[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                       MID-SESSION REVIEW: BUDGET
                         OF THE U.S. GOVERNMENT

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JULY 16, 2003

                               __________

                           Serial No. 108-11

                               __________

           Printed for the use of the Committee on the Budget


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


                                 ______

88-396              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut,      JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
GIL GUTKNECHT, Minnesota               Ranking Minority Member
MAC THORNBERRY, Texas                JAMES P. MORAN, Virginia
JIM RYUN, Kansas                     DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania             TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia             RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina  ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida              CHET EDWARDS, Texas
ADAM PUTNAM, Florida                 ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi            HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri              LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado         MIKE THOMPSON, California
DAVID VITTER, Louisiana              BRIAN BAIRD, Washington
JO BONNER, Alabama                   JIM COOPER, Tennessee
TRENT FRANKS, Arizona                RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan          RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida

                           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, 2003....................     1
Statement of:
    Hon. Joshua B. Bolten, Director, Office of Management and 
      Budget.....................................................     8
Prepared statement and additional submission of:
    Mr. Bolten:
        Prepared statement.......................................    10
        Response to Mr. Spratt's question regarding long-term 
          projections............................................    16
        Response to Mrs. Capps' question regarding the causes for 
          the drop in Medicare spending..........................    21
    Hon. Robert C. Scott, a Representative in Congress from the 
      State of Virginia, submission of the macroeconomic analysis 
      of H.R. 2, the ``Jobs and Growth Reconciliation Tax Act of 
      2003''.....................................................    36
    Hon. Christopher Shays, a Representative in Congress from the 
      State of Connecticut, submission of the sponsor list of 
      H.R. 436...................................................    53

 
                          MID-SESSION REVIEW:
                     BUDGET OF THE U.S. GOVERNMENT

                              ----------                              


                        WEDNESDAY, JULY 16, 2003

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Shays, Thornberry, 
Ryun, Toomey, Hastings, Portman, Schrock, Hulshof, Tancredo, 
Bonner, Garrett, Barrett, Diaz-Balart, Hensarling, Spratt, 
Moran, Neal, Scott, Ford, Capps, Thompson, Baird, Cooper, 
Emanuel, and Kind
    Chairman Nussle. Good morning. Today, we are holding a 
hearing to examine the Office of Management and Budget's mid-
session review.
    I am pleased to have with us for the first time before the 
House Budget Committee the very recently confirmed Director of 
OMB, the Office of Management and Budget, Josh Bolten.
    Welcome. Congratulations on your confirmation. We welcome 
you here today for, I am sure, a spirited discussion about the 
fate of our budget and your thoughts on that.
    As expected, this mid-session review projects substantial 
short-term deficits and sees the economy as not yet in full 
recovery. Also as expected, my friends on the other side of the 
aisle grabbed onto this story yesterday and waved it around as 
proof positive that the Republican-championed tax relief 
plunged us into these massive deficits, the likes of which had 
never been seen before in our history.
    Well, I can read the newspapers just like you can. But let 
me remind us of a little bit of that history.
    On September 10, 2001, we were running a surplus, a very 
large one. We were dealing with the economic challenge of a 
recession, and thankfully we passed tax cuts in 2001 to deal 
with that recession, making it the mildest in American history, 
creating 1.8 million jobs.
    So on September 10, while we were running a surplus and 
while the economy was struggling to get back on its feet, we 
thought we had the world by the tail. And then September 11 
occurred, and just like many Congresses and Presidents before 
us, we knew we had a job to do. We had a war to deal with. We 
had a national emergency to deal with and we had economy that 
had just gotten a gut punch like it had never seen before.
    So we did whatever it took to protect the economy and to 
protect America. And there is not one of us, at least on my 
side of the aisle, who would ever shrink from that 
responsibility again or regret the decisions we made.
    Many of those decisions were made in a bipartisan way, and 
appropriately so, because protecting America and protecting our 
economy should be bipartisan. But now we have a situation to 
deal with. As the very distinguished new director of the Office 
of Management and Budget said yesterday, we have deficits and 
they are manageable, but now we need to manage them.
    They are spending-driven deficits. Every Member of Congress 
knows how we got here. Over the past few years our Nation and 
economy have been hit with a steady stream of shocks. We fought 
and won a war. We continue to fight a war against terrorism 
around the world that we intend to win. We had to shore up our 
security at home and protect Americans as they work and travel 
every day.
    Let me show you a chart about some of the work that we have 
had to do. In a bipartisan way, we have enacted supplementals, 
spending $142 billion since September 11 alone, in order to 
shore up and protect America. As you can see from this chart, 
we have spent--in addition to the money that we budgeted for 
that year--in order to combat terrorism for the emergency. And 
we did this while the economy was struggling to recover from 
the slowdown in the recession that began in the middle of the 
year 2000.
    We knew that some of the spending choices we made in the 
last 2\1/2\ years would put an immense strain on the budget. We 
had to protect America and we had to protect Americans at home 
while at the same time promoting policies that would grow the 
economy and create jobs. These obligations supercede everything 
else that we do here.
    Further, these recent spending demands followed several 
years of very generous spending in a range of government 
programs. Let me show you chart 16 that shows you the 10-year 
spending pattern of this Federal Government. As you can see, we 
have been more than generous with regard to spending.
    Since 1995, government spending has increased by nearly 41 
percent--41 percent increase since 1995. Looking at individual 
budget categories, education spending has grown 82 percent; 
veterans, mandatory spending, 49 percent; Medicare, mandatory 
spending, 55 percent; and Medicaid, an astounding 77 percent.
    So make no mistake, these deficits are promoted and will 
continue as a result of excess spending.
    Second, deficits do matter and spending-driven deficits, I 
believe, matter even more. And the current deficit is way too 
big. I can guarantee you, you will not hear me arguing with 
anybody about the size of the deficit being too large, but I 
think we have to have a discussion what to do about it.
    We can continue to have a great time today pointing fingers 
at one another; but I read the articles yesterday, and they 
basically said that is all they heard on Capitol Hill yesterday 
was finger pointing. We can continue to do that or we can, I 
suppose, continue to try and spend our way back to prosperity, 
as some of our colleagues might suggest.
    I am sorry there are some who are surprised by these 
deficits. We all knew in this committee that they were going to 
be large. That is why we came up with a plan. That is why we 
wrote and passed a budget and that is why we have to stick to 
that budget because it will, if we stick to it, get us back to 
balance. It is why we passed tax relief to create jobs and 
increase revenues to our government.
    Let me show you a chart with regard to this fact, payroll 
jobs with and without the tax cuts. The tax relief has made a 
difference--despite what many critics would say. An estimated 
1.8 million more people are working today than there would have 
been without the tax relief, according to estimates.
    But those things alone are not going to take care of the 
deficits. That is just one of the first steps. If these 
deficits are truly manageable, then let us manage.
    We, all of us, Republicans and Democrats, must control 
spending. I intend to stick to the budget and to the levels in 
the budget, period. I don't think you can tell me that we can't 
offset new initiatives or new spending. From what we have 
already seen in this committee from waste, fraud and abuse, it 
is very clear that we can.
    If Democrats are genuine in their resolve to get back to 
balance, I welcome them to help in the Republican-led efforts 
to reduce these deficits by slowing the unsustainable rate of 
Federal spending growth.
    I appreciate Director Bolten being with us here today and I 
look forward to your testimony. I welcome you to this fight to 
control spending and get us back to a balanced budget and keep 
our economy moving forward in a positive way.
    And I would like to turn to my friend Mr. Spratt for any 
comments he would like to make before we hear from our witness.
    Mr. Spratt. Mr. Chairman, I thank you very much.
    Mr. Bolten, welcome to your first hearing. We look forward 
to working with you. Your reputation precedes you, and it is an 
excellent one; and we are glad to see you in the office you are 
holding now.
    Let me just put a chart up here. It might not be news to 
you, but it is worth reminding ourselves from time to time that 
deficits need not be the norm. We changed the fiscal policy of 
this country in the 1990s. We moved the budget from a deficit 
of $290 billion in 1992, a record deficit, to a surplus of $236 
billion in the year 2000. Every year after the adoption of the 
Clinton budget--every year, the bottom line of the budget got 
better to the point where we had the budget in surplus for the 
first time in 30 years. It was a phenomenal accomplishment.
    Mr. Bush, when he came to office, inherited an advantage 
that no President in modern times has had. As you can see from 
this chart, in the first fiscal year he was in office, he had a 
surplus of $127 billion. We have now seen that surplus 
deteriorate in rapid fashion to a deficit this year of $455 
billion. And, Mr. Chairman, let me tell you, we are not 
surprised. We predicted this.
    When you brought out your budget in the year 2001 for 2002, 
with the enormous tax cuts, we said simply, ``We think you are 
betting the budget on a `blue sky' forecast. If for some reason 
these forecasts don't obtain, don't pan out, we are going to 
find ourselves right back in the red again and in a big way.'' 
And unfortunately, and I take no pleasure in it, that is 
exactly what has happened.
    We had a policy going that was bipartisan at that time. We 
both disavowed ever again spending the Social Security surplus, 
anything but Social Security benefits. We were going to buy up 
outstanding debt, not fund new debt and add to the debt of the 
United States. We were going to try to buy down the debt held 
by the public and reduce it to zero by 2008 or 2010 as the 
first step toward making Social Security solvent.
    We have totally lost the trail of what was a truly 
conservative economic policy, and somehow or another we have 
got to find our way back to that trail.
    The second chart shows you, in a simple linear graph that 
we are looking right now at the largest deficits in American 
history. The sag there in 1992 shows what the previous record 
was $290 billion. $455 billion will be an all-time record in 
nominal terms, but it only lasts for 1 year. You foresee it is 
getting better in the year 2005, and we hope that happens; and 
we do note, as politicians, that it happens to be after the 
next election.
    In addition, we can't forget the forecasting record we have 
seen over the last several years. Last year, your predecessor 
came here--same time, same report, the mid-session review--and 
said the deficit for next year, the deficit for fiscal year 
2003 which we now project is $109 billion.
    In February, he came back and said, ``We have increased 
that deficit; we think it is going to be $309 billion.'' That 
was 5 months ago. And now, 5 months later, you come and tell us 
it is going to be $455 billion.
    So if we are skeptical of your outyear projections, of the 
improvement from $475 [billion] to $300 billion in the year 
2005, that is because we have been burned before. We have seen 
those projections made in the outyears before only to see them 
not take place.
    If I show you the next chart, what we heard yesterday was a 
comparison of these deficits in terms of their relationship to 
GDP, sort of diminishing their significance and saying, Well, 
these weren't bad; if you look back and compare these deficits 
as a percentage of GDP to the past they aren't too badly out of 
alignment with past fiscal history.
    A couple of things wrong with that: No. 1, that is to make 
a norm of a period when we were actually saying, all of us, 
both sides of the lines, these deficits aren't acceptable. We 
didn't accept them then as acceptable fiscal policy.
    In addition, if you go back in the past, the surplus in 
Social Security was not a big factor until recent years. We 
didn't have a surplus in 1983 in Social Security; we were 
scraping bottom. So if you back out Social Security, and it is 
off budget, and just look at the on-budget deficits, you can 
see that the on-budget deficit for 2003 is going to be 5.7 
percent of GDP, the gross domestic product. And that happens to 
be the second largest non-Social Security deficit since World 
War II.
    These are consequential numbers. You can express them 
different ways, but there is no way around the fact that these 
are mammoth deficits and a matter of serious concern.
    The next chart shows the deficit as a percent of GDP--
excuse me the debt, the debt as a percentage of GDP. And you 
can see after 8 years of improvement, that it is returning to 
historic highs, too, and it has to be a matter of concern.
    Chart 7--this is a different way of saying what the 
chairman just said. We read a report and we listen to the 
chairman's comments, and there is a constant refrain for 
spending restraints, we have got to rein in spending. And we 
will agree readily that half of the problem, at least, has to 
be some kind of restraint on spending if we are really going to 
get a grip on the deficit.
    But let us look at where the increases in spending have 
come over the last three fiscal years under the Bush 
administration. In fiscal 2001, if you look at current services 
and the increment, the additional spending over and above what 
CBO said was required to have current services, and then divide 
that by percentage into the different accounts of the budget. 
What you find is that in each of 3 years--in each of 3 years, 
93-95 percent of additional spending is in the three 
categories: defense, traditional defense, DOD; the 9/11 
response, New York City and airline response, help to the 
airlines; and finally the war in Iraq and the war against 
terrorism generally. That is where a large part of the spending 
increases come. And I don't know what you are going to do to 
diminish that; I am not sure we can.
    Most of the members here feel we are running--skating on 
thin ice when it comes to homeland security now, we ought to be 
spending more. In any event, I don't see how you rein that in. 
I am not giving up the effort on spending cuts, but that is 
where the increases have come in the last several years.
    I don't get any sense in reading your report of yesterday 
that you give any culpability to the three tax cuts that this 
administration has passed--two substantial tax cuts and one 
stimulus tax cut which we both supported. Let me give you a 
simple way of looking at what those tax cuts have done to the 
deficit, the role they play.
    Page 6, chart No. 6--I used this last night on McNeil-
Lehrer, and we can argue about these numbers, but they are 
relatively right. If you take all the tax cuts that you 
proposed over the period 2002-11, add up their production of 
revenue over that period of time and add in the additional debt 
service we have to pay because we have a lower surplus due to 
the fact that we have cut taxes and reduced revenues, they come 
to 3.746 trillion over that period of time, 2002-11.
    If you then take the unified deficit--and this is actually 
a lower number than you have got because we developed this bar 
graph before we got your numbers yesterday--the total deficits 
during that period of time, $3.6 trillion. This is back-of-the-
envelope accounting, but the comparability of those two numbers 
suggests that the tax cuts have indeed had a major role in 
increasing the deficit to the heights we have seen.
    One of the things you acknowledged in your report yesterday 
is that the estimate of the surplus in 2001, February of 2001, 
$5.6 trillion, was overstated. We said then, ``Mr. President, 
you are betting the budget on a `blue sky' forecast of the 
economy.'' It turns out we were right.
    Instead of having a surplus of $5.6 trillion during the 
period 2002-11, you now acknowledge that was off by 53 percent 
for economic and technical reasons. They aren't broken out, but 
basically it was a misestimate of what the surpluses are likely 
to be. Forty-seven percent of $5.6 trillion is $2.6 trillion, 
and your tax cuts have substantially exceeded the available 
surplus. There is no way around it; doing that simple 
arithmetic, the tax cuts are a major contribution to the 
deficits we are looking at today.
    My concern is, if we put up chart 5, as bad as these 
deficits seem, $455 billion this year, $575 billion next year, 
$1.9 trillion in additional debt over the next 10 years, over 
the next 5 years it could turn out to be worse. First of all, 
if you take next year's estimate of a deficit of $575 billion, 
your estimate, your projection, that does not--excuse me, $475 
billion; I don't want to make it any worse than it is you add 
to that the cost, unbudgeted, of our deployments in Iraq and 
Afghanistan, which are now running at a rate of $5 billion a 
month incremental spending, then we could easily have a deficit 
over $500 billion, maybe $525 billion.
    DOD acknowledges they are coming back at us with a 
substantial supplemental sometime in the next fiscal year, so 
that $575 [billion] is understated by that factor alone. In 
addition, you haven't factored into your survey--and by doing a 
5-year forecast instead of a 10-year forecast, you skirt this 
issue--the cost of renewing lots of expiring tax provisions 
with which--the tax code is now studded as a result of putting 
expiration dates and sunsets on most of the tax bills we have 
passed over the last 2, or 3 years.
    You call for spending restraint. We don't find any specific 
cuts in domestic discretion there. We doubt you can do what you 
want to do and still increase homeland defense, still increase 
defense. And every time we look at the tax agenda that you 
present, your administration presents, there is an another 
omission.
    The Treasury is sending us a warning saying the alternative 
minimum tax is a looming problem. It affects 2 to 3 million 
taxpayers. Within 10 years, it will affect 39 million 
taxpayers. We all know, as politicians, it is politically 
inevitable we will have to deal with that problem sometime in 
the next 10 years. It will make the marital penalty look like a 
donnybrook by comparison.
    What does it cost to deal with it? Well, if we wanted to 
hold the impact to just 5 to 6 million families, so it wouldn't 
hit middle-income families, it would cost $680 billion. If you 
want to repeat it, it will cost a $1 trillion. That is nowhere 
factored into any of these numbers, but we know it is coming.
    Here we are, pushing other tax cuts, but we continually 
fail to mention the elephant in the room. The AMT fix will have 
to be done sooner or later and has to be factored into the 
numbers because of its inevitability.
    So those are the problems that we have, just to mention a 
few, with what you have projected there, what you have got in 
your report.
    And let me just end with one particular chart, which is 
chart No. 9; and if you can understand this one, we will give 
you credit in advanced algebra or something like that. It has 
got too many lines here. But when I read your report yesterday, 
I didn't find any compelling sense that this is a problem we 
had to come together and come to grips with. I still found the 
sense that we can grow out of this problem; if we can take it 
easy and restrain spending a little bit, we can grow out of 
this problem in 2 or 3 years.
    I have been here 21 years and I have heard that argument 
made before, and the lesson I have learned in 21 years 
following this problem is, it hasn't worked. It took Gramm-
Rudman-Hollings, the budget summit in 1990, the Clinton budget 
in 1993, the balanced budget agreement in 1997, every one of 
those budget plans and the process rules that came with it; it 
took all of that bearing down on the problem over a period of 
nearly 15 years to finally turn the budget out of deficit and 
into surplus.
    And there is no plan or process proposed in your report 
yesterday and no sense that we need one now, because if we are 
lucky, we can grow out of it.
    Well, here is what it took, here is what it took to move 
the budget from a record deficit of $290 billion to a surplus 
of $236 billion in the year 2000; this is what happened in the 
Clinton years. If you follow the line, outlays at the top as a 
percentage of GDP, you will see that in those years, from 1992 
onward, outlays steadily declined as a percentage of GDP.
    In addition, however, if you look at the bottom blue line, 
you will see that revenues increase as a percentage of GDP.
    CBO did an analysis, looking back at what happened over the 
1990s, and they said 48 percent of the reason for eradication 
of the deficit is due to revenue increases, 52 percent is due 
to spending cuts.
    To succeed, you have to have a tax strategy, a revenue 
strategy and a spending strategy; and I just don't find that 
anywhere in the reports you have given us today.
    Thank you very much for coming Mr. Bolten, and we look 
forward to your testimony we have further questions, but I 
wanted to register those concerns with you before we got 
started.
    Chairman Nussle. Let me just offer, because we have so many 
members here, I understand that both yesterday and today there 
has been a lot of concern about the tax cuts and so there is an 
opportunity in the Congress to repeal them. And, unfortunately, 
H.R. 436, which is the repeal of the tax cuts, to date only has 
four cosponsors. So I thought I would help out my good friend 
Charlie Rangel by passing around a cosponsorship form for H.R. 
436, since there seems to be so much concern about the tax 
cuts.
    And you, my friends, whoever on either side of the aisle--I 
will pass it this direction first--can certainly sign up to 
repeal the tax cuts if, in fact, they are so problematic.
    Mr. Spratt. Mr. Chairman, you know we supported the child 
tax credit. We supported the marital tax mitigation provisions. 
We did, however, vote against the complete repeal of the estate 
tax; we wanted to reform it and not repeal it. And, in 
addition, we proposed the suspension of the implementation of 
the upper-bracket tax cuts.
    So we not only supported some of those tax cuts, we voted 
for them in our own substitutes.
    We acknowledge that some tax reduction is needed to get the 
economy going. But I am just putting the simple arithmetic 
facts to you. You cut taxes by way more than the surplus, and 
as a result, we have a gaping deficit.
    Chairman Nussle. Well, Dick Gephardt said in Dubuque, IA, 
his first act as President would be to repeal the Bush tax 
cuts.
    And I will leave it here and--leave it right up here on the 
table, and if somebody would like to sign up for it, I would be 
happy to give that back to my friend Charlie Rangel and let him 
know there is support for repeal. Otherwise, it seems to be 
more rhetoric than reality.
    Mr. Bolten, welcome to the Budget Committee. This is where 
we have these kinds of discussions and they are usually done in 
a fairly cheerful way, as I hope you will see today. We know 
you are a partner in this effort because there is a lot of work 
to do; and we look forward to working with you on a number of 
these projects. So welcome. Your entire testimony and the 
report will be made part of the record, and you may summarize 
as you wish.

