[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.]

                                
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