one that the last
administration had made over the 10 years, absolutely spoke to
this issue and left a trillion dollars in what was described as
a contingent reserve. In plain English in that budget it said
no one can see that far out and therefore 18 percent, I think
it was, of the expected, then expected surplus is simply left
aside because no one can know and there may need to be a
buffer. It turned out we needed a bigger buffer than that, but
it wasn't that no one thought about it.
Let me move quickly through the questions you did ask. On
GDP growth we underestimated it this year by 2 percent. I have
got to be the first Budget Director ever attacked for having
been too conservative about that, but so be it, and I have
explained about GDP coming out. If we are wrong, so is the
private sector consensus of 50 forecasters who have no axe to
grind in budget debates.
I have to tell you my view is we should simply embrace the
private sector estimate so that----
Mr. McDermott. You mean the Arthur Andersen School of
Accounting, that's what we have ought to embrace?
Mr. Daniels. There is a Blue Chip consensus that tends to
take the outliers out of the picture by pulling together and
averaging I think 52 analysts and economists from every
direction and----
Mr. McDermott. Our committee used them and we came up with
one.
Chairman Nussle. The gentleman's time has expired.
Mr. Daniels. I would just say if you are smarter than the
amalgamation of those 52, you ought to be a wealthy man. The
higher share of GDP, this is the question I answered before.
When the BEA issues its new update of wage and income as a
share of total income, this problem I think you will see we
resolved it the best way we could and we were not in a position
to use their number, as I told Congressman Spratt. So we
adjusted the number which it interacts. The Medicare baseline,
we actually raised our Medicare baseline in this report. I
don't know where CBO will be when they come out next month. It
possibly will be much closer, but we talked about this in the
spring and our total entitlement baseline was almost identical
to theirs; that is to say, they had a little bigger number for
Medicare and we had a little bigger number I think for Social
Security. So there was no difference in terms of what was
expected in mandatory or entitlement spending.
The fix of AMT is a real issue. We have talked about it
before. It wouldn't make much difference in the first year or
two. The year 2005 for instance, the year when we hope to fight
our way back to balance; it is only a few billion. But this is
an important issue and I think part of the tax simplification
study that the Secretary of Treasury is leading right now.
We are not going to assume anything further. That is what
the President asked for and got. No other assumption I think is
reasonable at this point. Yes, we omitted extra costs of
various bills because the President hasn't embraced them.
Your next to last point I don't understand. Any increase
the President has proposed, which does include Medicare
prescription drugs at a different number than the House voted
for, does include defense spending increases, for instance,
does include coverage for the uninsured through the credit he
has proposed, those are all in there. So reasonable questions,
but there are answers for each one determined.
Chairman Nussle. Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. And thank you, Mr.
Daniels, for your information you provided here today. I am
pleased that Mr. Spratt is focusing on cash flow. My only
problem with his focus is he has blinders on. He only talks
about outgoing, not coming in except a little bit of
terminology referring to it. But there are a lot of problems in
the environment here today in the Congress and in Washington
and across the country dealing with corporate profits. It is a
reflection on what has happened the last few days with some
revealing of some people who may not have done everything
proper within the structure of their corporations.
But corporate profits reflect individual tax revenues; is
that not true, Mr. Daniels? Corporate profits reflect
individual income tax?
Mr. Daniels. Ultimately, yes, sir.
Mr. Collins. It does. It is right here in your testimony.
It is called capital gains, it is called jobs, investments,
dividends that are paid by corporations. All those are part of
corporate profits; is that not true?
Mr. Daniels. Yes, sir.
Mr. Collins. My question to you then is twofold, both
dealing with cash flow. Yes, projections were wrong. That is
what they were, predictions. It is easy to be a Monday morning
quarterback. But as we see the reality of the cash flow coming
in and you made some mention to it and the question was asked
for a figure, but I never heard the figure. Based on the
supplemental, you said there is room for lowering the amount of
supplemental requests. Do you have a figure in mind based on
the fact that the revenues are down?
Mr. Daniels. We would still like to resolve, and I think
there are very hopeful signs we can resolve the supplemental at
the limit that the House set and the President had indicated
was acceptable.
Mr. Collins. But that is a higher figure than the President
asked for, and you said there is room for reduction. So we will
pass on that. Evidently there is not. But I am concerned with
the portion of cash flow coming in, which is down some. If you
look at this report, it varies, 6, 8, 10, 12 percent. What
measures are we going to hear from your end of the street that
will reflect a possible return to profits for corporations
which you have already agreed reflect individual income tax?
What are you proposing or do you have any proposals or does the
President have any proposals?
I will just throw out a couple. When you compare what takes
place in this country that has reference to corporations as far
as their profit structure, costs that we impose as a government
on corporations such as corporate rates, the corporate AMT, and
I am pleased to hear Mr. McDermott is very interested in
personal AMT, but there is a corporate AMT, also. We have
varying depreciation allowances that we allow for capital
investment return. We have provisions in law dealing with
double taxation of incomes such as stock dividends.
Does the administration have any proposals that would
address any of those areas so that we can, as you say, return
back to enjoying corporate profits in this country rather than
criticizing corporate profits which reflect the individual
income? Do we have any proposals coming from the administration
in those areas?
Mr. Daniels. No new ones at this point, Congressman, but
the President is very fixed on the state of the economy. He has
acted twice already. Once in the tax relief of last year which
was modified to take into account the recession that has become
apparent and then again, and I must remind everyone sort of
swimming upstream for quite a while in asking for a follow up
stimulus bill this year. I take you back to January: the
prevailing opinion aside from the President seemed to be, oh,
let it go, it looks like the recession will not be a severe one
and so forth, but he fought that bill through. Now the effects
of both those bills will continue. One has only been in effect
for a few months, and the tax relief of course has subsequent
installments, very important to small business and those
millions on the individual rate schedule.