 STATEMENT OF JOSHUA B. BOLTEN, DIRECTOR, OFFICE OF MANAGEMENT 
                           AND BUDGET

    Mr. Bolten. Thank you, Mr. Chairman, for that very generous 
welcome. And thank you for welcoming me as a partner for this 
committee; and I look forward to working with you on both sides 
of the aisle in the months ahead.
    Mr. Chairman, the President's top priorities are: winning 
the war on terror, securing the homeland, and growing the 
economy. He has continued to lead boldly on all of these 
priorities. The President has sought, and many of you in this 
room--in fact, most of you in this room have supported him in 
approving the funds necessary for the global war on terror in 
the defense of the homeland. I know the members on both sides 
of the aisle have been highly supportive in ensuring that we 
are able to spend whatever is necessary to support our troops.
    The President also acted with Congress in 2001, 2002, and 
again this year to strengthen economic growth and create jobs, 
because neither the President nor anyone in this room, I am 
sure, will be satisfied until every American worker who wants a 
job can get one. Small business owners now have new incentives 
to invest and create jobs. Workers are already saving more in 
their paychecks because of the tax relief and millions of 
Americans will receive tax refund checks within weeks because 
of the 2003 Jobs and Growth Act. The combination of these and 
other policies, and strong economic fundamentals like low 
interest rates, low inflation and increasing confidence now 
have the economy poised for strong recovery in the months 
ahead.
    It is in this context that we released yesterday, OMB's 
annual mid-session review which, as each of you knows, is 
directed toward updating and revising the estimates of 
receipts, outlays and the deficit to reflect economic, 
legislative and other developments since the release of the 
President's budget in February.
    As a result of those factors, a number of factors, 
including weaker than anticipated economic growth in tax 
receipts, additional spending for the war on terror, the 
deficit--as, Mr. Chairman, you and Mr. Spratt have noted--is 
now estimated to be at $455 billion, well up from the $304 
billion estimate released in February.
    The number is projected to increase to $475 billion in 
2004, after which, in response to the President's program to 
generate strong economic growth and exercise spending 
restraint, the deficit is projected to decline dramatically. In 
fact, by 2006, our projection show the deficit to be half of 
this year's level in nominal terms, and as you can see from the 
chart that has just been put up on the screen, even less than 
half today's level when measured properly as a percentage of 
GDP.
    With the projected shrinkage in deficits, the accumulated 
level of national debt as a percentage of GDP is expected to be 
consistent, with the average level over the past half century. 
And because interest rates are the lowest over the past 40 
years, the total amount of interest the government must pay on 
that debt in 2003 actually declines.
    So while large in nominal terms and a legitimate subject of 
concern, today's deficits are manageable if--and I emphasize 
``if''--we continue pro-growth economic policies and exercise 
serious spending restraint.
    Placing this year's budget deficit in historical 
perspective, Mr. Chairman, as you have just done, the most 
relevant number in measuring deficits is not the nominal 
figure, it is the deficit as a percentage of the overall 
economy. With that in mind, a $455 billion deficit, while 
certainly higher than anyone would like, constitutes 4.2 
percent of GDP, well below the post World War II peak of 6 
percent and indeed lower than in 6 of the last 20 years. As a 
percentage of GDP, the deficit, properly measured, while higher 
than average, is nowhere near a record.
    When this administration took office, the budget was 
forecast, as you noted, by both the administration and by the 
Congressional Budget Office and many outside economists to run 
cumulative surpluses of $5.6 trillion over the 10 years from 
2002-11. These were good-faith, broadly supported estimates, 
Mr. Spratt's warnings to the contrary, that took into account 
no collapse in the stock market, no recession, no September 11 
terrorist attacks, no revelation of corporate scandals, no 
subsequent spending or tax changes, no additional homeland 
security spending and no war on terror.
    But by far the largest single factor in the changes of our 
budget position has been an economy that has been weaker than 
originally projected. As you can see from the chart that is 
coming up now, more than half the change in our 2003 budget 
position from projected surplus to deficit is due to an economy 
that has not lived up to April, 2001, expectations.
    The tax cuts proposed by the President and enacted by this 
Congress are not the problem; they are and will be part of the 
solution. It is important to understand that without any of the 
President's tax cuts, not 2001, 2002 or 20003, the deficit this 
year would be at least $278 billion. The combined effect of the 
three tax packages on the budget balance has been to reduce the 
surplus by less than a quarter in 2003 and by only slightly 
more between 2004 and 2008. Had Congress not enacted the 
President's three tax relief packages, moreover, the economy 
would be substantially weaker than it is and there would be 
substantially greater job losses.
    Mr. Chairman, as you pointed out just at the outset of your 
remarks, the most effective way to lower future deficits is to 
grow the economy, and the tax packages enacted by this Congress 
have been very well designed to do that. The key to improving 
the budget outlook is healthy and sustained recovery with 
strong job creation. Since the submission of the February 
budget, prospects for that sustained economic growth have 
brightened on several fronts.
    We have passage of the Jobs and Growth bill. We have 
successful action in Iraq. We have further reduction in short-
term interest rates by the Fed. And we have upturns in consumer 
and investor confidence. These developments suggest the economy 
is poised to return to healthy and sustained growth, creating 
jobs, reducing the unemployment rate and raising incomes.
    A healthy economy is essential to an improved budget 
outlook, but strong growth alone is not sufficient. It is vital 
to exercise discipline over Federal spending growth while still 
funding our urgent priorities. Both the President's budget and 
the budget adopted by Congress pursuant to action by this 
committee fund the priorities of the war on terror and homeland 
security while restraining the overall growth of discretionary 
spending to 4 percent, about as much as the average family 
income is expected to grow next year.
    Restoring a balanced budget is an important priority for 
this administration, but a balanced budget is not a higher 
priority than winning the global war on terror, protecting the 
American homeland or restoring economic growth and job 
creation. The February budget and congressional action since 
then reflect the right priorities for this country. Our 
priorities going forward need to continue to include 
restoration of strong growth and exercising fiscal restraint.
    Mr. Chairman, I am pleased to take your questions.
    [The prepared statement of Joshua B. Bolten follows:]

   Prepared Statement of Hon. Joshua B. Bolten, Director, Office of 
                         Management and Budget

    The President's budget, released in February, focuses on the 
challenges posed by three overriding national priorities: winning the 
war against terrorism, securing the homeland, and restoring strong 
economic growth and job creation. Significant progress has been made in 
all three areas.
    This mid-session review of the budget revises the estimates of 
receipts, outlays, and the deficit to reflect economic, legislative, 
and other developments since February. The deficit for 2003 is now 
estimated at $455 billion, up from the $304 billion deficit estimated 
in February, for the following reasons:
     Economic and Other Reestimates. The economic assumptions 
for this review, discussed later in the chapter ``Economic 
Assumptions,'' reflect weaker-than-anticipated economic growth since 
February. Slower growth, lower estimates of wage and salary income, and 
other economic factors have reduced receipts from the levels estimated 
in the budget. In the interest of cautious and prudent forecasting, the 
revised estimates also include a downward adjustment for revenue 
uncertainty of $15 billion in 2003, $30 billion in 2004, and $15 
billion in 2005. These reestimates in receipts are partially offset by 
lower outlays due to revised economic and technical assumptions. The 
net effect of all economic and other reestimates is to raise the 
projected deficit by $66 billion in 2003 and $95 billion in 2004.
     Iraq War. Funding for Operation Iraqi Freedom in 
supplemental appropriations enacted in April, including costs for 
military action and reconstruction assistance, increases spending by 
$47 billion in 2003 and $20 billion in 2004. These estimates do not 
reflect what the administration has previously indicated are expected 
but undetermined additional costs arising from ongoing operations in 
Iraq, extending beyond 2003.
     Jobs and Growth Act. Enactment of a jobs and growth bill 
that was larger for 2003 and 2004 than proposed in the February budget 
raises the projected deficit by $13 billion in 2003 and $36 billion in 
2004. Of this increase, $9 billion in 2003 and $11 billion in 2004 is 
due to temporary State fiscal assistance included in the final enacted 
bill. In later years, the enacted tax relief is smaller than proposed 
in the budget, which reduces the deficit projected in those years 
relative to the February estimates.
     Other Legislation and Policy Changes. Final 2003 
appropriations action, non-war related costs in the April supplemental, 
extension of the program to help unemployed Americans by providing an 
additional 13 weeks of unemployment benefits, and other policy changes 
raise spending by $26 billion in 2003, $17 billion in 2004, and smaller 
amounts in subsequent years.
    The reasons for changes in receipts and spending from the February 
budget are discussed further in the ``Receipts'' and ``Spending'' 
chapters of this Review.
    The deficit is projected to increase slightly from $455 billion in 
2003 to $475 billion in 2004. As a share of the economy, the projected 
deficit remains steady in these 2 years, at 4.2 percent of Gross 
Domestic Product (GDP). These deficit levels are well below the postwar 
deficit peak of 6.0 percent of GDP in 1983, and are lower than in 6 of 
the last 20 years.

                                      TABLE 1. CHANGES FROM THE 2004 BUDGET
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                   2003       2004       2005       2006       2007       2008
----------------------------------------------------------------------------------------------------------------
2004 Budget policy deficit                           -304       -307       -208       -201       -178       -190
    Economic and technical reestimates........        -66        -95        -80        -58        -53        -50
    Iraqi war supplemental....................        -47        -20         -1          *          *          *
    2003 jobs and growth act..................        -13        -36          1         30         29         24
    Other legislation and policy changes\1\...        -26        -17        -16         -9        -10        -10
                                               -----------------------------------------------------------------
        Total changes.........................       -151       -168        -96        -37        -35        -36
Mid-Session Review policy deficit.............       -455       -475       -304       -238       -213       -226
----------------------------------------------------------------------------------------------------------------
* $500 million or less.
\1\ Includes debt service on all policy changes.


    Even more important, after 2004, the deficit is projected to 
decline rapidly in response to the economy's return to healthy and 
sustained growth. By 2006, the deficit is cut in half. Chart 1 shows 
that the decline is even more pronounced as a share of the economy, 
falling from 4.2 percent of GDP in 2003 and 2004 to 1.7 percent of GDP 
in 2008.
    Budget deficits as a percentage of GDP are projected to be 4.2 in 
2003 and 2004, 2.6 in 2005, 1.9 in 2006 1.6 in 2007 and 1.7 in 2008.
    Today's deficits reflect an economy in recovery from recession, 
increased spending in response to the war on terror and homeland 
security needs, and the reversal of a massive surge in individual 
income tax collections. Although large in nominal terms and a 
legitimate subject of concern, these deficits are manageable if we 
continue pro-growth economic policies and exercise serious spending 
discipline.

                                  TABLE 2.--CHANGES FROM APRIL 2001 PROJECTION
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                          2002                2003                2004-08
                                                  --------------------------------------------------------------
                                                              Percent             Percent                Percent
                                                    Amount   of total   Amount   of total     Amount    of total
                                                              change              change                 change
----------------------------------------------------------------------------------------------------------------
April 2001 baseline surplus projection...........       283         -       334         -        2,578         -
    Economic and technical reestimates...........      -284       64%      -418       53%       -1,782       44%
    Enacted policy:
      Tax relief:
        2001 tax relief..........................        41        9%       -94       12%         -761       19%
        2002 stimulus act -52 12% -38 5% 19 -*...
        2003 jobs and growth act.................         -         *       -45        6%         -280        7%
      War, homeland, and other enacted                  -63       14%      -193       24%         -723       18%
       legislation...............................
    Pending budget proposals.....................         -         *        -1         *         -506       13%
                                                  --------------------------------------------------------------
      Total change...............................      -441      100%      -789      100%       -4,034      100%
Mid-Session Review policy deficit................      -158         -      -455         -       -1,455         -
----------------------------------------------------------------------------------------------------------------
* 0.5 percent or less.
Note: Each change includes associated debt service.

                 THE TURNAROUND FROM SURPLUS TO DEFICIT

    When the administration took office, the budget was forecast by 
both the administration and the Congressional Budget Office to run 
cumulative surpluses of $5.6 trillion over the 10 years from 2002-11. 
These forecasts were good-faith estimates that took into account no 
subsequent spending or tax changes, no recession, no collapse in the 
stock market, no September 11 terrorist attacks, no revelation of 
corporate scandals, no additional homeland security spending, and no 
war on terror. As shown in Table 2, the largest factors behind the 
subsequent change in surplus estimates are a weaker economy than 
originally projected and other reestimates in receipts and outlays, 
such as weaker capital gains realizations and higher growth in health 
care costs. These reestimates account for 53 percent of the change in 
the 2003 budget balance from the $334 billion surplus estimated in the 
April 2001 budget to the current estimate of a $455 billion deficit.
    By far the largest reestimate from the April 2001 projection has 
been in receipts. In the late 1990s, revenue from the individual income 
tax surged far above historical rates of growth, due to increased 
capital gains realizations from a booming stock market, growth in stock 
options and bonus income to high-income taxpayers, and other factors. 
At the height of the revenue surge in 2000, total receipts came in 
nearly $300 billion above long-term historical trends. This receipts 
``bubble'' more than accounted for the $236 billion budget surplus in 
that year. The administration's April 2001 projection, like those of 
the previous administration, the Congressional Budget Office, and other 
forecasters, assumed this level of receipts would continue. The 
subsequent reversal of the receipts surge has brought today's receipt 
levels far below the original April 2001 estimates.
    Policy actions account for the remainder of the change in the 
budget outlook since April 2001. The President proposed, and Congress 
enacted, three major tax bills in the past two and a half years. The 
first tax cut, the Economic Growth and Tax Relief Reconciliation Act of 
2001, came just after the economy had entered into recession. Its 
immediate tax relief in the summer and the fall of 2001 boosted 
consumer demand and helped to ensure the recession was short and 
shallow. The second tax cut, the Job Creation and Worker Assistance Act 
of 2002, provided incentives for business investment to jump-start the 
recovery. This spring, Congress passed the Jobs and Growth Tax Relief 
Reconciliation Act of 2003, proposed by the President in January to 
strengthen the recovery and accelerate job creation from its current 
subpar pace. In 2003, the effects of these three tax cuts account for 
23 percent of the change in the budget balance from the original April 
2001 projection. Even without these tax cuts, the deficit this year 
would be projected at $278 billion and, of course, the economy would 
have been even weaker had the tax cuts not been enacted, with 
substantially greater job losses.
    Policy action on the spending side of the budget has also increased 
the deficit. The largest spending increases, in the areas of defense 
and homeland security, came in response to the terrorist attacks of 
September 11, 2001 and the ensuing wars in Afghanistan and Iraq. The 
effects of this and other new spending account for 24 percent of the 
change in the budget balance since April 2001.

                PROSPECTS FOR THE ECONOMY AND THE BUDGET

    The key to improvement in the budget outlook is a healthy recovery 
with strong job creation. Since the submission of the budget in 
February, prospects for sustained economic growth have brightened on 
several fronts:
     Passage of the President's jobs and growth tax package 
will stimulate consumer spending, improve incentives to work, and 
encourage individual and business investment.
     Successful action to free the Iraqi people from the regime 
of Saddam Hussein has removed uncertainty about the timing and outcome 
of the war.
     A further reduction in short-term interest rates by the 
Federal Reserve last month and historically low long-term rates provide 
an attractive climate for investment and a strong housing market.
     Upturns in consumer and investor confidence indicate 
economic improvement is in the offing.
    All of these developments combine to suggest that the economy is 
poised to return to healthy and sustained growth creating jobs, 
reducing the unemployment rate, and raising incomes.
    A healthy economy is essential to an improved budget outlook 
because it generates more revenue and reduces the pressure for spending 
in unemployment-sensitive programs. But strong growth alone is not 
sufficient. It is vital to exercise discipline over Federal spending 
growth, keeping new policy action within the framework set by the 
President's budget and this year's congressional budget resolution. 
Both the budget and the resolution fund the priorities of the war on 
terror and homeland security, while restraining the overall growth of 
discretionary appropriations to a 4-percent level, consistent with the 
average growth in family income. If discretionary spending instead 
continued to grow at the average 7.4 percent rate experienced between 
1998 and 2003, it would add a cumulative $400 billion to the deficit 
over the next 5 years.
    Holding discretionary spending to 4 percent growth overall requires 
us to make choices, to set priorities, and to exercise fiscal 
discipline. Even in priority areas such as homeland security, we must 
be sure that funding increases are well spent. The administration's 
efforts to assess and improve the performance of Federal programs 
across the government, discussed further in the chapter ``Progress 
Implementing the President's Management Agenda,'' will help to ensure 
that taxpayer dollars are directed to programs that provide the 
greatest benefit.
    It is important to restrain increases in mandatory as well as 
discretionary spending to the levels envisioned by the budget and the 
resolution. Proposals for concurrent receipt of military retirement 
benefits and veterans' disability compensation, and increases in 
highway spending above the levels in the budget, are examples of new 
proposals however well-intended that have the potential to undermine 
the fiscal framework designed to move the budget toward balance. The 
administration renews its call for budget enforcement mechanisms that 
will restrain policy action above the limits set forth in the budget 
and the resolution.
    While we work to improve today's budget position, we must keep in 
mind the real fiscal danger: the unsustainable long-term finances of 
the nation's two major entitlement programs. Even if the budget were in 
balance today, the growth in the future costs of Social Security and 
Medicare beyond their dedicated resources would create deficits that 
grow ever larger as a share of the economy in the decades to come. The 
President is committed to reforming these programs in a way that 
modernizes their benefits and restructures their financing to ensure 
that they provide benefits not only for those in or near retirement 
today, but for generations to come.
    The fundamentals of the economy remain sound. With renewed economic 
growth, and with judicious stewardship of the people's money, we can 
return the budget to a stronger position in the years ahead.

    Chairman Nussle. Thank you for your testimony and for your 
words of wisdom and partnership today.
    And I am struck by your comment--and I want to go back 
because I haven't heard this number before--if we did nothing, 
if we didn't cut taxes, we would be in deficit?
    Mr. Bolten. Mr. Chairman, we would be in large deficit 
today, at least $278 billion in deficit, if none of the tax 
cuts had never taken place. And I want to add that that number 
does not take into account the very salutary effect that the 
tax cuts have had on the economy and, therefore, on Treasury 
receipts.
    We would be at least $278 billion in the red today without 
the tax cuts, probably worse.
    Chairman Nussle. I mean I haven't heard that story before. 
No one has reported on that. I haven't seen that on the chart.
    So if the Rangel bill was adopted, or had been adopted, or 
if we had not adopted the tax relief, not only would 1.8 
million people not be working today who are currently working, 
but we would still be in deficit?
    Mr. Bolten. Very deeply in deficit, Mr. Chairman. And I 
would add, we would also be in a much worse economic situation.
    What caused these deficits in the first place? The 
principal reason for the deficit in the first place was very 
sluggish economic growth and slow receipts in the Treasury. 
Without the tax cuts, we would be in a very similar situation 
with little prospect of pulling out, because we would not have 
the stimulus in the economy that the tax cuts have already 
provided and have a very strong promise of providing in the 
months ahead.
    Chairman Nussle. Now, I understand that the next argument 
that is going to be made though is, well, we can get back to 
surplus sooner than 2008 and 2009. Does anyone want to bet the 
farm on those numbers?
    I hope the argument here today is that doing nothing really 
should not have been an option here, and that is why doing 
something was so important. And I want to show another chart, 
chart No. 9. Not only was cutting taxes important and doing 
nothing is not an option, but let us assume for a moment that 
we would adopt the Democrat proposals, these first 7 months 
with regard to mandatory spending, on the floor of the House. 
Just look at what the deficit would have been then.
    Look at what the drug bill would have done that they put on 
the floor for a trillion dollars. Welfare, unemployment, I 
mean, you know, it goes on and on.
    Just run through these charts real quick. There is 
Medicare. That is the increase, $579 billion increase, to the 
deficit. The deficit that we are talking about today, that is 
being complained about, is the ``worst in history.'' Let us 
adopt the Democratic Medicare proposal and watch it grow.
    What is the next one you have got? Well, that is not it. I 
was on a roll--welfare, $52 billion added to the deficit. I 
know, I am getting a few things off my chest.
    So, OK, doing nothing is not an option. I would suggest as 
humbly as I can that this kind of excess spending is not an 
option and that is why I am arguing as forcefully as I can here 
today that you have got to stick to the plan, to the budget. It 
has two components. It has growing the economy, as the Director 
suggested, so we can get people back to work who are looking 
for work, so they can make money and pay taxes. And the second 
component is controlled spending.
    And I would like to go to that--and I know this is, in the 
grand scheme of all these bar charts, not a lot of money. It is 
in Iowa. A lot of money--I think it was said in Des Moines, IA, 
``a million here and a million there add up to a lot of 
money.'' But let us look at the supplemental, just as an 
example, $1.9 billion; I am calling for this to be offset.
    Back before we were at surplus, we used to offset 
supplementals, emergency spending around here, with lower-
priority reductions so that we could build in for the higher-
priority emergencies. And we are only--gosh, please I hope my 
mother is not hearing me saying only $1.9 billion--but only in 
the grand scheme of all these big numbers we are throwing 
around here, I would say, Mr. Director, can we offset, can we 
find $1.9 billion of waste, of lower-priority items so that we 
can fit this in and not go any deeper and begin the trend 
again?
    We are not talking about a war. We are not talking about a 
national emergency or a terrorism attack. We are back to the 
deficits we saw at the time when we had a practice to offset 
them.
    I know you can't do that. It is obviously Congress' job to 
offset, but will you help us try to find the necessary offsets 
to offset the supplemental that is before Congress?
    Mr. Bolten. Mr. Chairman, we didn't send that supplemental 
up with offsets. We would be glad to work with you on that. It 
is obviously a difficult and complicated process, especially as 
we approach the end of the fiscal year, because we need those 
offsets in fiscal year 2003, and that is emergency spending 
that we need in 2003 in order to combat fires and hurricanes 
and things like that. And I am glad to work with you on that, 
and I am glad, in looking forward, to cooperate with you in a 
process where, in fact, we do seek offsets for items that go 
outside the budget.
    And on that subject, Mr. Chairman, I very much welcome the 
words of Mr. Spratt, who, when he spoke about restoring 
mechanisms--statutory mechanisms to restrain the budget, we are 
very much in support of that, and I look forward to working 
with the committee on that as well.
    Chairman Nussle. Let me take one more minute and suggest 
one pet peeve that I have in this regard.
    We notoriously--we hope to God it doesn't happen, but we 
know it is coming next year--floods, forest fires; it is 
terrible to know that they are coming, but we notoriously do 
not provide resources ahead of time to budget for that. And so 
we then stand at the underfunded FEMA accounts and say, ``Oh, 
my gosh, what are we going to do?'' These are so high-priority 
emergencies that we have to deal with, we have got to spend 
more money, we have to pass a supplemental.
    And I would suggest to you, part of the reason we got back 
to the practice in the mid-1990s is because I think a forceful 
case was made that these are predictable. We don't know exactly 
where and when, but we know we are going to help people in 
need. That is our job in many of these instances, to help 
people who cannot help themselves. And I would hope that not 
only we start with a relatively--I had better use that word--
``small'' supplemental while we can, so we set up the practice 
for a time when it may be a little more difficult and where we 
had more time to plan.
    And part of the reason I say this, I don't want to make 
455, 456.9 or 460, we don't want to go any deeper is the old 
adage when you are in the hole. Spending is what is driving 
this, and I want to do whatever we can even on the margins even 
when it is relatively small.
    Mr. Spratt.
    Mr. Spratt. Am I correct in reading your report yesterday 
that the current estimate, restated estimate of the surplus 
between 2002 and 2011 is actually $2.6 trillion; not $5.6 
trillion, as presented and projected in January of 2001, but 
$2.6 trillion?
    Mr. Bolten. No, Mr. Spratt. I don't think so.
    Mr. Spratt. You stated the surplus was overstated by 53 
percent because of economic and technical mistakes.
    Mr. Bolten. I think that was just in 1 year. But in fact, 
the $5.6 trillion surplus was overstated by more than $5.6 
trillion if we look at the actual reality of what happened. I 
think the 53 percent relates to----
    Mr. Spratt. Just 1 year?
    Mr. Bolten. Is it 2003--the change that is directly 
attributable to the--to economic effects as opposed to either 
spending, which was the second largest contributor in 2003, and 
the tax cut, which was the last.
    Mr. Spratt. Now the tax cut you have got there is actually 
the tax cuts passed with the expirations assumed. You have got 
31 percent of the problem is due to tax cuts.
    That is just for the year 2003?
    Mr. Bolten. I think we estimated 23 percent for the year 
2003.
    Mr. Spratt. That is for tax cuts?
    Mr. Bolten. Yes, sir.
    Mr. Spratt. I saw a chart that had 31 percent for tax cuts.
    Mr. Bolten. Between 2004 and 2008.
    Mr. Spratt. For the whole 5-year period of time?
    Mr. Bolten. And, Mr. Spratt, we actually did assume 
throughout that period that all of the tax cuts in the Jobs and 
Growth bill were extended. None are assumed to sunset and all 
of the other extensions of tax provisions that were contained 
in the President's budget were also extended.
    Mr. Spratt. Just 26 percent.
    So do these percentage allocations hold over the 10-year 
period of time? Are they roughly right for all 10 years?
    Mr. Bolten. We didn't run precise numbers over the full 10 
years, but I am told that it doesn't change by that much over 
the full 10-year period, by the rough--again, back of the 
envelope.
    Mr. Spratt. Could you give us for the record a pie chart 
that shows 2002-11 of how much is diminished of that total pie 
due to economic and technical miscalculation and how much has 
diminished due to tax relief, tax measures passed and still to 
be passed that are part of your agenda?
    Mr. Bolten. We will give you what we can that--at least 
what we can reliably report on.
    [The information referred to follows:]

  Mr. Bolten's Response to Mr. Spratt's Question Regarding Long-Term 
                              Projections

    The administration mid-session review of the budget updates 
estimates of the changes in the April 2001 projection through 2008. We 
have limited our estimates to five years due to the high level of 
uncertainty in longer term projections. Table 2 in the mid-session 
document allocates the change among economic and technical re-
estimates, tax relief, and other legislated changes. Attached is a pie 
chart that shows the source of the change by category. The largest 
cause was economic and technical re-estimates which accounted for 47 
percent of the total. As your requested, we have also attached a table 
that shows the distribution between economic and technical re-
estimates.

              TABLE 2.--CHANGES FROM APRIL 2001 PROJECTION
                        [In billions of dollars]
------------------------------------------------------------------------
                                                         2002-08
                                               -------------------------
                                                              Percent of
                                                   Amount       total
                                                                change
------------------------------------------------------------------------
April 2001 baseline surplus projection........        3,195  ...........
    Economic and technical reestimates:
        Economic..............................         -833  ...........
        Technical.............................       -1,651  ...........
                                               -------------
            Subtotal, reestimates.............       -2,484          47%
    Tax relief:
        Enacted policy:
            2001 tax cut......................         -897  ...........
            2002 stimulus act.................          -71  ...........
            2003 jobs and growth act..........         -325  ...........
                                               -------------
                Subtotal, enacted.............       -1,293          25%
        Pending tax proposals.................         -218           4%
                                               -------------------------
            Subtotal, enacted and pending.....       -1,511          29%
    Other:
        War, homeland, and other enacted               -979          19%
         legislation..........................
        Pending spending proposals............         -289           5%
                                               -------------------------
            Subtotal, other...................       -1,268          24%
        Total change..........................       -5,264         100%
Mid-Session Review policy deficit.............       -2,069  ...........
------------------------------------------------------------------------
Note: Each change includes associated debt service.


    Mr. Spratt. You estimate that in the years 2004 and 2005, 
the budget will begin to get better, actually sort of comes 
down to a new plateau that is beneath $400 billion. It is the 
$230 and $304 billion, I believe, in 2005.
    What do you a attribute that to? Is it all economic growth?
    Mr. Bolten. No. A great deal of it is economic growth, and 
the faltering of economic growth is what created these large 
deficits in the first place. So a very large chunk of it is 
economic growth.
    But we are also assuming a pretty good dose of spending 
restraint like was contained in the budget resolution that this 
Congress approved.
    Mr. Spratt. By our calculation, if we are to have the kind 
of growth you appear to assume during that period of time, the 
economy has to start growing now, this quarter, at about a 4 
percent annual growth rate. And that has to continue in order 
to attain a 2.8 percent fourth quarter, over fourth quarter 
result.
    Do you think the economy right now is growing at 4 percent? 
Is there a surge that is happening right now that we are not 
aware of?
    Mr. Bolten. Mr. Spratt, I think what we have assumed is 
roughly for the second half of this year a 3.7 percent growth 
rate in the economy. And that----
    Mr. Spratt. That will average out to 2.8 percent for the 
full year.
    Mr. Bolten. Yes.
    And that estimate, I am told, is straight down the middle. 
Corresponds with what CBO estimates and what the Blue Chip 
estimators are estimating has well. So I think it is a sound 
and, I understand, relatively conservative estimate.
    Mr. Spratt. My time is just about up.
    You mentioned that you are game to the idea of having the 
budget process rules that we put in the Budget Enforcement Act 
of 1991 renewed. In rewriting or extending the PAYGO rule, 
would that apply to taxes as well?
    Mr. Bolten. Going forward, we would be prepared to consider 
that.
    Mr. Spratt. Thank you sir.
    Chairman Nussle. Mr. Thornberry.
    Mr. Thornberry. Thank you Mr. Chairman.
    Mr. Bolten, let me add my welcome to this committee. I have 
been a member of this committee for about 5 years now, and the 
one thing that I continue to be struck by is how rotten we are 
at predicting revenue coming in to the government. And if we 
could put up chart 1, which is similar to what you were talking 
about with Mr. Spratt, if you kind of start at the top and work 
your way down, this is what has happened with the downturn 
receipts.
    The blue is tax relief, and that is a debate we have back 
and forth, but ultimately the democratic process runs its 
course and a bill is or is not passed, is or is not signed into 
law; and so at least tax rates are something within our 
control. And obviously part of the downturn in the receipts are 
the deliberate result of bills passed by Congress and signed by 
the President.
    And then the next level down, our spending increases. 
Again, we have a debate; that is something within our control. 
And a lot of those spending increases in some areas are more 
than I would like; other areas, perhaps not as much as I would 
like--in homeland security, perhaps. But we have disagreements 
and ultimately we take action and there are results.
    But then we come to the red. And the red, as your chart 
shows and this chart shows, dwarfs everything else. Part of 
that is just the flow of the economy, improving or not 
improving, or actually going down. But there is even an 
element--CBO has testified before to us that even with the 
economy performing at a certain level, the revenues coming into 
the Federal Government are less than what would be expected of 
the economy performing at that level, so it is not just 
economic growth.
    There seems to be a lot that we don't know and are not very 
good at predicting. And I guess what I would like to know--and 
I understand you have been in this position a short time--do 
you have suggestions about what any of us can do to do better 
at predicting, or even budgeting, going into the future?
    We know the top things are under our control and the 
results are the decisions that we make, but this huge red area 
in this chart, which is the result of economic forces that we 
can't, at least directly, control, presents us with difficult 
problems. Do you have suggestions on what we can do better 
again at predicting or at budgeting or to have a little better 
estimate in the future?
    Mr. Bolten. Mr. Thornberry, I think you are targeting 
exactly one of the right problems, which is--a lot of the 
misestimates have come on the revenue side, that the very rosy 
projections of huge surpluses were radically wrong about 
government receipts. And that is an area where we need to 
improve our projections.
    It is interesting that where the receipts seem to have 
fallen off the most is in some corporate taxes, especially in 
individual income taxes and capital gains taxes. It seems that 
there is a steep fall-off in tax receipts, particularly from 
wealthy individuals, unrelated to any tax cut, but I think it 
had to do with the stock market collapse, with options and so 
on that built up in the late 1990s and the beginning of this 
decade.
    So it is a real problem in the estimates. It is one that I 
think the economic estimators are getting better at, but there 
is a great deal of work to do.
    One thing we can do is be conservative in our estimates 
going forward, and we did that in the mid-session review. We 
have inserted into our estimates a plug that is just a guess, 
that the estimates may be too optimistic even though we think 
we have been conservative. We have inserted a plug into our 
numbers of $15 billion in 2003, $30 billion in 2004 and $15 
billion in 2005 for precisely the problem you are talking 
about, which is an over expectation of revenues.
    So we feel we have been on the conservative side of this. 
We have got $60 billion in just the first 3 years of our 
projections that we have put into the estimates for any 
unexpected further shortfall in revenues. And I think we need 
to do that going forward until we are better at estimating how 
revenues come in.
    Mr. Thornberry. I agree. Thank you very much.
    Chairman Nussle. Mrs. Capps.
    Mrs. Capps. Thank you Mr. Chairman.
    And thank you Joshua Bolten, for being here for your first 
hearing.
    At the last mid-session review a year ago the President 
said the fiscal year 2003 budget deficit would be $109 billion. 
In January, the President said it would be $304 billion. Today, 
in a tour de force of fiscal recklessness, the expected fiscal 
year 2003 deficit will be $455 billion. This represents a 
stunning 300 percent increase in 12 months.
    Despite this, the administration and the Republicans in 
Congress have no plan to address the deficit--no real plan. In 
fact, the argument is being made that the White House may see 
the fiscal damage this causes as an added benefit of this 
reckless policy. This is the starve-the-beast strategy 
Republican operatives speak of so glowingly. The way to keep 
spending down is to keep cutting taxes and drive up the 
deficit. Then, the argument goes, there is no way to spend 
money on programs and services that the American people ask 
for.
    These tax cuts do mostly benefit the richest people in the 
country. And the programs we underfund--Head Start, Medicare, 
education, veterans health--are most important to middle-class 
and working families. It is a cynical and destructive strategy 
that hurts families today and saddles our children and our 
grandchildren.
    And my question to you, Mr. Bolten, is a statement that you 
are quoted as making that ``these deficits are manageable.'' My 
question is, at what level would you consider the deficits to 
be unmanageable either in dollar amount or in percentage of 
GDP?
    Mr. Bolten. There is no fixed answer to that. I don't know 
where the situation gets difficult.
    Chairman Greenspan was asked the same question yesterday. 
He doesn't know where the situation is.
    What I can tell you is that the deficits we are 
experiencing today, although much larger than we would like 
them to be, are manageable.
    Where we would see a problem is in long-term interest 
rates. And long-term interest rates--from a deficit that is too 
large. Long-term interest rates today are at 40- or 50-year 
historic lows. So we are not seeing the current deficits 
causing a problem in the economy. And I think this needs to 
be--whenever we look at the deficit picture as a percentage of 
GDP we need to be assessing what is the effect on the economy.
    The situation today is indeed manageable, and if our 
projections prove correct, and I think as I was just discussing 
with Mr. Thornberry, I think they are conservative, going 
forward, we will see the deficits declining in just the next 
few years to about 1.7 percent of GDP which should put even 
less strain on the economy.
    Mrs. Capps. But long-term interest rates are long term. And 
surely there must be some way to estimate either 5 percent of 
GDP or 6 or 10, the point at which you could predict that that 
would affect long term--there is no way?
    Mr. Bolten. Mrs. Capps, no, I don't think there is. Because 
there are so many different factors that affect the economy. We 
could be looking at high unemployment and yet a low-growth 
rate. We could be looking at high interest rates. So there are 
so many different factors at play that I don't think any 
economist would hazard a guess at what the right number is. So 
what I can tell you is that today a 4.2 percent of GDP deficit, 
while much larger than we want, is not causing substantial 
damage to the economy.
    Mr. Baird. Would the gentlelady yield for a moment? You 
answered her earlier by saying that interest rates have not 
been impacted by the deficit so, therefore, it must not have a 
negative impact. But now you are saying they are unpredictable, 
their relationship. Seems inconsistent.
    Mr. Bolten. I don't think so. The point I was making was 
that when you assess whether a deficit is causing damage to the 
economy, you need to look at the whole economic picture. That 
means what is the employment level, what is the productivity 
level, what are interest rates and so on. This is how the 
markets and the economists do it. I think that is how we all 
ought to be doing it as we cautiously evaluate what is the 
right step to be taking.
    Mrs. Capps. Could I reclaim my time? I do want to ask you a 
question. I hear you saying there is no ceiling on how big 
deficits can get without causing damage.
    Mr. Bolten. No, that is not what I said. I said you can't 
predict in the abstract exactly what that number is.
    Mrs. Capps. I do want to get out the fact that the mid-
session review shows a gross decrease of $25.5 billion in 
Medicaid spending for fiscal years 2004-08. I would like you to 
explain the causes behind the drop in Medicaid spending.
    Mr. Bolten. I don't have those with me at hand. If I could 
provide that for you for the record, I will.
    Mrs. Capps. Could it be that the States are cutting 
Medicaid benefits and tightening eligibility criteria for this 
program, and isn't this projected decrease in spending a real 
negative effect on Medicaid beneficiaries?
    Mr. Bolten. I will give you an answer for the record, Mrs. 
Capps.
    Mrs. Capps. Thank you.
    [The information referred to follows:]