So I would say there are additional effects coming, but I
would say that if the economy should stutter or recovery seemed
to be stalling out, the President won't hesitate again to look
at other measures that might be helpful.
Mr. Collins. Out of the four areas that I mentioned, there
was one that was in the first stimulus package but it was
omitted from the final version and that was the corporate AMT
repeal, which is something I think only this Nation has when it
comes to taxation of corporations. We have lost a lot of our
industry base. A lot of this comes from the standpoint we have
extreme costs when it comes to environmental regulations, we
have extreme costs when it comes to taxation compared to some
other nations who industrialize, and we have lost a lot of our
tax base.
And I will close with this. I appreciate the fact that the
President will veto anything that goes above the $28.8 billion
in the supplemental. I agree with you. I think that number
could be much lower, lower than the 27.1 that the President
sent up here. I will help to sustain a vote if he so does
because I will vote against the supplemental again. I voted
against the first one because I thought at that time it was too
high.
So we appreciate your comments and I hope that the present
administration will come forward with some relief that will
help us to be competitive in the world marketplace corporately
which reflects the individual income in this country due to the
jobs, dividends, capital investment, capital gains and such.
Thank you.
Chairman Nussle. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Daniels, I want to say at the outset, and our colleague
from New Hampshire is no longer here, but I continue to be
somewhat amused by our colleagues on the other side of the
aisle who say you really can't trust these numbers going very
far out; we should only look at it 1 year or not. The book that
you sent up to us has 5-year budget numbers, 10-year economic
numbers and talks about policy changes in the ninth year going
out. And last year as I recall when we were debating the tax
cut we were being told, look, we have got $5 trillion unified
surplus going out 10 years, in fact it may even be larger and
so we should be confident in building in a tax cut and other
policy changes into that. Now a year later we find out that
those numbers didn't pan out. The book you sent us today shows
that we have had a reversal in the level of the unified surplus
of about $5 trillion in the space of 1 year.
The chart that is up there now shows that from going from a
net surplus in 2000, we are now looking at deficits as far as
the eye can see--at least to 2012 even in your own numbers, and
granted we are going back to the old definition of deficits as
opposed to the newer definition that occurred in 2000. Now we
are going back to the old definition that a deficit is just
that, a deficit on budget, and we count Social Security and
Medicare as a way to pay for it. But the fact is that the debt
numbers that Mr. Spratt raised and others show we are not
getting out of debt anymore 10 years from now from where we are
today. The fact remains, and the chart shows up there, that the
President's fiscal policy is in a ditch and a lot of our
colleagues on the other side, rather than trying to figure out
how to pull it out of that ditch, are talking about pushing it
deeper in by adding another half trillion dollars and that is
part of the President's policy as well. But the numbers show we
are making the situation worse for the baby boomers and worse
for the people depending on Social Security and Medicare than
making it better, and I think that is an undeniable fact that
everybody has to take a look at.
Even if your numbers are accurate, and there are a lot of
reasons to believe they are not given our experience over the
last 18 months, this is where we are today, and the chairman
can say, well, the Democrats haven't put forth a plan, but the
President hadn't put forth a plan either to get us back into a
real surplus situation. Even if we assume the spending numbers,
the discretionary spending numbers that you talk about in your
Mid-Session Review, that only gets us back into a surplus in
the on-budget account but not in the unified account. And that
still means that we are in--that we have $3\1/2\ trillion of
debt outstanding, we have not positioned our economy to deal
with long-term obligations of the entitlement programs that
again you reference in your report.
So I think that is quite startling, and I would like you to
respond to that and I would also like you to respond to why OMB
still has a difference in the baseline for Medicare, absent any
policy change with respect to prescription drugs of about $173
billion as compared to CBO, $173 billion, more optimistic when
we have seen that those numbers are quite unstable, and I would
like you to respond.
Mr. Spratt and others talked about the 25 percent pickup in
corporate profits in the 2004-05 period, and you talked about
the impact of capital gains and dividends and interest that led
to the ramp-up in receipts in the latter part of the 1990s.
Do the numbers you present to us today in your economic
assumptions assume that we are going to have a pickup in those
numbers again in the 2003-07 period, because there are a lot of
folks now saying perhaps we are heading back into a 1974-76
period, a bear market period that could tamper down those
numbers? I would like you to address those issues.
Mr. Daniels. Thanks, Congressman. I think I got most of
them. First of all, in terms of a plan to get back to goals
that we do share--those goals being substantial surpluses,
enough to reduce debt and so forth--there is one plan here, and
we would be glad to work with you on ways to elaborate on it,
but the choices are pretty simple. I keep saying the thing we
must do is what we can do. We can control spending and we would
be receptive to ideas you may have as we proceed through this
year and put the next budget together about ways to restrain
spending more than the President has suggested at this point.
Every dollar we do, it will clearly be one dollar toward the
goal that you are talking about.
One thing I think the President believes will not work is
to try to tax our way back. That is a formula for economic
downturn if there ever was one. I suppose somebody could get
out the chalkboard and claim academically if we jacked up tax
rates high enough, all that revenue would come into the Federal
Treasury, but it wouldn't. Economic activity would slow down.
Mr. Bentsen. Nothing in the proposed policy changes in the
Mid-Session Review would get us back into the surplus position
that we were in in 2000.
Mr. Daniels. All that would get us back to projections,
estimates like that, that we can see is very strong economic
growth, stronger than we are willing to forecast. We are not
willing to assume growth beyond what we think is moderately
reasonable. We are not going to play that game. And it might
happen. It did in the 1990s and if we can all work together to
create the right conditions it might again. I think we now see
that would probably have to include a pretty darn strong stock
market as well as good old-fashioned GDP, but that is the way
and the only way we can once again estimate surpluses that big.