Mr. Bolten's Response to Mrs. Capps' Question Regarding the Causes for 
                     the Drop in Medicare Spending

    Under the fiscal year 2004 MSR estimates, Medicaid spending is 
estimated to grow at an average rate of 8.1 Percent over the next 5 
years compared to the fiscal year 2004 President's budget estimate of 
8.7 percent. This growth rate is slightly smaller than was previously 
forecast in January. The estimates reflect a combination of anticipated 
changed in state Medicaid programs and revised economic assumptions. In 
2003-04, medical assistance spending is projected to increase by $9 
billion over the January estimates, primarily as a result of the Jobs 
and Growth Tax Relief Act of 2003. This legislation gave states 
temporary increase in their Federal matching rates.

    Chairman Nussle. Thank you. Mr. Hastings.
    Mr. Hastings. Thank you, Mr. Chairman. Mr. Bolten, welcome 
to what I hope will be a first of many pleasant experiences in 
front of the Budget Committee. We have heard today, of course, 
a number of reasons why we are running deficits, largely all 
because they were unpredictable prior to, I would say 9/11. A 
lot of factors came into that. That is been, I think, well-
documented. However, a lot us came to this body thinking that 
balancing the Federal budget is a very good policy. And so what 
I would like to ask you, just for the record, in view of the 
difficulties that we are going through, does the President 
still share that goal of having a balanced budget?
    Mr. Bolten. Yes, he does.
    Mr. Hastings. That is pretty unequivocal. I like to hear 
that. In the last exchange that you had with some of the other 
Members there, the interests or the issue came up regarding 
interest rates, and critics of deficit spending have said over 
a long period of time that when you run deficits, that tends to 
crowd out the markets and, therefore, interest rates rise. And 
yet, I can speak on a personal basis that I have refinanced and 
interest rates continue to come down. How do you explain that 
phenomena right now? And should there be other considerations 
that go into effect when you are looking at the economic impact 
when we talk about deficit spending?
    Mr. Bolten. Well, that is what I was just beginning to get 
into with Mrs. Capps, which is that there are a whole wide 
variety of factors in an economy that will affect what interest 
rates, what long-term interest rates are going to be. They do 
include the level of employment. They include very 
significantly the productivity rate, that is the rate by which 
we are able to produce more goods with less labor. They include 
international factors like growth rates abroad and how 
receptive are foreign countries going to be to our exports. So 
there are a whole wide variety of economic factors that come 
into determining interest rates.
    And the main reason we need to be worried about deficits in 
the short run is because we need to ensure that they are not 
causing substantial upward pressure on those interest rates. 
Today with a 4.2 percent of GDP deficit, too large, we are not 
seeing that upward pressure on interest rates. And that is why 
I have use the world manageable to describe the situation.
    Mr. Hastings. Just out of curiosity, I know back in the 
'80s the deficit as a percentage of GDP was somewhere around 6 
percent. Do you know what they were after the Second World War, 
say during the '50s when we were growing up?
    Mr. Bolten. Oh, I think immediately after the Second World 
War they were very large. The government ran huge deficits 
during the war. They fell off after that fairly rapidly. But 
let me turn to my colleagues to see if we have a specific 
answer.
    Mr. Hastings, in the interest of the time of the committee, 
we will be able to give you a chart for the record. But during 
wartime, traditionally, the numbers have gone well above 6 
percent of GDP. That 6 percent peak is just in the last 20, 30 
years.
    [The information referred to follows:]

 Mr. Bolten's Response to Mr. Hastings' Question Regarding the Deficit 
                       as a Percentage of the GDP

    The Highest post-war deficit as a percentage of GDP was in 1983, at 
6 percent. For most of the 1950s, deficits were below 2 percent of GDP. 
During the Second World War, deficits reached over 30 percent of GDP. 
The attached table shows deficits as a percent of GDP from 1930 through 
the administration's estimate for 2008.

                              SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (-) AS PERCENTAGES OF GDP: 1930-2008
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Total                                                                  Total
                                            GDP (in -------------------------------                                GDP (in -----------------------------
                                           billions                                                               billions                      Surplus
                   Year                       of                        Surplus or              Year                 of                            or
                                           dollars)  Receipts  Outlays  deficit (-                                dollars)  Receipts  Outlays  deficit (-
                                                                             )                                                                     )
--------------------------------------------------------------------------------------------------------------------------------------------------------
1930.....................................      97.5       4.2      3.4        0.8   1970........................   1,013.2      19.0     19.3       -0.3
1931.....................................      83.9       3.7      4.3       -0.6   1971........................   1,081.4      17.3     19.4       -2.1
1932.....................................      67.7       2.8      6.9       -4.0   1972........................   1,181.5      17.5     19.5       -2.0
1933.....................................      57.6       3.5      8.0       -4.5   1973........................   1,308.1      17.6     18.8       -1.1
1934.....................................      61.2       4.8     10.7       -5.9   1974........................   1,442.1      18.3     18.7       -0.4
1935.....................................      69.7       5.2      9.2       -4.0   1975........................   1,559.8      17.9     21.3       -3.4
1936.....................................      78.5       5.0     10.5       -5.5   1976........................   1,736.7      17.2     21.4       -4.2
1937.....................................      87.8       6.1      8.6       -2.5   TQ..........................     454.8      17.9     21.1       -3.2
1938.....................................      89.0       7.6      7.7       -0.1   1977........................   1,971.3      18.0     20.8       -2.7
1939.....................................      89.0       7.1     10.3       -3.2   1978........................   2,218.6      18.0     20.7       -2.7
1940.....................................      96.7       6.8      9.8       -3.0   1979........................   2,503.8      18.5     20.1       -1.6
1941.....................................     114.0       7.6     12.0       -4.3   1980........................   2,732.1      18.9     21.6       -2.7
1942.....................................     144.2      10.1     24.4      -14.2   1981........................   3,061.6      19.6     22.2       -2.6
1943.....................................     180.1      13.3     43.6      -30.3   1982........................   3,228.6      19.1     23.1       -4.0
1944.....................................     209.0      20.9     43.7      -22.8   1983........................   3,440.5      17.5     23.5       -6.0
1945.....................................     221.3      20.4     41.9      -21.5   1984........................   3,839.4      17.4     22.2       -4.8
1946.....................................     222.7      17.6     24.8       -7.2   1985........................   4,136.6      17.7     22.9       -5.1
1947.....................................     234.6      16.4     14.7        1.7   1986........................   4,401.4      17.5     22.5       -5.0
1948.....................................     256.4      16.2     11.6        4.6   1987........................   4,647.0      18.4     21.6       -3.2
1949.....................................     271.5      14.5     14.3        0.2   1988........................   5,014.7      18.1     21.2       -3.1
1950.....................................     273.4      14.4     15.6       -1.1   1989........................   5,405.5      18.3     21.2       -2.8
1951.....................................     321.0      16.1     14.2        1.9   1990........................   5,735.6      18.0     21.8       -3.9
1952.....................................     348.8      19.0     19.4       -0.4   1991........................   5,930.4      17.8     22.3       -4.5
1953.....................................     373.4      18.6     20.4       -1.7   1992........................   6,218.6      17.5     22.2       -4.7
1954.....................................     378.0      18.4     18.7       -0.3   1993........................   6,558.4      17.6     21.5       -3.9
1955.....................................     395.2      16.6     17.3       -0.8   1994........................   6,944.6      18.1     21.1       -2.9
1956.....................................     427.7      17.4     16.5        0.9   1995........................   7,324.0      18.5     20.7       -2.2
1957.....................................     450.7      17.7     17.0        0.8   1996........................   7,694.6      18.9     20.3       -1.4
1958.....................................     461.1      17.3     17.9       -0.6   1997........................   8,185.2      19.3     19.6       -0.3
1959.....................................     492.1      16.1     18.7       -2.6   1998........................   8,663.9      19.9     19.1        0.8
1960.....................................     518.9      17.8     17.8        0.1   1999........................   9,137.7      20.0     18.6        1.4
1961.....................................     531.8      17.7     18.4       -0.6   2000........................   9,718.8      20.8     18.4        2.4
1962.....................................     568.5      17.5     18.8       -1.3   2001........................  10,021.5      19.9     18.6        1.3
1963.....................................     599.7      17.8     18.6       -0.8   2002........................  10,337.3      17.9     19.5       -1.5
1964.....................................     641.3      17.6     18.5       -0.9   2003 estimate...............  10,746.4      16.3     20.6       -4.2
1965.....................................     687.9      17.0     17.2       -0.2   2004 estimate...............  11,265.6      16.0     20.2       -4.2
1966.....................................     754.2      17.3     17.8       -0.5   2005 estimate...............  11,828.7      17.2     19.8       -2.6
1967.....................................     813.5      18.3     19.4       -1.1   2006 estimate...............  12,413.4      17.8     19.8       -1.9
1968.....................................     868.4      17.6     20.5       -2.9   2007 estimate...............  13,023.6      18.1     19.8       -1.6
1969.....................................     949.2      19.7     19.3        0.3   2008 estimate...............  13,671.4      18.1     19.8       -1.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
* 0.05 percent or less.

Note: Budget figures prior to 1933 are based on the administrative budget concepts rather than the unified budget concepts.