You talk about corporate profits or taxes, I think, corporate
tax payments, and as I said a lot of that assumes and we do
assume that the 3-year accelerated depreciation, that is what
it was called, to accelerate depreciation and then really to
accelerate investment in the near term runs for 3 years and
only 3, and on Medicare again we raised our Medicare forecasts.
I don't know what CBO, whether it will stay where it was or
increase. The differences had to do with estimates about
percentage of Medicare beneficiaries that were disabled, things
like that.
I take you back again to say that the differences across
trillions of dollars of Medicare spending were not very big and
there were places in the entitlements area where we expect more
spending than they did. If you put entitlements together, we
were right on top of each other. So there was no real
difference in the long-term fiscal outlook.
I hope I hit your main questions.
Mr. Bentsen. My time is up, and you can respond for the
record, but whether or not you make any assumptions with
respect to corporate share earnings or dividends and interest
if we are actually in a bear market for an extended period of
time similar----
Mr. Daniels. I would be glad to respond. Again this is the
area that the review says I think we have all got to work on
harder. I will take a second to make a point, Mr. Chairman,
that struck me many times. I think my first day in this job, I
didn't even know what to call it, but I knew somewhere there
must be a sensitivity table that would tell us what a point of
GDP was worth up or down and what inflation was worth up or
down. In fact there is in every budget document. And history
has told us that a point of GDP this year ought to be worth on
the order of $28 billion more revenue. We were low on GDP by
two points, but instead of getting 50 or $60 billion more
revenue, as history would suggest, we got less, and that is a
new phenomenon at work that we have to study, and there is
nothing in that sensitivity table today that says if the S&P
goes up a hundred points or down, this is what you can expect.
There may never be, but it is a phenomenon we are going to have
to understand better.
[Information referred to follows:]
Mr. Daniels' Response to Mr. Bentsen's Question Regarding a Bear Market
The forecast for earnings, dividends, and interest income is based
on past historical relationships. It is driven by our overall
macroeconomic forecast which is almost identical to that of the
consensus of private-sector forecasters. As such, we believe our
economic assumptions are the most likely outcome. We do not make
alternative economic and budget projections based on other, less-likely
alternative scenarios.
Mr. Bentsen. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Watkins.
Mr. Watkins. Thank you, Mr. Chairman. And, Director, your
comment was probably very appropriate, and that is the
sensitivity table. We watch that sensitivity if you are in
corporate or Wall Street in most cases, the sensitivity of our
stock not doing very well. Things happen and we don't see the
growth taking place, et cetera; so it becomes a big variable.
We all are known for our mistakes, I think, with that question,
David. We realize we have erred along the way and most of those
are not intentional, I don't think. I think on either side we
try to estimate or guesstimate what is going to happen, and
that is what we are talking about here today is how can we get
our hands on more solid figures. I think that is something we
have to wrestle through, whether it is our personal budget or
whether it is the budget when you are in business or in
corporate America to a certain extent.
I have taken two small companies through IPOs, and let me
tell you the sensitivity there is always at a boiling point as
you get through those. But I want to say sometimes we beat
ourselves over the head in here but there is no guide, actual
guide, on how to get to some of these, and I know we have to
use an estimated GDP which can vary quickly, and it is
happening out there today.
It seems like we are out of step there. So I guess trying
to get those solid numbers is one of the things that we have to
try to do because, as I stated in some earlier groups today, we
have got a problem out in America. There is a lot of
credibility that is at stake. There is a lot of uncertainty out
there of just what is going to be happening, and we have got to
know what role we can play.
I agree we cannot raise taxes. That is the wrong step, the
wrong direction, especially when earnings have been going down.
There are some I know in this body that would not go along with
reducing taxes and some people will use that, but I would like
to sound a warning that we have got to make sure that this
golden goose that has laid the golden egg for us, free
enterprise, is not the whipping boy at this time because we
might find ourselves way down. But we have got to find a way, I
think, to reduce the deficit across the board.
I don't know about some of your States, but our State has
balanced budget amendments and we have to balance it. So we are
taking a 7\1/2\-percent cut.
Has there been any discussion of that in your office or
anything about how we try to get back to this balanced budget?
Mr. Daniels. We discuss it all the time, Congressman,
including ideas like you are mentioning. I know before you know
it we will be putting the next budget proposal together and we
have to look at ideas like this, especially in view of lower
revenues that we have just discovered. For the moment I think
the President would be very pleased if he and the Congress were
able to agree to limit spending aside from those things we
cannot avoid in winning the war, defending Americans here at
home, to limit spending that alone would be a big step forward.
We are having trouble enough right now persuading some of
your colleagues to set aside business as usual and do as I
mentioned and as your question points out what 50 States of
this country manages to do every time they have a squeeze. The
50 States have just limited spending increases to 2 percent. I
don't know what it was in Oklahoma. In many States they
actually had to reduce spending year after year. And businesses
do it, families do it and all the President asks is that the
Federal Government do it, not in the overall but just in those
things that for the meantime have to take second place to
winning a war and defending Americans.
Mr. Watkins. I would like to ask one other thing, if I may,
Mr. Chairman.
I wish you would maybe get the President to ask the
Governors, who have probably got the strongest lobbying group
here, that they need to back off. The Governors here are trying
to get a lot of programs that fund their State programs so they
can do what they want to do with their budgets. I think the
Governors should be backing off and not be putting us all in a
big spot, John, out there as we go about doing it, and I think
this Congress needs to tell--but I think there are a lot of
things that would not have to be cut out. We could carry out a
program, but it might be reduced 7 percent and----
Mr. Daniels. Yes, sir.
Mr. Watkins [continuing]. That is what we have to do in our
household budgets. We have to sometimes say we can have this
but we are going to have 7-percent less. You had better not be
buying this, this or this because we cannot do it.