    Mr. Hastings. Mid-'80s, if my memory serves me correctly. 
Well, I just want to say that--I am one of these that don't 
like to--I don't think it is good policy to run deficits, but I 
do think that the proper measurement, when you do have 
deficits, is what is what in relationship to the overall 
economy. So I think that is an important point. I do want to 
emphasize that.
    And I thank you for your time, and again, I hope you have 
other pleasant experiences here.
    Mr. Bolten. I am enjoying it so far, Mr. Hastings.
    Mr. Hastings. Yield back.
    Chairman Nussle. Mr. Emanuel.
    Mr. Emanuel. Thank you, Mr. Chairman. Thank you Director 
Bolten for being here. Using your own numbers, I think I am 
doing this right, we are going to have added, or have added 
nearly $3 trillion to the Nation's debt and 3 million Americans 
have lost their jobs. As we say back in Chicago, such a deal. 
And that has been the consequences, whether you want to say it 
is taxes, you want to say it is spending, those are the facts. 
That is what is there so far. Not that other people won't find 
jobs who so lost them, and we may actually begin to turn our 
deficit around, but based on your numbers, $3 trillion will 
be--nearly $3 trillion will be added to the Nation's debt. And 
as of now, in this meeting a net 3 million Americans have lost 
their jobs.
    Now, I want to read you something from the State of the 
Union and have you been in this job a little too early but it 
is the President's State of the Union. His quote is, ``We will 
not deny, we will not ignore, we will not pass along our 
problems to other Congresses, to other Presidents and to 
another generations.'' As I look at those 24 words, I have 
almost the instinct to ask you who wrote those words for the 
President? Because it is really inconsistent with about $455 
billion in deficits and almost the lackadaisical approach about 
$3 trillion being added to the Nation's debt.
    I was struck, as Congressman Spratt was, by the tone in 
which--that we will--the lack of urgency about the Nation's 
debt being increased. I was struck by it because yesterday in 
front of the Financial Services Committee, the Fed chairman had 
a very different attitude about the deficit. He says the 
deterioration in the unified budget has been mirrored in a 
sharp downsizing in Federal saving. Net Federal saving fell 
from a high of a positive 2 percent of GDP in 2000 to a 
negative two and a half of GDP in the first quarter of 2003. 
With little change in the non-Federal domestic saving over this 
period, the down sizing in the Federal saving showed into net 
national saving which is equal to less than 1 percent of GDP in 
the first quarter compared with a recent high of 6.5 percent of 
GDP in 1998.
    If not reversed over the long haul, such levels of national 
saving could eventually impinge on the formation of private 
capital that contributed to the improved productivity 
performance of the past half-decade.
    Now, you are right, in the sense that deficits don't really 
matter there. Whether they become as they are now or they 
become perceived by the market as structural, that will have an 
impact on the interest rates. But there is no doubt that it is 
going to have an impact on the savings rate. As Chairman 
Greenspan said in his own testimony, there is a sense of 
urgency on its impact on savings and what it will do to fund 
the growth.
    We can all talk about tax cuts. We can all talk about 
spending. The fact is if it impinges on savings, we cannot have 
the economic growth that is necessary to fund the growth that 
we need. I would like to--this is more of a philosophical 
question because you do, hopefully--I think you are doing your 
job well, serving your President, being loyal to his economic 
plan, but the lack of sense of urgency of what these deficits 
will do to savings that can fuel economic growth is--I am taken 
aback by because I know you have private sector experience, and 
you know without private savings, there will be no economic 
growth.
    Mr. Bolten. Mr. Emanuel, I agree with everything that 
Chairman Greenspan said.
    Mr. Emanuel. That is a good place to start.
    Mr. Bolten. And I think those are all important points. The 
administration does have proposals that were included in our 
budget to encourage long-term savings in the form of lifetime 
savings account and retirement savings account and so on. And 
we are going to be very interested to work with you and the 
other members to see those adopted. In the short run, in the 
short run, our problem is not the savings deficit we have in 
the country, our problem is an economy that has been far too 
weak. It is that economy that caused the deficits. And that is 
the--the policies that the President has put in place are the 
ones that have are best suited to get us out of that problem in 
the first place.
    Mr. Emanuel. Director Bolten, I would agree that you need 
to stimulate the economy. It could be accomplished with certain 
spending areas that are good for both short-term, as well as 
long-term economic growth, but if you look at the tax cuts, no 
disrespect meant here, a slight difference of opinion, in 2003 
the only piece of that tax cut that was stimulative was the one 
that Democrats had offered in the sense of a tax cut 
immediately that went into effect right then and there. And 
only 10 percent of the $350 billion that was just passed goes 
into effect. The bulk in the back end of 2008. You may be 
worried, but you are not worried about your projections in 2008 
because you are not projecting one. We have one now, 3 million 
Americans have lost their jobs.
    So with all due respect, tax cuts, yes, they can be helpful 
to an economy. And philosophically, yes, they can be helpful in 
moving the economy, but if they are not here and now and not in 
people's paychecks, which they are not, it is whether they hit 
people's paychecks today. Less than 10 percent of the $350 
billion tax cut went to the economy in 2003. Fact.
    Mr. Bolten. I don't agree with your numbers to begin with, 
Mr. Emanuel, but I think the people who will be getting the 
checks that are going into the mail at the end of this month 
won't agree either. I think there is a substantial stimulative 
effect to the tax cuts that have been introduced. There is a 
Treasury study came out yesterday showing a 2-percent increase 
in GDP as a result of the tax cuts. And I think the right 
measures have been taken.
    Mr. Emanuel. Director Bolten----
    Chairman Nussle. The gentleman's time has expired. If you 
have a final question, go ahead.
    Mr. Emanuel. It would be a statement, not a question. I 
will try to make it as a question. Director, the Fed chairman 
noted the importance of the Child Tax Credit yesterday as part 
of growing the economy. And I would note that, yes, people who 
receive their checks at the end of this month will feel the 
impact on that. Unfortunately, 6.5 million families, 12 million 
children will be left out. I think they would also like to 
participate in this growing economy.
    Mr. Bolten. The President supports that.
    Mr. Emanuel. Thank you for that.
    Chairman Nussle. Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman. And welcome from me 
as well. You are having a good time now, but it is not over 
yet. Let me--I am going to address the tax reduction thing and 
ask you a question, but I want to make a comment first.
    I heard one of the members a minute ago say that the tax 
cuts we have had or the tax cuts for the rich and, of course, 
as we get closer to the 2004 elections those will be the 10- 
and 20-second sound bytes you will hear over and over again. 
But let me tell you what it means to one person that I met. We 
bought a place here, I had the carpet changed a while back, a 
couple months ago. I had a young man who is the carpet 
installer for a carpet company. I was there. It was a Saturday. 
He said to me, I hope you don't mind me saying this, but he 
says, I think what you guys do down there as far as tax cuts 
are absolutely wonderful. A lot of my buddies and I agree. It 
is probably going to afford my wife and I the opportunity for 
the first time in our lives to buy a house that we haven't been 
able to buy. And that story can be told over and over and over 
again by a lot of small businesses. So frankly, I think the tax 
cuts, if that--he said to me, do I look rich? I said, well, no. 
I don't want to be insulting, but no you don't look rich. He 
said, it does help a lot of people like me and will continue to 
do that.
    So what I think the President has done in this Congress 
under the current leadership is very, very good for the 
economy. And frankly, I think the President is doing a great 
job. It is a terrible situation to have to deal with this 
stuff. And everybody talks about the surpluses we were going to 
have; those were projected. If the sun came out every morning, 
everything was rosy, well it didn't. We had some folks on 9/11 
who decided they were going to change some of that, plus a lot 
of other things. I think, that taken into consideration, we 
have to realize we are probably not as bad shape as we could 
have been if this President hadn't taken some of the actions he 
took.
    I know you answered in this your testimony, but I am going 
to ask it again because I want everybody to understand. Did the 
tax reductions, the tax reduction policies over the last two 
and a half years, cause the deficits described in the mid-
session review, and if not, why not? I don't think we can tell 
that over and over again enough to make people understand.
    Mr. Bolten. The tax cuts adopted in 2001, 2002 and 2003 
were a relatively small contributor to the deficit on a static 
basis. And the most important thing is that because they do 
reduce government receipts somewhat, the most important thing 
is though that the principal cause of the large deficits we are 
seeing today is a downturn in the economy and attendant much 
lower Treasury receipts than we would like to see. And the tax 
cuts have been both well-designed looking back and especially 
looking forward to restore the economic growth that ultimately 
will restore the deficit picture.
    Mr. Schrock. And a President, no matter how good he may or 
may not be, has no impact on that. I mean they may be the most 
brilliant people in the world, but the economy is going to be 
cyclical whether a Democrat or Republican is sitting in the 
White House. It just happens to be this guy is a Republican and 
that is when things started to happen. Am I right or wrong?
    Mr. Bolten. Sure. The stock market peaked in early 2000. 
The country was entering recession already when the President 
took office in early 2001. The corporate scandals that came to 
light last year and the year before had been brewing throughout 
the 1990s. All of these factors are baked in, regardless of who 
was the President, and then we were hit with the shock of 
September 11 and the global war on terror. So all of these 
things come together to suggest that it is a pretty tough 
situation that this country has faced in the last 12\1/2\ 
years. I would argue that the right measures have been taken to 
mitigate the damage caused by the external situation and to 
bring us back to a good budget picture.
    Mr. Schrock. I would agree with you. According to your 
estimates, roughly how much of the deficit do you think 
resulted from the economic factors and how much from spending?
    Mr. Bolten. If I could have one chart back up, the pie 
chart. This one if you will look in--if you are looking at the 
year 2003, the year we are now, we see the economy explaining 
more than 50 percent of the deficit. And I would emphasize 
again that this is a static look. This is not take taking into 
account the positive effect that the tax relief has had on the 
economy, meaning actually mitigating the deficit picture.
    Mr. Schrock. I agree. Thank you very much. Thank you for 
being here. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Thompson.
    Mr. Thompson. Thank you, Mr. Chairman. Thank you, Mr. 
Bolten for being here. I would like to get back to something 
that Mr. Spratt brought up that was the issue of the Budget 
Enforcement Act. In your report, you actually mention that the 
administration supports extension of the now expired Budget 
Enforcement Act but in manners that are consistent with the 
President's budget proposal. Given the fact that without the 
tax cuts, the deficit would be, you know, roughly a little less 
than half of what it is today, I guess I have trouble 
understanding what bringing back the act consistent with the 
President's spending proposal actually means, given that PAYGO 
is a major component of that. And if you have--and the leader 
on the other side, Mr. DeLay, on the floor of the House already 
stated that he believes there are some more needs and budget 
room for even greater tax cuts, and there is no PAYGO that goes 
along with it, so it seems somewhat contradictory. If you could 
answer that. And also let me know, is the administration going 
to be pushing, in the fiscal year 2005, budget reenactment of 
the Budget Enforcement Act?
    Mr. Bolten. Consistent with the President's budget, we mean 
going forward, beyond the President's budget, we would, of 
course, what is already out there, we would be prepared to look 
at the imposition of the cap, PAYGO and the caps that were----
    Mr. Thompson. So we could actually be in greater deficit 
and greater debt than we were today before you consider budget 
enforcement enactment?
    Mr. Bolten. I don't think that is necessarily true. But we 
are--actually, I will very much look forward to working with 
members on both sides of this committee in the year ahead. As 
we prepare the 2005 budget--in answer to your second question, 
as we prepare the 2005 budget, to see what we can agree on in 
terms of new budget enforcement mechanisms. I think they are 
very useful and they are important.
    Mr. Thompson. So will the administration then be asking for 
reenactment of the Budget Enforcement?
    Mr. Bolten. I can't tell you specifically what will be in 
the 2005 budget proposal now, we are still a ways off from 
that. But my own inclination would be to work with you to try 
to see that we can put something in there.
    Mr. Thompson. If Members try to bring that about before the 
2005 budget, you would be willing to work with us and be 
supportive of that?
    Mr. Bolten. We will work with you before then.
    Mr. Thompson. Appreciate that very much. One other thing on 
your report, several points indicate that deficits would be 
manageable if we were to exercise serious spending controls. 
But then it also states that the largest spending increases 
have been in the area of defense and homeland security. And 
given the, I think, terrible news that we heard this week that 
the cost of $5 billion a month between Iraq and Afghanistan and 
that seems like things are still pretty unpredictable there and 
depending upon what happens in Liberia, these costs that you 
state as the largest spending increases and already stated 
today as the top priority, may actually grow. So does that mean 
that the only serious spending control that we see will be in 
the nondefense discretionary programs?
    Mr. Bolten. Well, what I can tell you is that the President 
will spend what is necessary to defend the country and the 
homeland and to support our troops. And my expectation is he 
would have support from both sides of the aisle in doing that.
    Beyond that----
    Mr. Thompson. That is not the question. The question is 
where will the serious spending controls be focused?
    Mr. Bolten. Well, we will have--we will be looking at very 
hard at the nondefense, nonhomeland portion of the budget, but 
we also need to look at the whole budget. We need to be serious 
as well about defense and homeland security to be sure that we 
are spending the people's money wisely. The one thing you can 
be sure of though, that if the spending is actually related to 
our national defense, and if it is related to supporting our 
troops in the field, the President will insist on spending what 
is necessary, and I expect he would have a lot of support up 
here to do that.
    Mr. Thompson. But I am assuming we will also look at 
appropriate expenditures there, we are going to make the right 
financial--the right fiscal choice there is as well.
    Mr. Bolten. I hope so.
    Mr. Thompson. Well, we hope so. Hope we get a little 
greater commitment than just hope. Thank you.
    Chairman Nussle. Just to report to the gentleman too, there 
is a little known or little reported title in the Medicare bill 
which is a $33 billion savings proposal that is promoted by 
this committee in waste fraud and abuse. So we are starting the 
process and not just the discretionary side, but also on the 
mandatory side. Mr. Bonner.
    Mr. Bonner. Thank you, Mr. Chairman. Mr. Bolten, welcome. I 
am a new Member of Congress. I have only been in office for 
about 6\1/2\ months, although I worked up here for about 18 
years. So I have had an opportunity during my time in public 
service to meet a lot of people back in any district. One in 
particular that I met just a couple of days ago told me about 
frustration he has had, and I mention this in hopes of 
soliciting help out of your office in dealing with waste, 
fraud, and abuse.
    This gentleman lives in Orange Beach, AL. He has been 
fighting cancer and was recently in a hospital where he had a 
procedure done. It cost $1,500 and Medicare reimbursed $5,500. 
When he contacted the hospital and when he contacted Medicare, 
they both said, well, it is really very difficult to fool with 
the $4,000 overpayment; so we are just not going to worry about 
it.
    I worried about it. Because I think that $4,000 here and 
$4,000 there eventually adds up to a lot of money. I applaud 
our chairman because this committee, just in recent weeks, has 
invited Inspectors General from many of the Departments to come 
in and help identify other areas of fraud and abuse. So I use 
that as an example to ask this question, can we get from the 
Office of Management and Budget a commitment, I know this 
administration has only been on the job for a little over 2 
years and a lot of these are systemic problems that have 
occurred in administrations over the decades, but can we get 
some assistance from the administration, an assurance that as 
we bring to the different departments and agencies, examples of 
overpayment and abuse, that you will work with us in Congress 
to identify them and to try to put an end to it? Because that 
certainly has an effect on the overall level of government 
spending.
    Mr. Bolten. Absolutely, Mr. Bonner. I know the chairman has 
been interested in this subject for some time. We do at OMB 
have an initiative on erroneous payments that we are serious 
about putting a lot of effort into. A large portion of the 
erroneous payments that we have now in the government, which 
are estimated in the billions and billions of dollars, do occur 
in the Medicare program. We would like to be sure that we get 
after those dollars because those are dollars that we need to 
spend actually giving people the care they need.
    Mr. Bonner. Well, you are right. Chairman Nussle has done 
an admirable job on that. I want to publicly thank him for his 
efforts on it. I would now like to invite to you come into 
the----
    Chairman Nussle. You have an extra couple of minutes now 
for that too, just so you know.
    Mr. Bonner. Thank you, Mr. Chairman. I would like to invite 
you into the buzz saw, if you will. As an observer of what has 
gone on for the last 6 or 7 months. I find myself sometimes 
scratching my head in bewilderment over what I hear from some 
of my colleagues in this committee, and on the House floor, 
demanding that the tax cuts have just ripped apart our economy 
and caused all these high levels of unemployment. And that the 
doom of western civilization, as we know it today, is on the 
horizon. And yet, amendment after amendment is offered on the 
floor and in committees to increase spending. So my question to 
you is, if we were to accept some of these amendments that have 
been offered over the last 6\1/2\ months that would increase 
spending whether it is for homeland security, we are not 
spending enough there, or for Medicare, we are not spending 
enough there, or for education or for whatever the program, 
would not all of these increases in spending also turn around 
and increase the deficit that they also decry as being the 
worst thing since the creation of this country?
    Mr. Bolten. They would, Mr. Bonner. I thought Chairman 
Nussle had an exceptionally good chart that details exactly 
that in some pretty stark reality.
    Mr. Bonner. Thank you, Mr. Chairman. I appreciate the 
additional time, but I yield back my remaining time.
    Chairman Nussle. Mr. Baird.
    Mr. Baird. That is a dapper tie you have.
    Chairman Nussle. You got an extra 2 minutes. This is not 
hard.
    Mr. Baird. Mr. Bolten, what is your understanding of a 
lockbox?
    Mr. Bolten. To tell the truth, I don't really have an 
understanding of what some in the public debate mean by it when 
they say a lockbox.
    Mr. Baird. The President of the United States of America 
ran for office as did many of the members of this institution 
promising to put Medicare and Social Security in a lockbox. Is 
that your recollection?
    Mr. Bolten. The--it is actually not my recollection with 
respect to Medicare.
    Mr. Baird. Let's take Social Security.
    Mr. Bolten. Social Security there was general acceptance 
that it is good--it is good practice top off the Social 
Security surplus.
    Mr. Baird. If that is the case--on page 1, the second 
paragraph of your document--the deficit for 2003 is now 
estimated at $455 billion. Does that reflect the lockbox that 
we all promised to put Social Security trust funds in or is 
that including the so-called lockbox to lower the actual 
appearance of the deficit?
    Mr. Bolten. There is no appearance being played here. The 
$455 billion number does include the Social Security surplus, 
but that is always been the practice with respect to estimating 
the unified deficit. And it is the right measure, I should say, 
when assessing what effect is the deficit having on the 
economy. That is the purpose for which we are using it.
    Mr. Baird. If the Congress were to level with the American 
people and honor our pledge it set aside the money in a lockbox 
instead of borrowing it for other purposes what would the 
deficit be?
    Mr. Bolten. The unified deficit would--I am not sure what 
you mean.
    Mr. Baird. The on-budget deficit.
    Mr. Bolten. Again, I am not entirely clear on what you 
mean.
    Mr. Baird. Let me say it this way: How much are we 
borrowing from Social Security, Medicare in your projections?
    Mr. Bolten. The concept is not borrowing from Social 
Security and Medicare.
    Mr. Baird. It is a concept that we debated for hours ad 
nauseam in this Congress 2 years ago. And the President talked 
about it on the campaign trail, as did many of our own 
candidates.
    Mr. Bolten. Well, the money that is set aside for Social 
Security is an accounting set aside. That moneys there too pay 
current and future retirees. If what you are getting at is that 
we face a long-term problem with an unfunded liability, I agree 
completely. That is an issue that we do need to address going 
forward. It is not--it is not the current problem with the 
deficit. The current problem with the deficit is one in which 
we need to restore economic growth.
    Mr. Baird. I can help you out from your own materials, I 
believe. It looks to me like in 2004 you are planning to borrow 
$164 billion from Social Security, Medicare and the on-budget 
deficit projection from your own document would be $639 billion 
not, in fact, $4 [billion]--whatever it was--$50 billion. So 
actually, the deficit, if we honored or pledged to put Social 
Security and Medicare in a lockbox, the deficit exceeds $630 
billion is that correct?
    Mr. Bolten. I don't see it that way.
    Mr. Baird. The President seemed to during his campaign. Let 
me ask a second question. Our President seemed to. You 
mentioned to Mrs. Capps earlier that interest rates did not 
seem to be affected by the current deficits. It is an 
interesting economic theory. My understanding is that the 
Federal Reserve is largely responsible for setting interest 
rates. Is that accurate?
    Mr. Bolten. As far as governmental entities that can have 
some substantial effect on interest rates, the Fed is the one 
that has the strongest hand on the levers.
    Mr. Baird. My further understanding is it those rates are 
low largely an attempt to stimulate the economy. Were those 
rates lowered by the Fed due to actions by the Congress or the 
President or was that an independent opinion of the Federal 
Reserve Board?
    Mr. Bolten. The Fed is highly independent.
    Mr. Baird. So if the Democrats or Republicans in the 
Congress try to take credit for lowering those interest rates 
that would be fallacious would it not?
    Mr. Bolten. If the Republicans or Democrats tried to take 
credit for Fed action that has an effect on interest rates, 
yes. But that would not be a proper thing to do, unless they 
have some influence that I am unaware of. But there are a lot 
of other factors that affect interest rates. And those include 
the kind of spending rates that the President and the Congress 
agree on, and those we should, we do and should take 
responsibility for.
    Mr. Baird. Let me add one other point. We talk about the 
deficit. There are choices in how you get into deficit. One 
choice might to be spend $50 billion, for example, as we 
propose in the Transportation Committee to build roads and 
bridges to put people back to work, a tangible public asset 
that has value over the long term and employs people today and 
really stimulates the economy with a useful resource. The 
contrast to that is $50 billion tax cut that goes back to me, 
but it is hard to see a direct job created. So I would favor 
the former.
    When Mr. Bonner talked about the increase in the deficit, I 
find it ironic that you mentioned no stimulative effect at all 
of the increased spending which I think would have a 
stimulative effect but only talked about stimulative effect of 
tax cuts. I find that specious. I yield back.
    Chairman Nussle. Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chairman. Mr. Bolten I have no 
talking points. I have no designed questions to put you or the 
administration on the spot. I am less interested here today in 
assigning blame.
    Mr. Bolten. Why should you be different, Mr. Hulshof?
    Mr. Hulshof. I have less interest in assigning blame. I am 
really more interested in the facts and just a couple of 
observations. I guess that is one of the advantages of going 
toward the end is hearing other colleagues. And I would say to 
my friend from the State of Washington, this whole discussion 
about the lockbox, I think inherent, in that, of course, was 
the idea that we would not be in a recession, that we would not 
have a national emergency, that we would not be engaged in a 
war. I know in a number of pieces of legislation, for instance, 
to have a Constitutional amendment to balance the budget or 
some other enforcement mechanism, we anticipate in times of 
emergency that we would relax the rules. And I think, obviously 
since September 11, we have taken on a number of those unique 
and hopefully once in a lifetime events.
    Mr. Bolten. All absolutely true, Mr. Hulshof.
    Mr. Hulshof. Also, I want to emphasize a point that Mr. 
Schrock made in passing, and I wanted to emphasize that the--we 
go back to prior projections and, you know, the $5.6 trillion 
projected surplus was just that. It was a guess. I think back 
and some of my colleagues that were here, my friend from 
Massachusetts, Mr. Neal, we worked on the committee back in 
1997, Mr. Neal, we worked in a bipartisan way on the Balanced 
Budget Act to have a glide path over the next 5 years, from 
1997, to have a balanced budget. We did it, or actually the 
American people did it for us, in half the time. So even our 
best projections, we saw better results in balancing the 
budget. True on-budget surpluses, Mr. Baird, that did not have 
to borrow from any trust fund.
    And again, so we make these calculated guesses based on the 
best information we have available. And ultimately, then we 
come back and we get to Monday morning quarterback whether we 
or you were right or wrong. In fact, I think back to, I think 
now economists, main stream economists, are pretty accurate 
when they say that the malaise or the economic recession 
actually began in the last quarter in 2000, which was 
unanticipated at the time.
    So again, we can go back and revisit history and some would 
even revise history, but I am more interested really in where 
do we go from here? That is why I want to focus just a little 
bit on the economic assumptions, specifically on pages 12 and 
13. And just before doing that, again, I see my time. I am 
trying to see if there is some part of your--the tie has been 
taken, but----
    Mr. Shays. You can try intelligence.
    Mr. Bolten. The chairman's hair looks real good.
    Chairman Nussle. Regular order.
    Mr. Hulshof. I would also say, again, another quick point 
to my friend, and he is my friend, from the State of Washington 
regarding interest rates. It was interesting that the rhetoric, 
and I wasn't here in 1994 and 1995, I was seeking this seat in 
those years and was unsuccessful, but it was interesting that 
the political rhetoric that was there was a direct causal 
relationship between if you had surpluses and interest rates. I 
remember making the arguments if we balance the budget, we will 
see a 2-percent cut in the interest rates which will be great 
for American families. And I think now economists, and we have 
to be honest that there is not that direct link between budget 
surpluses or budget deficits and what,in fact, happens with 
interest rates. In fact, over a dozen or so interest rate cuts 
that have been made since we have gone into a recession.
    So again, just a quick observation. You pointed out, again, 
I want to make sure this is certain for the record, that over 
the second half of 2003, you are projecting about a 3.7 percent 
growth rate; is that right, Mr. Bolten?
    Mr. Bolten. That is correct.
    Mr. Hulshof. Which ultimately translates into about a 2.8 
percent increase in the growth rate for the year; is that also 
true?
    Mr. Bolten. Correct.
    Mr. Hulshof. Also, for 2004 and 2005, you also project 
somewhat stronger growth; what are those numbers?
    Mr. Bolten. I am looking at, if I am looking at the right 
line here, we have 3.7 percent and 3.5 percent in 2004 and 2005 
as projected growth rates. Again, I think those are entirely 
consistent with main stream blue chip economists' forecasts as 
well as the CBO.
    Mr. Hulshof. Is it true, again, I guess I am going 
backwards now, but is it true that Federal Government receipts 
have declined? This is the third year in a row that we have 
seen government receipts decline?
    Mr. Bolten. True.
    Mr. Hulshof. The last time that we have had three 
consecutive years of government receipts actually going down 
was is it true that it was during the period of the Great 
Depression?
    Mr. Bolten. Yes, 80 years ago, something like that.
    Mr. Hulshof. Again, thanks for your presence here today.
    Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Neal.
    Mr. Neal. Thank you, Mr. Chairman.
    Mr. Hulshof is my friend, and he is a good guy, but let's 
revisit history. Incidently, the gentleman from Missouri seemed 
to derive the notion of projections in the previous 
administration and then looked to you to give us projections 
that probably are more accurate for this administration. But 
let me read to you a quote here from February of 2001. It is 
called ``A Blueprint for a for New Beginnings, a Responsible 
Budget for America's Priorities.'' I believe your office 
generated this report. This is the quote, ``In sum there is 
ample room the administration's budget to pay off the debt as 
far as possible, to reduce taxes for American families, to fund 
program priorities and still leave roughly $1 trillion for 
Medicare modernization and to meet any other programmatic and 
contingency needs as they arise.'' do you continue to agree 
with that position?
    Mr. Bolten. No. And I don't think anybody else does either. 
That was written in February 2001 before the extent of the 
stock market collapse was clear, before recession had been 
officially declared, although it was probably as Mr. Hulshof 
just pointed out, underway at that point, before corporate 
scandals came to light, and especially before the September 11 
attacks and the war on terror.
    Mr. Neal. You no longer agree with that position that was 
offered here in the budget projection?
    Mr. Bolten. No.
    Mr. Neal. OK. Next question.
    Mr. Bolten, is it your position this morning, are you 
arguing here this morning that these tax cuts where we have 
taken $2 trillion from the Federal budgets will pay for 
themselves?
    Mr. Bolten. In terms of direct in and out of the Federal 
Treasury, no. I don't think anybody knows exactly what the 
effect is. But no, I am not arguing that.
    Mr. Neal. I would assume that you would argue that these 
three tax cuts passed since 2001 have been helpful for our 
economy? Because I know the talking points that were referenced 
earlier which are used by the other side, often say it would 
have been worse. So could you clear that up? Do you think they 
have been helpful to the economy?
    Mr. Bolten. Oh, I think they have been essential to the 
economy.
    Mr. Neal. OK. What about their effect on the economy over 
the long run?
    Mr. Bolten. The effect of these tax cuts on the economy 
over the long run, I think, should be even more positive than 
they have been already, because some of these tax cuts as Mr. 
Emanuel was earlier pointing out, do take time to take effect. 
But in the both the short, medium, and long run, I think all of 
the tax cuts are highly positive for the economy because they 
put the incentives where they belong for people to work, save 
and invest.
    Mr. Neal. Do you have a high opinion of the Joint Tax 
Committee here?
    Mr. Bolten. Yes, I do.
    Mr. Neal. Would you say an extraordinary opinion of Joint 
Tax?
    Mr. Bolten. I will reserve on that until I hear your 
question.
    Mr. Neal. Well, I am going to get to that in a moment. That 
is how we will close. I compliment the chairman on his tie and 
suit, and then we will decide whether we can compliment you on 
your answer. You mentioned that the tax cuts have had a static 
effect on the deficit of one quarter to one-third. Are you 
familiar with the dynamic scoring that has been done by the 
Joint Committee on Taxation, on the most recent tax proposal?
    Mr. Bolten. I know they have been working on it, but I am 
not familiar with the details of it.
    Mr. Neal. You are not familiar with the details of it. Do 
you agree or disagree with their conclusion that these 
additional tax cuts, adding to our deficit, will perhaps boost 
the economy slightly in the short term but will be harmful in 
the long run?
    Mr. Bolten. No, I disagree. I know the Joint Tax Committee 
has been working, as have economists in many other places, to 
come up with a suitable measure so that we can accurately gauge 
what the effect of--the dynamic effect of a tax cut is on the 
economy. We are working on that ourselves. And I think the art 
and science of economics has not yet advanced to the stage 
where we can properly capture all the positive effects that the 
tax cuts do have on the economy.
    Mr. Neal. Do you hold the Joint Tax Committee in high 
regard, Mr. Bolten?
    Mr. Bolten. I do.
    Mr. Neal. Do you agree with the conclusion they have drawn?
    Mr. Bolten. I do not.
    Mr. Neal. Mr. Bolten, let me ask you this last question. Do 
you find it astounding that a political party that based much 
of their modern history on fighting communism and deficits 
would now adopt a position that deficits don't count?
    Mr. Bolten. I might, but I don't think there is a party of 
that nature. This administration certainly has never adopted 
the posture that deficits do not count. We take the current 
deficits very seriously. What I did say is that we believe 
these deficits are manageable, given our current economic 
situation, and that the tax cuts that contributed in small 
measure to those deficits have, in fact, been essential to 
restoring economic growth to this economy which is what is 
going to be important in the long run in bringing the deficit 
down.
    Mr. Neal. Mr. Bolten, I look forward to your testimony at 
Ways and Means.
    Mr. Bolten. Thank you, sir.
    Chairman Nussle. Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you, Mr. Chairman. Mr. Bolten, thank 
you for being here. You know, I am really new here. I am just 
always amazed at what we hear from our dear friends from the 
minority party. All of a sudden, they have this huge interest 
in concern for the deficit, and yet at the same time, they say 
that their actions are totally different. You know, it is 
amazing, you can say anything, but facts don't bear out what 
they are saying. They have proposed $890 billion increase to 
that deficit that all of a sudden they say they are concerned 
about, and yet, not only that, they didn't even support 
Chairman Nussle's cut of 1 percent of fraud.
    Mr. Neal. Would the gentleman yield?
    Mr. Diaz-Balart. I had very little time. So, Mr. Neal, you 
just had some time, so let me finish my question. They didn't 
even support the 1 percent cut on waste fraud and abuse that 
Chairman Nussle proposed. It looks like, again you can say 
anything, but the facts don't bear that out. Spending is 
clearly, I think, a bit of a problem. You know, you can't lose 
weight and continue to eat. You can't lose weight and not only 
continue to eat, but continue to eat pancakes and lard as your 
diet.
    Economist Robert Simulson recently stated, he wrote that 
government spending has to be paid for, which is not rocket 
science, either through taxes or deficits, and that both can 
put burdens on the economy. He argued, therefore, that 
government spending is the problem, as some of us have been 
saying, and it must be controlled. Do you agree with that 
statement or argument, and if so, what specifically is the 
administration going to be looking at proposing to control 
spending?
    Mr. Bolten. I do agree, Mr. Diaz-Balart. And the 
administration has already, in its own budget proposals and in 
the budget resolution adopted by this committee, I think made a 
major step toward exercising some important spending 
restraints. I think the chairman's initiatives to pursue waste 
fraud and abuse are important, and we are working on our own 
end to pursue those as well. And I think you will see in the 
budget that we present in 2005, and hopefully beyond, enhanced 
measures to try to make sure that we are--we are being as 
careful with the taxpayers dollars as we possibly can be.
    Mr. Diaz-Balart. Mr. Bolten, I am not really good at math. 
So I want to make sure I am not misunderstanding something. 
When people who say they are determined about the deficit, but 
when they propose $890 billion additional toward that deficit, 
can that do anything to get us out of the deficit?
    Mr. Bolten. It would make the situation substantially 
worse.
    Mr. Diaz-Balart. Again, Mr. Chairman, I will not ask for 
additional time, even though I do like your tie, by the way. 
But I just want--I keep saying and I keep repeating, Mr. 
Chairman, what I keep saying, I know that maybe as a new Member 
of this Congress and this committee, I am just not used to 
hearing and I am not used to hearing it and I am not used to 
accepting so much double-talk. You cannot on one side of your 
mouth say that you are concerned about deficits, and at the 
same time go to the floor of this Congress and argue for $890 
billion in increased spending and say that we are cutting when 
we are not. Because some of us think, if anything, we are 
spending too much.
    So Mr. Chairman, begging your indulgence, I know have you 
heard me say this time and time again, but I will not sit idly 
and just listen to rhetoric which is not at all based on the 
facts that are before us. $890 billion in additional spending 
was proposed by the other party. They have the right to do so. 
Thank God, they have the right to do so. But then don't tell us 
that they are the ones that are concerned about the deficit.
    Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman. I would like to ask 
unanimous consent that the Joint Committee on Taxation scoring 
on the Republican tax bill be entered into the record.
    Chairman Nussle. Is there objection? Without objection so 
ordered.
    [The information referred to follows:]
                                  House of Representatives,
                                                      May 08, 2003.

Macroeconomic Analysis of H.R. 2, the ``Jobs and Growth Reconciliation 
   Tax Act of 2003'' Prepared by the Staff of the Joint Committee on 
                                Taxation

    The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from California (Mr. THOMAS) is recognized for 5 minutes.
    Mr. THOMAS. Mr. Speaker, pursuant to clause 3 (h)(2)(A)(iii) of 
rule XIII, I submitted the following macroeconomic impact analysis:
    In accordance with House Rule XIII.3(h)(2), this document, prepared 
by the staff of the Joint Committee on Taxation (``Joint Committee 
staff''), provides a macroeconomic analysis of H.R. 2, the ``Jobs and 
Growth Reconciliation Tax Act of 2003.'' The analysis presents the 
results of simulating the changes contained in H.R. 2 under three 
economic models of the economy. The models employ a variety of 
assumptions regarding Federal fiscal policy, monetary policy, and 
behavioral responses to the proposed changes in law.

              1. DESCRIPTION OF MODELS AND RESULTS FORMAT

(A) Models
    The Macroeconomic Equilibrium Growth (``MEG'') model.--This model, 
developed by the Joint Committee staff, is based on the standard, 
neoclassical assumption that the amount of output is determined by the 
availability of labor and capital, and in the long run, prices adjust 
so that demand equals supply. This feature of MEG is comparable to a 
Solow growth model, described as the ``textbook growth model'' by the 
Congressional Budget Office (An Analysis of the President's Budgetary 
Proposals for Fiscal Year 2004, March 2003, pp. 28-29) (``CBO''). 
Individuals are assumed to make decisions based on observed 
characteristics of the economy, including current period wages, prices, 
interest rates, tax rates, and government spending levels. Because 
individuals do not anticipate changes in the economy or government 
finances, this type of behavior is referred to as ``myopic behavior.'' 
Consumption in MEG is determined according to the life-cycle theory, 
which implies that individuals attempt to even out their consumption 
patterns during their lifetimes.
    MEG differs from a simple neoclassical growth model in that prices 
in MEG adjust to equilibrate supply and demand with a delay or lag, 
rather than instantaneously. This feature allows the model to simulate 
a disequilibrium adjustment path, in which resources may be 
underemployed or over-employed (used at an unsustainable rate) in 
response to policies that stimulate or depress economic activity. It 
also allows an analysis of the effects of differing intervention 
policies by the Federal Reserve Board. In this respect, the MEG model 
resembles econometric models such as the Macroeconomic Advisers model 
and the Global Insight model.
    In the MEG simulations in each of the tables below, it is assumed 
that the Federal Reserve Board either acts aggressively by raising 
interest rates to counteract almost completely any demand stimulus 
provided by H.R. 2 (``MEG aggressive Fed response''), or remains 
neutral with respect to any changes in fiscal policy, allowing 
temporary changes in demand to affect levels of employment and output 
(``MEG neutral Fed response'').
    The Global Insight (``GI'') econometric model.--Like the MEG model, 
this commercially available model is capable of simulating 
disequilibrium adjustments to changes in demand. The model is made up 
of a set of equations that estimate from historical data the behavioral 
coefficients that determine the timing and strength of economic 
relationships within the model. Comparable parameters in the MEG and 
OLG models are derived from economic research. In many cases this 
research is also based on econometric analysis of historical data.
    Individuals and firms behave myopically in the GI model. For this 
analysis, the Joint Committee staff uses an estimated monetary reaction 
function designed to moderate gradually, but not completely offset, 
deviations from full employment by lowering or increasing interest 
rates. Thus, if the economy is operating near capacity, proposals that 
increase employment and accelerate the economy will result in 
increasing interest rates.
    The overlapping generations life cycle model (``OLG'').--In this 
model, individuals are assumed to make consumption and labor supply 
decisions with perfect foresight of economic conditions, such as wages, 
prices, interest rates, tax rates, and government spending, over their 
lifetimes. The OLG model is similar to the type of model described as a 
``life cycle model'' by the CBO, ibid.
    One result of the perfect foresight assumption is that if a policy 
results in an economically unstable outcome, such as increasing 
government deficits indefinitely into the future, the model will not 
solve. Therefore, to run simulations in this model, it is necessary to 
assume that an offsetting budget balancing fiscal policy will be 
enacted. In the tables below, it is assumed that either government 
spending will be reduced after 2013 to offset the tax cut (``OLG future 
government spending offset'') or individual income tax rates will be 
increased after 2013 (``OLG future tax rate increase'').
    The cut in government spending to offset the costs of a tax cut can 
be modeled either as a cut in transfer payments, as is presented here, 
or as a cut in ``non-productive government spending.'' The latter 
assumption is used in CBO, ibid. The difference between the two 
approaches is that consumers are assumed to value transfer payments, 
and thus work and save more within the budget window in anticipation of 
losing them; but they are assumed not to value non-productive spending, 
and therefore do not increase work or savings in anticipation of this 
cut. Thus, the anticipation of valued spending cuts results in more 
growth in the early years than the anticipation of non-valued spending 
cuts.