Mr. Chairman, thank you. It is a tough nut to crack to say
the least. It is always challenging and always quite
interesting.
Chairman Nussle. I thank the gentleman. Mrs. Clayton.
Mrs. Clayton. Thank you, Mr. Chairman.
Thank you, Mr. Daniels, for being here. Thank you for your
testimony and the mid-year review of our budget. It obviously
is a very useful document, but when we put our documents out,
we put them out for a reason. I gather the reason is for the
accounting and give the American people the assurance where
things stand.
The chairman started the meeting off by giving some
contextual standards by which we can now understand this
discussion. Given the contextual view of how Americans are
outraged at the corporate accounting procedure--certainly
investors are because they have lost their money and retirees
have lost their money, people are losing their jobs based on
how their books are kept, and records are kept.
Should the American people have confidence in the integrity
of our books, and how we are keeping the books and the
projection for the future of retirees in Social Security based
upon your opinion here?
Mr. Daniels. I think regrettably, Mrs. Clayton, in a way I
would say they should because the facts are very plain and the
facts are very stark. Members of this committee frequently
remind us of this. The extent of our unfunded liability in the
entitlement programs is there for all to see. It is measured in
the trillions. It does underscore the need for entitlement
reform, as the President has called for some time in the years
just ahead of us. But in this case the numbers are all too
accurate. We know how many people will retire and we know
actuarially about what to expect in terms of how many payments
they will draw, and so forth, and it is plain as day that right
now those programs are not built to sustain themselves.
Mrs. Clayton. I agree they will not sustain themselves.
Would you agree that that would be an accurate projection that
Social Security would have sustained itself but in this light--
it will not?
Mr. Daniels. No, ma'am. Social Security would not have
sustained itself. If we could return to large surpluses, we
would increase the Federal Government's borrowing capacity by
paying down debt, and let us all hope we can resume doing that
the first possible date, but that never was going to solve
Social Security's problems and it wouldn't today.
Mrs. Clayton. Let me phrase the question differently. Is it
not true that what we are experiencing now in the projection of
Social Security is much more severe than it would have been
since the budget of 2001 and 2002--we had a projection in 2001
that there would be $3.6 billion. Now, that might have
sustained itself over the long term, and we may quibble over
that amount, but the severity of the Social Security Trust Fund
is far more severe now than it was when we began the budget
process in 2001 and 2002; is that not correct?
Mr. Daniels. No, ma'am. Just to separate the questions:
first of all there is not a doubt, I don't think, in anybody's
mind that every penny of Social Security benefits promised will
be delivered now, next year, every year, I guarantee every year
this President is in office, one way or another that will
happen. The real question that you are quite appropriately
pointing us to is what happens about out here about 13 or so
years from now when Social Security begins to pay out
substantially more than it takes in and that is if the system
has not been reformed between now and then, and as that happens
there is no doubt, I don't think, that this top priority of
government will be honored but the question will be how will we
pay for it then and we can start borrowing from a higher base--
--
Mrs. Clayton. I will agree with you, Mr. Daniels, that
every Member of Congress and the President included will never
renege on trying to pay for that, but in doing so under the
circumstances they will renege on their commitments to other
things. There is no way we can keep both of them. Our budget's
shared responsibility is more than controlling expenditures. A
budget is not an expense statement only. A budget is a
combination of revenue, assumptions, and expenses. And, if we
don't plan for the unexpected, as we did not in the year 2002,
we will find ourselves going into deficit. So what we can
control is limited. But it is a misrepresentation of what we
should consider in a budget analysis when we should expect what
we do policy-wise in terms of stimulating the economy, having
receipts and tax revenue. These are all part of it. We run away
from tax revenue as if there is some other way to get income.
There is no other way.
So tax revenue should be addressed just as we look at
controlling expenses. We are being disingenuous, all of us
collectively, by not engaging in a comprehensive statement of
how we balance the budget and how we are responsible for the
total obligation of the American services, defense. Any
contingency has to be based on what we have to work with, and
if we ignore that the tax part was part of that, and the
unexpectancy of terrorists is part of it, all of that has to be
a balanced approach. And, to suggest that because we are
acknowledging we had some misconnections or mixed assumptions,
Mr. Chairman, with all due deference, I think the American
people are wondering if we are not held to a different standard
than corporate America. I think we ought to be held to the same
bookkeeping accounting as corporate America.
Mr. Chairman, I yield back the balance of my time.
Chairman Nussle. I thank the gentlelady, and I guess part
of my concern with what you were just saying and since there
are no members on my side that are left, I will take the time
for just a moment. When your chart says that the Republicans
spent the surplus, that assumes that it was all spent in a
partisan vote, and my recollection is--and the gentlewoman can
correct me if I am wrong--that you supported the stimulus
package, you supported the emergency supplemental, you
supported the defense appropriation that just went, you
supported all of the bills. Now, you did not, I believe,
support the decrease in taxes last year which as the Director
suggested was 14 percent of the reduction of that surplus this
year but the other 86----
Mrs. Clayton. Because----
Chairman Nussle. We have a difference of opinion. But my
point is that 86 percent of that I believe the gentlelady voted
for.
Mrs. Clayton. Incorrect. His analysis of the taxes was 14
percent.
Chairman Nussle. What is your analysis?
Mrs. Clayton. I will assume that Mr. Spratt is correct.
Chairman Nussle. What is his analysis?
Mrs. Clayton. I think it was 29 percent.
Chairman Nussle. So in other words, 61 percent you voted
for?
Mrs. Clayton. I did not vote for the supplemental.
Chairman Nussle. So what percentage is left? You didn't
vote for any of those things?
Mrs. Clayton. I did not vote for the budget.
Chairman Nussle. When you say Republicans spent----
Mrs. Clayton. I didn't say Republicans.