(B) Results format
    Because the exact time path of the economy's adjustment to changes 
such as a new tax policy is highly uncertain, the Joint Committee staff 
presents results as percent changes during the Congressional budgeting 
time frame. In addition, for the MEG and OLG models, which have been 
designed to provide long-run equilibrium results, information is 
provided about the long run. While it is impossible to incorporate 
unknowable intervening circumstances, such as major resource or 
technological discoveries or shortages, these models are designed to 
predict the long-run effects of policy changes, assuming other, 
unpredictable influences are held constant.
    Because the MED model is myopic, if the policy simulated is 
ultimately a fiscally unstable policy, such as a net decrease in taxes 
that produces deficits that grow faster than the rate of growth of the 
economy, ``long-run'' is defined as the last period before the model 
fails to solve because of this unstable situation. For the OLG 
simulations, which incorporate a stabilizing fiscal policy offset, 
``long-run'' is defined as the eventual steady-state solution.

              2. ESTIMATED MACROECONOMIC EFFECTS OF H.R. 2

    The magnitude of the macroeconomic effects generated by these 
simulations depends upon a number of assumptions, some of which are 
described above, that are inherent in the models used. Several 
additional assumptions detailed below.

(A) Assumptions
    Effect of tax rate reductions on investment.--Reductions in 
marginal tax rates (tax rates on the last dollar of income earned) on 
interest, dividend, or capital gains income create incentives for 
individuals to save and invest a larger share of their income, as each 
additional dollar of investment yields more after-tax income. 
Conversely, reductions in the average tax rate on income from capital 
provide taxpayers with more after-tax income for the same amount of 
investment, reducing their incentive to save and invest. Changes in the 
statutory tax rate affect both marginal and average rates of tax on 
these sources of income, providing potentially offsetting incentives. 
Consistent with existing research, the model simulations assume that on 
net, the marginal rate effect is slightly larger than the average rate 
effect, and thus decreases in tax rates on capital income increase 
savings.
    Effect of reductions in the dividend tax rate.--There is general 
agreement that dividend taxation reduces the return on investments 
financed with new share issues. However, there are two alternative 
views regarding the effect of dividend taxation on corporate investment 
returns financed with retained earnings. The ``traditional view'' holds 
that reductions in dividend taxes would lower the cost of corporate 
investment financed with either new share issues or retained earnings, 
and thus would provide an incentive for corporations to increase 
investment. Alternatively, the ``new view,'' holds that a reduction in 
the dividend tax rate would not lower the cost of corporate investment 
financed with retained earnings. Under this view, a decrease in the 
dividend tax rate would result in an immediate increase in the value of 
outstanding stock reflecting the reduction in dividend tax payments, 
thus increasing the wealth of the stockholders, and providing an 
incentive for additional consumption. The model simulations assume that 
half of the corporate sector is in accordance with the traditional view 
and half with the new view.
    Foreign investment flows.--Increased Federal Government budget 
deficits increase the amount of borrowing by the Federal Government. 
Unless individuals increase their savings enough to finance completely 
the increased deficit, the increase in government borrowing will reduce 
the amount of domestic capital available to finance private investment. 
This effect is often referred to as the ``crowding out'' of private 
business activity by Federal Government activity. A reduction in 
national saving may lead to a reduction in domestic investment, and 
domestic capital formation, depending on the mobility of international 
capital flows. The government and private firms would compete for the 
supply of available funds and interest rates would rise to equate the 
demand and supply of funds. Returns on foreign investments would accure 
mainly to foreigners and would only increase the resources available to 
Americans to the extent that higher domestic investment resulted in 
higher wages in the United States. The MEG and GI simulations 
incorporate an assumption that there would be some in-flow of foreign 
capital to the extent that the rate of return on capital is increased 
by the tax policy. However, the inflow in foreign capital is not enough 
to offset completely the increased Federal borrowing. The OLG 
simulations assume there is no inflow of foreign capital.
    Effect of tax rate reductions on labor supply.--As in the case of 
savings responses, tax rate reductions provide offsetting labor supply 
incentives. Reductions in the marginal tax rate on earnings create an 
incentive to work more because taxpayers get to keep more of each 
dollar earned, making each additional hour of work more valuable; while 
reductions in the average tax rate create an incentive to work less, 
because they result in taxpayers having more after-tax income at their 
disposal for a given amount of work.
    Consistent with existing research, the simulations assume that 
taxpayers in different financial positions respond differently to these 
incentives. Typically, the largest response comes from secondary 
workers (individuals whose wages make a smaller contribution to 
household income than the primary earner in the household) and other 
underemployed individuals entering the labor market. As described 
above, labor supply responses are modeled separately for four different 
groups in MEG: low income primary earners, other primary earners, low 
income secondary earners, and other secondary earners.
    Effects of reductions in tax liability on demand.--Generally, any 
net reduction in taxes results in taxpayers making more purchases 
because they have more take-home income at their disposal. Policies 
that increase incentives for taxpayers to spend their income rather 
than save it provide a bigger market for the output of businesses. The 
amount of economic stimulus resulting from demand side incentives 
depends on whether the economy has excess capacity at the time of 
enactment of the policy, and on how the Federal Reserve Board reacts to 
the policy. If the economy is already producing near capacity, demand-
side policies may, instead, result in inflation, as consumers bid up 
prices to compete for a fixed amount of output. If the Federal Reserve 
Board believes there is a risk that the policy will result in 
inflation, it may raise interest rates to discourage consumption. In 
this case, depending on how strongly the Federal Reserve Board reacts, 
little, if any increase in spending will occur as a result of would-be 
stimulative tax policy. The MEG aggressive Fed response simulation 
assumes the Federal Reserve Board completely counteracts demand 
stimulus; the MEG neutral Fed response simulation assumes the Federal 
Reserve Board ignores the stimulus; and the GI simulation assumes the 
Federal Reserve Board partially counteracts demand stimulus. The OLG 
simulations have no monetary sector because they assume demand 
automatically adjusts to supply through market forces.

(B) Simulation results
    Economic Growth.----

           TABLE 1.--EFFECTS ON NOMINAL GROSS DOMESTIC PRODUCT
                     [Percent change in nominal GDP]
------------------------------------------------------------------------
                                                       Calendar years
                                                   ---------------------
                                                     2003-08    2009-13
------------------------------------------------------------------------
                       Neoclassical Growth Model:
MEG--aggressive Fed reaction......................        0.3        0.2
MEG--neutral Fed reaction.........................        0.9        1.0
                           Econometric Model:
GI Fed Taylor reaction function...................        1.5        1.2
             Life Cycle Model With Forward Looking Behavior:
OLG Reduced Government Spending in 2014...........       n.a.       n.a.
OLG Increased Taxes in 2014.......................       n.a.       n.a.
------------------------------------------------------------------------


            TABLE 2.--EFFECTS ON REAL GROSS DOMESTIC PRODUCT
                     [Percent change in nominal GDP]
------------------------------------------------------------------------
                                                       Calendar years
                                                   ---------------------
                                                     2003-08    2009-13
------------------------------------------------------------------------
                       Neoclassical Growth Model:
MEG--aggressive Fed reaction......................        0.2       -0.1
MEG--neutral Fed reaction.........................        0.3        0.0
                           Econometric Model:
GI Fed Taylor reaction function...................        0.9       -0.1
             Life Cycle Model With Forward Looking Behavior:
OLG Reduced Government Spending in 2014...........        0.2       -0.1
OLG Increased Taxes in 2014.......................        0.2       -0.2
------------------------------------------------------------------------

    As shown in Table 1, depending on the assumed Federal Reserve Board 
reaction to the policy, the estimated change in Gross Domestic Product 
(``GDP'') due to this proposal can range at least from a 0.3 percent 
(an average of $43 billion) to a 1.5 percent (an average of $183 
billion) increase in nominal, or current dollar GDP over the first 5 
years, and 0.2 percent to a 1.2 percent increase over the second 5 
years. As shown on Table 2, depending on the assumed Federal Reserve 
Board reaction to the policy, and on how much taxpayers anticipate and 
plan for the effects of future Federal Government deficits, the change 
in real (inflation-adjusted) GDP due to those proposal can range from a 
0.2 percent (an average of $18 billion per year) to a 0.9 percent (an 
average of $76 billion per year) increase in real GDP over the first 5 
years, with a small decrease over the second 5 years.
    Investment.----

                   TABLE 3.--EFFECTS ON CAPITAL STOCK
------------------------------------------------------------------------
                                                       Calendar years
                                                   ---------------------
                                                     2003-08    2009-13
------------------------------------------------------------------------
             Percent Change in Non-Residential Capital Stock
Neoclassical Growth Model:........................
    MEG--aggressive Fed reaction                          0.6        0.4
    MEG--neutral Fed reaction                             0.8        0.6
Econometric Model:................................
    GI Fed Taylor reaction function                       1.5        0.4
Life Cycle Model With Forward Looking Behavior:...
    OLG Reduced Government Spending in 2014               0.1       -0.7
    OLG Increased Taxes in 2014                           0.1       -0.8
               Percent Change in Residential Housing Stock
Neoclassical Growth Model:........................
    MEG--aggressive Fed reaction                         -1.0       -1.5
    MEG--neutral Fed reaction                            -0.8       -1.1
Econometric Model:................................
    GI Fed Taylor reaction function                      -0.5       -1.3
Life Cycle Model With Forward Looking Behavior:...
    OLG Reduced Government Spending in 2014              -0.2       -0.1
    OLG Increased Taxes in 2014                          -0.2       -0.1
------------------------------------------------------------------------

    As the results in Table 3 indicate, this policy may increase 
investment in non-residential capital in the first 5 years by 0.1 
percent to 1.5 percent, while reducing investment in residential 
capital by -0.2 percent to -1.0 percent because of the reduced cost of 
capital, which is due to the reduction in taxation of dividends and 
capital gains, and the temporary bonus depreciation. The investment 
incentives for producers' equipment in this proposal are likely to 
shift some investment from housing to other capital. The size of the 
shift differs between the simulations because of different assumptions 
about adjustment costs and savings responses. In the second 5 years, 
the sunset of the bonus depreciation provision, combined with the 
negative effects of crowding out will slow increases in private 
nonresidential investment. The simulations indicate that eventually the 
effects of the increasing deficit will outweigh the positive effects of 
the tax policy, and the build up of private nonresidential capital 
stock will likely decline.
    Labor Supply and Employment.----

      TABLE 4.--EFFECTS ON EMPLOYMENT PERCENT CHANGE IN EMPLOYMENT
------------------------------------------------------------------------
                                                     Calendar years
                                               -------------------------
                                                  2003-08      2009-13
------------------------------------------------------------------------
                       Neoclassical Growth Model:
MEG--aggressive Fed reaction..................          0.2          0.0
MEG--neutral Fed reaction.....................          0.4         -0.1
                           Econometric Model:
GI Fed Taylor reaction function...............          0.8         -0.4
             Life Cycle Model With Forward Looking Behavior:
OLG Reduced Government Spending in 2014.......          0.2         -0.1
OLG Increased Taxes in 2014...................          0.2         -0.1
------------------------------------------------------------------------

    As shown in Table 4, employment may increase from 0.2 percent 
(approximately 230,000 new jobs) to 0.8 percent (about 900,000 new 
jobs) in the first 5 years, as the effects of the acceleration of 
individual rate cuts, and the initial increase in investment prevail. 
Employment increases in the first 5 years because of both the positive 
labor supply incentive from the individual rate cuts, and the economic 
stimulus effect of the proposal taken as a whole. This increase 
disappears by the end of the budget period, ranging from 0 percent to 
-0.4 percent. The acceleration of the individual tax rate reductions is 
effectively a temporary provision relative to present law; thus, the 
positive labor supply incentives are temporary.
    A substantial portion of the tax cuts in the proposed growth 
package, those attributable to the acceleration of the individual 
income tax provisions in the Economic Growth and Tax Relief 
Reconciliation Act of 2001 (``EGTRRA''), and the bonus depreciation/NOL 
carryback combination are temporary (operating from 2003-2006), and 
therefore likely to result in modest demand stimulus primarily in the 
first 5 years in the myopic models. In the OLG stimulations, in which 
individuals foresee the temporary nature of the stimulus, the increase 
in consumption is spread across both periods.

                          3. BUDGETARY EFFECTS

    When the macroeconomic effects of a change in tax policy are taken 
into account, estimates of the change in receipts due to the proposal 
may change. To the extent that a new policy changes the rate of growth 
of the economy, it is likely to change the amount of taxable income, 
which will have a ``feedback effect'' on receipts. In addition, by 
increasing the after-tax return on investments in capital that generate 
taxable income, a change in policy may shift investment from non-
taxable or tax-favored sectors, such as the owner-occupied housing 
market, into the taxable sector, and thereby increase receipts. The 
model simulations indicate that the policy analyzed here is likely to 
result in more economic growth in the first 5 years than under current 
law, and hence results in less revenue loss than what is predicted 
using conventional revenue estimates. As the GDP growth declines in 
years 6-10, the revenue feedback also declines.
    A change in policy, however, may result in inflation as well as 
real economic growth. Inflation causes increases in nominal revenues 
(revenues measured in current dollars), without necessarily increasing 
the purchasing power of the Federal Government. Conventional budget 
analysis is conducted in nominal dollars. To the extent that this 
analysis applies equally to revenue and expenditure estimates, this 
practice provides a reasonably accurate picture of the effects of 
inflation on the Federal budget. However, the Joint Committee staff 
analyzes the effects of tax policy on receipts, but not spending. 
Reporting revenues due to inflation, without reporting the commensurate 
budget effects would present an inaccurate picture of the effects of 
the proposal on the entire deficit. Therefore, the Joint Committee 
staff provides budgetary analysis in real (inflation-adjusted), rather 
than nominal terms. Table 5 shows the percent revenue feedback relative 
to the conventional revenue estimate, in real terms.
    Even when presented in real terms, revenue feedback analysis alone 
may provide an incomplete picture of the effects of tax policy on the 
Federal budget. To the extent that the policy results in a net decrease 
in Federal receipts, with no offsetting expenditure reductions, the 
policy results in an increase in the Federal deficit. Increases in the 
Federal deficit generate additional debt service costs.
    To determine how changes in tax policy affect the ability of the 
government to meet its current and future obligations it is helpful to 
compare tax-induced changes in the deficit and GDP. If GDP is growing 
faster than the deficit, the fiscal situation is improving, whereas if 
the deficit is growing faster, the fiscal situation is worsening. If 
deficits are growing faster (slower) than GDP, then the ratio of 
Federal debt to GDP would increase (decrease), which implies that 
future generations would have less (more) income to consume and invest 
after making payments on the debt.

  TABLE 5.--EFFECTS ON REAL REVENUES PERCENT FEEDBACK IN REAL REVENUES
                 RELATIVE TO REAL CONVENTIONAL ESTIMATE
------------------------------------------------------------------------
                                                     Calendar years
                                               -------------------------
                                                  2003-08      2009-13
------------------------------------------------------------------------
                       Neoclassical Growth Model:
MEG--aggressive Fed reaction..................          9.8          3.6
MEG--neutral Fed reaction.....................         27.5         23.4
                           Econometric Model:
GI Fed Taylor reaction function...............         16.1         11.8
             Life Cycle Model With Forward Looking Behavior:
OLG Reduced Government Spending in 2014.......          6.1          3.0
OLG Increased Taxes in 2014...................          5.8          2.6
------------------------------------------------------------------------

    Table 5 shows the relationship between the change in receipts 
generated using macroeconomic analysis, and the predicted change in 
receipts provided by a conventional revenue estimate. A positive 
percentage indicates the estimated revenue loss is less when 
macroeconomic effects are taken into account than when estimated using 
conventional methods. As the simulations indicate, depending on how 
much temporary demand stimulus is generated by the proposal, the 
revenue feedback could range from 5.8 percent to 27.5 percent in the 
first 5 years, and 2.6 percent to 23.4 percent over the 10-year budget 
period.