Chairman Nussle. That is what the chart says.
Mrs. Clayton. I didn't make the chart, but you have to
assume responsibility if you are in control.
Chairman Nussle. I am here.
Mrs. Clayton. Don't run away from that.
Chairman Nussle. I have the time and I won't run away from
it. In fact so much so--and I would be happy to yield to the
gentlelady for the discussion.
Mrs. Clayton. You usually do.
Chairman Nussle. So much so that we took the floor last
week, 2 weeks ago now, and voted to increase the debt ceiling
in order to manage this problem. My point is this: When you
come in here and say the Republicans spent it or that the
Republicans dragged us into Social Security, it forgets some
pretty important votes.
Mrs. Clayton. Why don't we----
Chairman Nussle. I will be glad to yield in a moment. It
forgets some pretty important votes that were done in a
bipartisan way where we were together unified in an appropriate
response to terrorism; in an appropriate response to emergency;
and in appropriate response to stimulate the economy. We
reached into that surplus and decided in a bipartisan way to
spend it, and that is the concern I have got and that was the
reason I brought the calendar out. It was the reason I have
done a couple of things here today that if you forget that
context, I can understand you will say in a chart like that
Republicans spent Social Security or Republicans dragged us
into deficits. But it forgets some pretty important votes that
the gentlelady and others cast, appropriately.
I am not suggesting they were wrong votes. I joined you.
All I am suggesting is that when those are the charts you put
up, it forgets some pretty important context, and that is that
we did this together and we did it together in an appropriate
response to some pretty vexing national emergencies that were
facing us since September.
And I would be happy to yield.
Mrs. Clayton. I agree with the gentleman. There was some
shared responsibility because there were some shared votes, but
there are differences. On September 11, all of us shared that
responsibility and there are other areas that we shared. My
concern is making the analysis of where we are now. Where we
are going is that we are ignoring the whole issue of revenue.
We are ignoring the whole issue of a tax. The tax bill was part
of that. The economy is another part of it as well as the
terrorist attack.
So to balance our discussion, as you had pointed out
earlier, you said we forgot September 11. I don't think we did,
but that was your emphasis. My emphasis was that over
consumption with controlling expenditures as the only way of
addressing this issue forgets some shared expense. You and I
both had to increase expenditures. When we say we are going to
control that to a very limited growth, where is the opportunity
to fulfill the President's commitment to "Leave no child
behind?'' Where is the opportunity if we don't do that to have
prescription drugs?
That is my only point. We are in this together and we ought
to find how does this mid-report add to confidence? And we
ought to get together and say let us now look at the budget
again, and how can we make sure as we go forward--we now know
some things we didn't know.
And I thank the gentleman for yielding time.
Chairman Nussle. Sure. Let me just say that there is a
difference of opinion here and that is fine. We have decided to
take a path of a 3-year glide path which has been confirmed
today by the Director of OMB to get us back to the unified
surpluses and the ability to pay the debt. Part of the reason
we chose that glide path as opposed to trying to attempt it
this year is because of those new challenges of homeland
security and defense and because we also believe it is
important to modernize Medicare and provide a prescription drug
benefit. You share in that. I understand that. But if you made
those two choices alone, homeland security-defense and
Medicare-prescription drugs, you cannot possibly get back to
even unified surplus this year without some type of effect on
revenue which is what you are saying.
We choose not to repeal the tax cut. I am not suggesting
that the gentlelady does, but without a plan it is in a little
bit of uncertainty. We choose not to. We choose to make them
permanent. That is a choice we make. We will have to stand
accountable for those choices, but my concern is that without
knowing what your plan is people can read into it or partisan
comments can be made and that is the reason that I take the
time in order to----
Mrs. Clayton. Mr. Chairman, would you yield one more time?
Chairman Nussle. One final comment, yes.
Mrs. Clayton. I don't think this is politically motivated.
Please understand that, but because I have a vested interest I
want to raise it. Did I hear you say a 3-year glide path or a
5-year----
Chairman Nussle. My point was that what we were trying to
do here and was confirmed here by OMB is we were trying to get
back to paying back the debt. That was one of the goals that we
announced as a result of what happened in September in the new
budget that we proposed and passed in the House, and we want to
try to stick to that so that by 2005 we can accomplish that. We
may or may not be able to. That is a goal we set, and the glide
path that we have passed with this budget in the House seems to
continue to be able to accomplish that.
Mrs. Clayton. The farm bill that we just passed was a 10-
year plan and I notice in the review you give a 5-year
projection, and it goes specifically less than we approved.
That may be just this way of projecting, but those of us who
live in the Farm Belt question how do we keep the commitment
for the next 5 years.
Chairman Nussle. I think we are scoring that probably
exactly right from what I can see. It was more than anyone
anticipated, but it certainly has been added to the bottom line
here.
The gentleman, Mr. Davis, from Florida.
Mr. Davis. Thank you, Mr. Chairman. Mr. Daniels, thank you
for being here. If I understood your testimony not just today
but earlier correctly, you like many of us continue to extol
the virtues of a balanced budget and paying down the Federal
debt as a priority for the Federal Government's budget.
Mr. Daniels. Yes, sir.
Mr. Davis. And it is fair to say in that regard that you
from time to time have not been bashful for criticizing the
Congress for excessive spending in some of those supplemental
appropriations bills and many of us have voted against some of
those bills on that basis.
Mr. Daniels. The supplemental bills during this
administration, I am happy to say, have not ballooned and have
been controlled at the levels they were requested at, but it
certainly has been a problem in the past.
Mr. Davis. My question is given those two points, why is
the administration continuing to advocate tax cuts like making
the estate tax repeal permanent, and there are other examples
of that which minimize our ability to get back to the balanced
budget and begin to pay down the Federal debt as opposed to
grow it as we are now?
Mr. Daniels. I think they are really separate questions in
two ways: the estate tax or the death tax. First of all, the
President has seen it as a fairness issue. I think many
Americans also believe that income has been taxed many times
during life and ought not to be taxed yet again at death, and
that was the nature of the debate that led to that reform.
Secondly, whatever one believes about the fairness of the
death tax, it has nothing to do with whether we can or can't,
do or don't get back to balance in the Federal Government
because the extension of that is years, 9 years away if it
happens, and in the interim, and this is essentially a non-
factor in the things we have been discussing here. So it is a
legitimate debate, but I don't think it has much bearing on the
critical issue of getting back to balance and debt reduction.
Mr. Davis. I agree there is a fairness issue and I have
supported, as many have, a middle ground to have a substantial
exemption approaching $5 million or more. But as we debate tax
cuts just as we debate spending bills, shouldn't we temper our
desire to pass tax cuts against our primary goal of balancing
the budget and paying down the Federal debt?
Mr. Daniels. I think they have to be weighed together and I
think the central point is that our shared responsibility is to
create the strongest economy we can. I have said it so often,
but a strong economy creates surpluses, not the other way
around, and taxation when this President came to office was at
record highs. Both overall taxation and individual income taxes
were at the highest levels we had seen measured against the
income of Americans, and he felt that both for fairness and for
economic reasons it was a good idea to moderate that and bring
it down. I will point out that even after the tax relief was in
place, taxation on Americans and individual income taxation on
Americans will remain at near record levels, certainly
peacetime levels.
So we do have to balance these things, but the President
felt we were out of balance before on the high tax side.
Mr. Davis. The tax cut, people use different numbers, $1.6
trillion that was passed. As I recall, it was based on an
assumption of the rate of growth in the GDP of about 3.2. Many
of us said that was a reckless assumption and, unfortunately, I
think that proves to be a correct statement. I think it is fair
to say, and you are not going to do this, I know, that if you
were to ask forgiveness for that mistaken assumption, some
would give you the benefit of the doubt on that.
But my question is, given that we blew it before--and I am
going to refer now to chart No. 7--why shouldn't we, Mr.
Daniels, be using very conservative assumptions about the
forecast? Because I think the major criticism that I offer
today as to your mid-session review is that I don't think you
are being sufficiently conservative in the assumptions you are
making and chart No. 7, which I am sure you have already
covered, illustrates some examples of that. Why shouldn't we be
more conservative in some of these assumptions so we don't make
the same mistake again and go into further deficit spending
than we are already?
Mr. Daniels. First of all, Congressman, we don't know
whether the 3.2 percent long-term assumption--you were
contrasting it to the full cost over 10 years of the tax cut--
we don't know if that was conservative or not. We can all hope
that over those years' growth will exceed that percentage and
maybe if we take the right steps--Washington can't control
this. It is in the hands really of millions of Americans and
their businesses.
But if things go well, it may actually exceed that. All we
know is that in the very front end, there was a recession that
was not seen as far as I know by anybody, and a hiccup in that
long-term line. Now, the line we have embraced going forward is
a little less than that, but it is the one that, consistent
with the Fed, the Blue Chip private consensus, and CBO, we are,
if anything, a touch to the conservative side. We were very
conservative this year, as I pointed out.
The biggest error, any way you want to measure it, the
biggest error in our February submission was we were too
conservative about economic growth this year. We missed a mile.
We said it was 0.7, and, as I said, it is going to be 2.6 or
more.
So I quite agree with you. I agree with you very much that
we should be very conservative looking forward.
The chart you mentioned, it was a good question. I asked
the same question repeatedly of our Treasury colleagues about
this growth rate coming out, and we will be glad to show you
the details. It is substantially slower than the growth rate
coming out of past recessions. But it may still be too fast,
and we are going to have to watch it every month. And the day I
believe that it is too fast, I will let you know, because--you
know, accuracy is what we are all after. Honestly, that is what
we are all after. And events have really thrown us all some
curve balls.
Mr. Davis. Mr. Daniels, I couldn't agree with you more. One
of my favorite adages is, everybody is entitled to their own
opinion, not their own version of the facts. And I think that
is what is separating us here and causing a lot of
consternation, at least on this side.
My final question, which gets back to something the
chairman has harped on repeatedly today, is about solutions;
because it is painfully obvious that it can be said we told you
so. That is too easy. There have been repeated attempts by
Democrats to try to offer what we think is the basis for a
bipartisan discussion about how to dig out of this hole, taking
into account the fact that we all believe that there is some
very important security spending that needs to occur and that
we are not going to get out of this hole overnight.
And what I am referring to is the Moore-Spratt-Davis-Moran
bill which has been filed. Do you have any comments on that
bill as a basis for us to start to come together to have a
discussion about how we dig out of this hole?
Mr. Daniels. Well, first let me say, Congressman, with
regard to the phrase, ``We told you so,'' I would have to know,
you know, we told you what? Nobody told us there would be a--
that a recession was really on already. Nobody told us there
would be an attack on September 11 or that it would cost $21
billion to rebuild New York from it, et cetera, et cetera.
These, as has been pointed out repeatedly here, are the reasons
that explain five-sixths of the difference between last year
and this. So just, before moving to your----
Mr. Davis. Let me just clarify, Mr. Daniels, because the
figure I recall is--and I think it was CBO or another credible
third party said that roughly 40 percent of the decline we have
experienced in revenues associated with the tax cut--and the
chairman is perfectly correct that it is important not to
overstate that, because
9/11 clearly entered into it, and so did the recession. And so
the ``told you so'' was just that the 3.2 left little margin
for error.
Mr. Daniels. Well, I think when the CBO comes out yet
again, you will find that they don't have any material
difference from us in terms of the small role, and, frankly,
the positive role I think the tax cut has played in events from
last year to this.
But I know your central question had to do with your bill.
I would just say that we appreciate very much your--and
certainly Congressman Spratt's--continuing commitment to fiscal
strength. I would be glad to talk to you about possible common
approaches. As I said, we have got to be putting together our
next budget submission, just starting weeks from now, and I
would be glad to look at ideas that might be incorporated.
Mr. Davis. Do you have a specific comment on the bill I
described, Mr. Daniels?
Mr. Daniels. I am sorry, I haven't made a close enough
study, and I probably should have, but I haven't seen it close
up enough to tell you. But I would be glad to take a look and
write you.
[The information referred to follows:]
Mr. Daniels' Response to Mr. Davis' Question Regarding H.R. 4758
H.R. 4758, the Restore Fiscal Discipline and Safeguard Social
Security Act of 2002, would condition future increases in the debt
limit on a plan to restore on-budget surpluses by 2007 without reducing
Social Security benefits. Specifically, it would:
(a) Restrict increases in the debt limit to $100 billion until a
budget resolution is in place reaching on-budget surpluses by 2007;
(b) require the President to submit a budget reaching on-budget
surplus by 2007, preferably using CBO economic and technical
assumptions; and
(c) establish points of order against any budget resolution that
does not reach on-budget surplus by 2007, except in time of war or low
economic growth.
The administration fully supports the goal of returning the budget
to surplus, but it has reservations about H.R. 4758, in particular
about those provisions of H.R. 4758 linking changes in the debt limit
to a particular fiscal policy. The size of the debt subject to limit is
the result of past fiscal policy decisions, current economic
conditions, and other budget developments. Delaying necessary increases
in the debt limit does not lead to any meaningful change in fiscal
policy. Instead, it only creates uncertainty about paying the
Government's bills, and raises the specter of Treasury defaulting on
debt. In particular, the bill's provision to limit increases in debt
subject to limit to $100 billion at a time would create the prospect of
protracted uncertainty in financial markets about Treasury borrowing.
Mr. Davis. Thank you, Mr. Chairman.
Chairman Nussle. Let me just take a moment and comment on
your bill. First of all, I think it is an important process
that we ought to consider. But I would say to the gentleman
with all due respect, there is a ticket to get into the dance.
We are willing to dance, but there is a ticket to get into the
dance. And the ticket to get into the dance is a budget. And we
have danced before, and we have learned how to dance before.
But when the Senate can't even pass a budget, that is, the
ticket to the dance, we can't sit down and discuss anything
without something to discuss. We are not going to discuss
process, we are not going to discuss triggers. I refuse to do
that. I am willing to discuss budgets. I am willing to discuss
solutions, but I will not sit down at the table and discuss a
process.
So the ticket to get into the dance is a budget, and the
Senate is unable or unwilling, or however you want to
characterize it, to pass a budget resolution to do so. As soon
as they do, the dance begins. I have danced before. I danced
last year. There are others that have come before. We are
willing to sit down at the table and to come up with a budget
between the two bodies. But you can't even get into the dance
if you don't have a ticket, and that ticket is a budget.
Mr. Davis. Mr. Chairman, I will just----
Chairman Nussle. Because we have a vote, let me just go to
Mr. Price. I would love to continue this, but I want to make
sure he has an opportunity before the vote.
Mr. Price.
Mr. Price. Thank you, Mr. Chairman. Mr. Daniels, I will add
my welcome. It looks like this may be wrapping things up. So
let me observe that the questions that have been raised today
at least on this side of the aisle, seem to be in two broad
categories. First of all, the question about possibly overly
optimistic projections. This is a very important question given
the accuracy of past projections.
You have raised your projections of GDP. Despite your
constant blaming of the long-term deficit on the deteriorating
economy, you are making some very optimistic assumptions about
GDP, more optimistic than were made some months ago.
You have raised the projections of the taxable share of
GDP. As Mr. Spratt indicated, you have made optimistic
assumptions about corporate profits, especially in the years
2003 and 2005. I expect, although I am not sure you have
directly answered this today, you have made optimistic
assumptions about the revenue from capital gains.
And if you don't have this today, I would appreciate your
furnishing it for the record. What are your projections about
capital gains revenues, and how have these projections changed
given the experiences of the last 12 to 18 months?
So there have been these questions about the rosy
projections.
Secondly, there have been questions raised about what all
this means for the Medicare surplus and for the Social Security
surplus. Even accepting the administration numbers, my reading
of your budget is that over the next 10 years, we are going to
be spending all of the Medicare surplus and all or most of the
Social Security surplus every year. And my understanding is,
there is no year in the next 10 years when all or most of the
Social Security surplus will not be diverted to fund the
general operations of government.
This leads, then, to a third area of questioning that I
would like to explore. It is, of course, related to the first
two, and that is the implications for debt retirement. You have
objected today to some of the rhetoric about the Social
Security trust fund, but I imagine you would agree that when
the cash flow in Social Security reverses in the next decade,
we would be in a much stronger position to meet those
obligations, to cash out those bonds that the trust fund is
holding, if we were no longer saddled with the $3\1/2\ trillion
of publicly held debt and spending over $200 billion a year in
interest on that publicly held debt.
So when we look at the very last page and the very last
line of your report here, that is a cause of concern. The debt
held by the public at the end of 2007 is going to be $3\1/2\
trillion, considerably more than it is today.
I wonder if you can compare that with what you were saying
and what lots of people were saying 18 months ago. As I recall,
the administration predicted that all the debt that could
prudently be paid down would be gone by 2008. That projection,
of course, has gone by the board. Figuring out how much debt we
can pay down is no longer our problem. Are we looking
essentially at $3\1/2\ trillion of publicly held debt and
having to pay yearly the interest on that debt for the
foreseeable future?
Mr. Daniels. Well, thank you, Congressman. First of all as
to assumptions, actually I disagree that we have raised them.
We have lowered them as to GDP. The recession caused the
economy, of course, to step back. And we do see it--because
this is the best advice that we are given, it is the common
consensus of the markets as well, Chairman Greenspan and
others--we do see it resuming a growth rate a little above 3
percent, but there is no question that we see a lower GDP over
time.
Mr. Price. But your GDP projection vis-a-vis what you
predicted in February of 2002 has been increased. Is that not
true?
Mr. Daniels. Well, I am not sure what numbers you are
referring to here, Congressman. Obviously--for this year,
obviously not. We forecast a growth of only .7. Yeah, we see it
growing faster this year than we did in February. But if you
are referring back to last year when the hope was there that we
would have large surpluses to work with over the next few
years, we saw a stronger GDP than today.
Mr. Price. I am referring to chart 10 while we are talking
here, but go ahead, please, with my main question.
Mr. Daniels. Alright. And, you know, your point about
``will we not be in a better position if we are able to resume
paying down debt?'' Yes, we would; and, yes, we should. And let
us hope that the economic conditions that made that possible
for a few years will return sufficiently to make it possible
again.
I keep pointing out that we need to do what we can in the
meantime, and that is to control spending. One way to assure
that we never pay another nickel of debt is to keep on spending
at the rate that we are at. And that is within our control. It
ought to be a reasonable--it ought to be reasonable policy that
we can come together on how to do that. And we seek your
support for that.
But to answer your basic question, although it would be
better if we were able to reduce the outstanding debt, it would
be no solution; and it would be a danger to think that it would
somehow allow us to procrastinate and put off reform of
entitlement programs just because we are able to borrow a
little more or start borrowing from a lower base when the time
gets here.
Mr. Price. The hill is a lot steeper to climb, though, you
are agreeing, when we start having to meet those obligations if
we are saddled with $3\1/2\ trillion dollars of publicly held
debt and the attendant interest payments.
You will furnish for the record, I trust, the figures on
the capital gains receipts, the estimated capital gains
receipts, and the way you have or have not revised those in the
last 12 to 18 months?
Mr. Daniels. We will tell you everything there is to know,
Congressman. What the report goes into, in hopes of provoking
people's interest in this very subject, is that I think we have
known far too little about this. Once again, it is not a high
percentage of the Federal revenue, but it has now proven to be
sort of the critical swing factor. And I was frustrated trying
to dig into this by the fact that the data on specific
components, like capital gains or other forms of incentive-
based income, trails by a couple years. What we know in more
like real time is the so-called entire category of non-withheld
income, income that doesn't come right off a paycheck.
We will give you all we can, and we would certainly welcome
your thoughts about how we all can get a better handle on this.
[The information referred to follows:]
Mr. Daniels' Response to Mr. Price's Question Regarding Capital Gain
Revenues
The forecast of tax receipts, prepared in December 2001 by the
Department of the Treasury's Office of Tax Analysis (OTA) for the
fiscal year 2003 budget, projected that taxable capital gains income
and revenue would decline by 16.6 percent in tax year 2001 and would
further decline by 3.8 percent in tax year 2002. The recently released
Mid-Session Review receipts forecast, prepared in June 2002, projects
that taxable capital gains income declined by 18.4 percent in tax year
2001 and would further decline by 8.9 percent in tax year 2002. Tax
return data needed to attribute recent collection shortfalls to
particular income sources will not be available until later this year.
Despite this fact, OTA's forecasts of tax liability fully incorporate
the impact of the fiscal year 2002 shortfall in income tax collections.
We suspect that a portion of the unallocated shortfall is attributable
to declines in taxable capital gains income beyond those forecast by
our models. Reinforcing this suspicion is the fact that mutual fund
capital gains distributions reportedly fell by 80 percent from 2000-01.
Since there is only a weak statistical relationship between taxable
capital gains income and mutual fund distributions, however, there is
considerable uncertainty about the quantitative implications of this
information.
Mr. Daniels. Once again, I associate with all the comments
from the Democratic side about the need to strive for accuracy.
None of us are served by anything else. And that is what we are
trying to do.
Mr. Price. Thank you.
Chairman Nussle. Let me just end with our chart No. 12. And
if I could, if you could get chart No. 4 ready from your side.
Chart No. 12 shows you the options that we have got right
now. Continuing on where we have been sends us $2 trillion more
into publicly held debt. It is a very similar chart to the one
that you brought along, Director Daniels, on the spending
trends, as opposed to the President's budget path or the House
budget path, which begins to pay back the publicly held debt in
about 2005 according to your projections.
Then, if you could switch to the Democrats' chart No. 4,
you see the glide path shown in slightly a different way.
I am willing to do better than that glide path. I am ready.
I will vote for it. And I will bet the President would sign a
glide path that would be possibly a little bit better than
that. But we currently only have consensus around that glide
path in the administration and in the House of Representatives.
We have no consensus in the Senate. Until we get a better
consensus, that is the glide path we are on.
And I believe we should do our best to at least--if nothing
else, if we can't come to a different agreement, at least agree
to enforce the glide path that we are on. I know it is
challenging to come up with one that gets us back quicker.
Because, trust me, I have tried to put it together and it was
difficult. But I am willing to go steeper, but only if we have
got the votes to do it. And until we see the plan that gets us
to that point, this is the glide path we are on and I intend to
enforce it.
If there is nothing else, then, to come before the
committee, I appreciate your testimony today, Director Daniels.
We appreciate the news. It is not always good news, but it is
given with very direct, plain speaking, and we appreciate the
work that you are doing to get us the information. And unless
you have any final comments, then we are adjourned.
Mr. Daniels. Thank you, sir.
[Whereupon, at 1:10 p.m., the committee was adjourned.]