                            4. DATA SOURCES

    All of the macroeconomic models used by the Joint Committee staff 
are based primarily on quarterly National Income and Product Account 
(``NIPA'') data published by the Bureau of Economic Analysis, U.S. 
Department of Commerce. In the MEG model, and to the extent possible in 
the commercial models, Joint Committee staff use the forecast for 
Federal and State and local government expenditures and receipts 
forecast by the Congressional Budget Office (The Budget and Economic 
Outlook: Fiscal Years 2004-2013, January 2003) instead of the NIPA 
series for these fiscal variables. For purposes of modeling changes in 
average and marginal tax rates in the macroeconomic models, the Joint 
Committee staff use microsimulation models that are based on tax return 
data provided by the Statistics of Income Division of the Internal 
Revenue Service (``SOI'').
    The Joint Committee staff uses these microsimulation models to 
determine average tax rates and average marginal tax rates for the 
different sources of income in each model, and to calculate the changes 
in these rates due to the proposal. The tax calculator calculates the 
change in liability due to the proposal for each record. These changes 
are aggregated for use in the macroeconomic models according to the 
different levels of disaggregation in each model. In the aggregations, 
averages are weighted by the income for each group. The percent change 
in average and marginal rates due to this proposal are:

                              TABLE 6.--PERCENT CHANGE IN TAX RATES DUE TO PROPOSAL
----------------------------------------------------------------------------------------------------------------
                                                                         Average marginal tax rate on
                                                 Average tax ---------------------------------------------------
                      Year                         rate on                                             Capital
                                                    wages        Wages       Interest    Dividends      gains
----------------------------------------------------------------------------------------------------------------
2003...........................................          -11           -9          -11          -51          -24
2004...........................................          -10           -6           -8          -49          -23
2005...........................................           -9           -3           -6          -52          -24
2006...........................................            0            0            0          -48          -23
2007...........................................           -1            0            0          -48          -23
2008...........................................            0            0            0          -50          -22
2009...........................................           -1            0            0          -47          -22
2010...........................................           -1            0            0          -48          -22
2011...........................................           -1            0            0          -52          -22
2012...........................................           -1            0            0          -50          -21
2013...........................................            0            0            0            0            0
----------------------------------------------------------------------------------------------------------------

    To obtain information about the effects of proposals affecting 
business tax liability, the Joint Committee staff uses a corporate tax 
microsimulation model that is similar in structure to the individual 
tax model. This data source for the corporate model is a sample of 
approximately 140,000 corporate tax returns provided by SOI.
    Depending on the requirements of the policy simulation, the 
corporate model can be run either on a full cross section of sampled 
tax returns, (i.e., one full year, or on a panel of returns constructed 
from any combination of tax years in the 1987 through 1998 period). 
This panel feature is particularly useful in tracking net operating 
losses and credits that can be either carried back or carried forward 
to other tax years.
    Finally, Joint Committee microsimulation tax calculators are also 
used to help assess the effect of a tax proposal on the cost of capital 
because some firms are operating at or near a net operating loss 
(``NOL'') position, not all of the 50 percent of equipment expenses can 
be deducted by each firm each year. A key component of the cost of 
capital is the net present value of depreciation deductions. An 
increase in the value of the depreciation deduction lowers the cost of 
capital. The calculated percent increases in the net present value of 
the depreciation deduction due to this proposal are shown below (the 
change is different for each of the first 3 years because of the 
temporary nature of the bonus depreciation provisions in present law 
and in the proposal):

    TABLE 7.--EFFECTS ON NET PRESENT VALUE OF DEPRECIATION DEDUCTION
------------------------------------------------------------------------
                                            Percent change from present
                   Year                                 law
------------------------------------------------------------------------
2003.....................................                            8.3
2004.....................................                            9.1
2005.....................................                           15.4
2006.....................................                           .005
------------------------------------------------------------------------

                             5. CONCLUSION

    The Joint Committee staff model simulations indicate that H.R. 2 
would likely stimulate the economy immediately after enactment by 
creating temporary incentives to increase work effort, business 
investment, and consumption. This stimulus is reduced over time because 
the consumption, labor, and investment incentives are temporary, and 
because the positive business investment incentives arising from the 
tax policy are eventually likely to be outweighted by the reduction in 
national savings due to increasing Federal Government deficits.

    Mr. Scott. Thank you.
    The first question to the witness is you mentioned the 
recession, when did the recession begin?
    Mr. Bolten. NBER, which is the official recession declarer, 
has put it some time ago, put it at March of 2001. Other 
economists have actually put it some months earlier.
    Mr. Scott. March 2001.
    Mr. Bolten. Yes.
    Mr. Scott. OK.
    Mr. Bolten. They generally do not go back and revise their 
estimates. Other economists have gone back and done revisions 
and put the beginning of the recession earlier.
    Mr. Scott. You mentioned that the tax cut was a small 
portion of the deficit. What is the amount of the 10-year tax 
cut? What is the amount of money that is involved in that?
    Mr. Bolten. I don't have that off the top of my head.
    Mr. Scott. Ten years worth of tax cuts? What is the 10-year 
deficit?
    Mr. Bolten. Mr. Scott, we projected for this mid-session 
review. We projected only out over a 5-year window.
    Mr. Scott. OK. One of the things that we are concerned 
about is how bad things would have to get before you 
acknowledge that somebody doesn't know what they are talking 
about. We have heard percentages of the debt compared to the 
GDP. I would like to kind of get an idea of how much of our 
annual budget is paid for with annual revenue and how much is 
paid for with borrowed money on a percentage basis.
    Mr. Bolten. I would like to provide that for the record, 
Mr. Scott. That is something else I don't know off the top of 
my head.
    [The information referred to follows:]

 Mr. Bolten's Response to Mr. Scott's Question Regarding Annual Revenue

    Approximately one-fifth of the 2003 and 2004 budgets are estimated 
to be financed by borrowing. By 2008, we estimate that the share of the 
budget financed by borrowing will fall to 8 percent. Attached is a 
table that shows our estimates of the portion of the budget to be 
financed by borrowing each year through 2008.

                                       FISCAL YEAR 2004 MID-SESSION POLICY
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimate
                                                          Actual -----------------------------------------------
                                                           2002    2003    2004    2005    2006    2007    2008
----------------------------------------------------------------------------------------------------------------
Total budget outlays....................................   2,011   2,212   2,272   2,338   2,452   2,573   2,706
    Paid for with annual revenue........................   1,853   1,756   1,797   2,033   2,215   2,360   2,480
    Paid for with borrowing from the public (net of          158     455     475     304     238     213     226
     financing other than the change in debt held by the
     public)............................................
Percent of total budget outlays:
    Paid for with annual revenue........................     92%     79%     79%     87%     90%     92%     92%
    Paid for with borrowing from the public.............      8%     21%     21%     13%     10%      8%      8%
                                                         -------------------------------------------------------
      Total.............................................    100%    100%    100%    100%    100%    100%    100%
----------------------------------------------------------------------------------------------------------------


    Mr. Scott. OK. To get the--let me just point out the chart 
that we are looking at up here. The comments have been made 
about what the Democratic plan is and what the Republican plan 
is. This charge separates the rhetoric from the reality. 
Democrats voted for the green, Republicans voted for the red. 
That is the deficit. Democrats voted for the green; we moved 
the deficit into surplus. Republicans voted for the red, and 
that is the deficit. To get the budget back in balance, what 
percentage would we have to increase the income tax, individual 
income tax?
    Mr. Bolten. Mr. Scott, my first answer is I don't know. My 
second answer is that I think that would be the worst thing to 
do, to restore the budget to balance. We could, in fact, 
increase taxes this year in an amount that would be equivalent 
to the deficit, but that would have such a detrimental effect 
on the economy that we would find ourselves in a much worse 
situation.
    Mr. Scott. I agree with you 100 percent. It took 8 years to 
dig us out from a $290 billion deficit, 8 years of hard, 
difficult choices, politically unpopular choices, but that's 
the green. Now, we are worse than that. So you are right. It 
would probably take a long time. But my question was whether or 
not we are even going in the right direction. We have--we have 
been told that we need to cut spending. How much, what portion 
of nondefense discretionary spending would we have to cut in 
order to balance the budget?
    Mr. Bolten. Oh, in 1 year, we would probably have to 
eliminate nondefense discretionary spending to balance the 
budget in 1 year. But that is not the----
    Mr. Scott. Wait a minute. Say that again.
    Mr. Bolten. We would probably have to eliminate nondefense 
discretionary spending if you tried to balance the budget in 1 
year.
    Mr. Scott. Are you saying insofar of deficit right now, 
that elimination of all nondefense discretionary spending would 
not bring the budget into balance, is that what you just said? 
I mean, it is true, I just want to get to you say it again.
    Mr. Bolten. Mr. Scott, I am happy to say it again, because 
that is clearly not the right sort of prescription.
    Mr. Scott. To eliminate all nondefense discretionary 
spending, eliminate it all, is not the right thing to do. But 
we have been told the problem with the budget is spending.
    Mr. Bolten. No, sir. You may have missed most of my 
testimony, but----
    Mr. Scott. I am sorry, I was listening to the President, so 
maybe I should have been listening to you.
    Mr. Bolten. You were spending your time much more wisely, 
sir. But what I did say was that that the principal cause that 
brought us into the deficit situation we are in now is economic 
growth that has flagged well below the projected levels. So the 
important thing we need to do while we exercise spending 
restraints is ensure that we return to a growing economy which 
is precisely what the tax cuts that have been enacted by this 
Congress over the last two and a half years have been designed 
to do.
    Mr. Scott. It hasn't worked; is that right?
    Mr. Bolten. I think it is, actually.
    Mr. Scott. How much worse would it to have to get before we 
figure out that it is doesn't work?
    Mr. Bolten. Well, I think----
    Mr. Scott. Can you put the chart back up there. How much 
worse would it have to get before we figured out it didn't 
work?
    Mr. Bolten [continuing.] Mr. Scott, I think the situation 
would actually be a great deal worse today in the absence of 
the tax cuts that this Congress has enacted.
    Chairman Nussle. Let me announce to my colleagues, we have 
votes that will occur in about 20 minutes. And just by perfect 
happenstance, we have just the perfect amount of members who 
have not asked questions. So this will work out very well. Mr. 
Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Forgive me, Mr. 
Bolten, but I am one of the members who did miss your 
testimony. I too am a freshman and have yet to master the art 
of being at three places at once. So if some these questions 
are redundant, please forgive me. Like my good friend from 
Florida, Mr. Diaz-Balart, occasionally, I may be mathematically 
challenged. I have heard a lot of questions concerning the tax 
relief that we have voted on in the budget. But if I am doing 
my math correctly, we voted on a $350 billion tax relief growth 
package out of a 10-year, $28.3 trillion budget. If I am doing 
the math right, that is about 1.2 percent is the growth package 
which would tend to suggest to me that almost 99 percent of the 
deficit problem that we are facing now is on the spending side. 
Can you tell me if I did the math right there?
    Mr. Bolten. You are correct that as a percentage of the 
economy, the $350 billion tax cut does come to 1.something 
percent.
    Mr. Hensarling. So everything that we seemingly hear on 
this side of the aisle is focusing on 1.2 percent of the 
problem and essentially ignoring 99 percent of the problem? Let 
me also ask because people question the growth package tax 
reliefs' impact on economic growth. Can you tell me what 
percentage of the tax relief that we have passed has actually 
made its way into the economy, into the hands of families, into 
the hands of small businesses?
    Mr. Bolten. I am advised, Mr. Hensarling, that we had $45 
billion in fiscal year 2003, and projecting $152 billion in 
calendar year 2004.
    Mr. Hensarling. So out of the entire growth package, we 
have still had a relatively small percentage that has worked 
its way through the economy?
    Mr. Bolten. I wouldn't say small, but it is--there is still 
quite a bit to come. The only thing I would say about it is the 
package was crafted to get the money into the economy about as 
rapidly as it physically could be done, and we will see in a 
few weeks when checks start going out to families with 
children.
    Mr. Hensarling. I am one member, I believe we all share 
this concern, I believe the deficit is a major problem. 
However, I tend to be more concerned at the absolute amount of 
money that we spend around here. The deficit is simply spending 
on a credit card as opposed to paying cash. To me what is most 
salient is how much money are we taking away from American 
families to pay for the government that we have now. Seems to 
me that logically there are several ways that we can reduce 
this deficit. Obviously, we hear from our friends on this side 
of the aisle that we need to raise taxes to close the deficit. 
I believe our paramount responsibility ought to be to promote 
economic growth which is one of the reasons I supported the 
President's package. And indeed, history does tell us that tax 
relief can promote economic growth.
    It also seems to me that there is a lot of waste and a lot 
of fraud in Washington government and we spend too much time 
here, I believe, in deciding how much more money will we throw 
at a problem as opposed to what are we getting for our money. 
To me it is not a matter of how much money Washington spends, 
it is how Washington spends the money.
    For example, we have had testimony before this committee 
before that $13.3 billion of improper payments were made in 
Medicare. If you straight line a $400 billion prescription drug 
benefit package over 10 years, bottom line is we just threw 
away a third of the cost of the prescription drug program.
    My question is does the administration believe that there 
are opportunities within this budget to find savings without 
cutting vital government services?
    Mr. Bolten. We absolutely do, Mr. Hensarling, and Chairman 
Nussle has been a leader in pushing toward the retrieval of 
erroneous payments. We are working hard on that within OMB and 
within the rest of the President's administration.
    Mr. Hensarling. I yield back the balance of my time.
    Chairman Nussle. Mr. Moran.
    Mr. Moran. Let me wrap up with some points. These are not 
new points to any of us on the Budget Committee. Some of them 
may be new to you, although I doubt it. Just for the public's 
edification, I would like to put up chart 8, it is one that Mr. 
Scott is also fond of, just to give you a sense of what you 
have to deal with. It is a pretty dramatic chart. Page 8, I am 
sure--there is the one.
    It shows that one fiscal policy approach worked beginning 
in 1993 when President Clinton took office and another has been 
a dismal failure at least if you look only at the facts rather 
than ideology, and that is what happened beginning in 2001. 
Your administration inherited a $5.6 trillion surplus. It is 
gone, plus trillions of dollars in addition to that. And you 
know, we have heard so many times from my friends on the other 
side of the aisle about the need to cut taxes, but really what 
President Clinton did was to build on a policy that the first 
President Bush began in 1990 of trying to balance the budget 
first. And by doing so, he put in motion something that worked 
that balanced the budget and in fact we have the strongest 
economic growth we ever had. And those people who would have 
benefited--those people who paid the most in increased taxes 
brought home the most after tax income after there were 
marginal incremental increases in their tax rate. And that is 
what economic growth can do for you.
    Now what we have done here is to create a climate of 
deficits as far as the eye can see. And our concern is not only 
with the tax cuts that have already been enacted, but in your 
mid-session review on page 50 you plan for another $878 billion 
of additional tax cuts over the next 10 years. Now that is on 
top of, as Mr. Spratt pointed out, tax cuts of $3.7 trillion.
    Now you disagree with that, but on the other hand, you 
don't disagree, I am sure, that the Congress is going to make 
permanent all of the tax cuts that have been enacted today. If 
you make those permanent, as I know the White House is going to 
urge us to do, and you have included the interest, which any 
good accountant or budget officer would do, is $3.7 trillion, 
almost identical to the amount of a unified deficit. And in 
fact, over 2003-04, the reality is that spending all of the 
Social Security Medicare Trust Fund surplus would be 
insufficient to meet the deficit to balance the budget even if 
we spend nothing on defense and homeland security, which we are 
not going to do, and that is Mr. Scott's point.
    You know, we keep hearing on the other side of the aisle 
about the need to eliminate waste, fraud and abuse. While we 
had people testify, what was it, last week, from the major 
agencies, none of them agree that these numbers are realistic. 
Then we talk about increased spending and it always goes down 
to social programs. If we eliminate all the social programs we 
are not going to balance the budget. But the worst problem we 
have is what we are doing to this country because not only are 
we going to be cutting and slashing social programs, but it is 
the unequal distribution of these tax cuts. Warren Buffett has 
perhaps articulated it best. He said this is a class war but my 
class has won. I am going to get hundreds of millions of 
dollars benefit from these tax cuts. I am going to wind up with 
an effective tax rate of 3 percent, and my secretary is paying 
an effective tax rate of 30 percent. How is that fair to have 
one-tenth of the wealthiest people in this country get as much 
benefit as the bottom 90 percent?
    In other words, 90 percent of people may have incomes of 
$95,000 or less per year. In total their tax benefit is as much 
as the top one-tenth of 1 percent. And that is what I think is 
going to erode the real economic strength of this country. The 
top 1 percent own 43 percent of the wealth in this country. 
That has gone up dramatically and is going to go up more 
dramatically with your tax cuts.
    And you know, if you don't agree with those facts, then I 
would love to hear you say so, but that is what we are faced 
with and that is why we are so frustrated, and that is why we 
wish you the best but we sure aren't optimistic about the 
results of your tenure any more than we are with Mr. Daniels'.
    Mr. Bolten. Thank you, Mr. Moran, for making me feel 
welcome.
    Mr. Moran. Well, I am sure you are nice guy. We have a 
responsibility beyond--you are probably a constituent, too. I 
always run that risk.
    Chairman Nussle. There goes another vote.
    Mr. Moran. I have already ticked off most of them. I might 
as well do it to Mr. Bolten. Welcome aboard, Mr. Bolten.
    Chairman Nussle. If the witness would care to respond, and 
then we do have votes that are going to be coming here very 
soon.
    Mr. Bolten. Mr. Moran, I appreciate the spirit of your 
remarks. I do disagree with many of your views on the facts. If 
I can get one chart up in particular, it is our chart on upper 
income share of the tax burden. This is how the three tax cuts 
that have been enacted in the last two-and-a-half years play 
out in terms of the share overall tax receipts that people pay. 
Those that make more than $100,000 before these three tax cuts 
paid 70 percent of all tax receipts. They now pay over 73 
percent of all tax receipts. They--further on the numbers and 
size of the overall cost of the tax cut, our numbers come out 
very different, less than half of the ones you do. I think we 
can probably get together, and hopefully in a congenial 
environment, and try to reconcile some of those numbers.
    But let me go to the broader picture, because there is one 
point that you made that I agree with very strongly, and I do 
this without any intent to point fingers one way or the other. 
But the President did not inherit a $5.6 trillion surplus. The 
President inherited an economy headed into recession and headed 
fairly sharply into recession. And the budget picture was not 
nearly as rosy as the one that was projected before the 
President came into office. The President inherited a very weak 
economy. Then he had to deal with corporate scandals that had 
been brewing for many years, with the September 11 attacks, 
with the war in Afghanistan and Iraq. All of these things 
combined made for a very different situation than the one we 
came in on.
    But the point I agree with you very strongly on is that the 
strong economic growth that we saw through certainly the latter 
part of the 1990s is the key to our budget situation, and that 
is why our focus is on restoring the economy to that kind of 
strong growth. And our perspective is that the best way to get 
back to that growth is through the effective implementation of 
the tax cuts that have been enacted so far.
    Mr. Moran. Fifteen seconds. That is income taxes. It isn't 
estate taxes or other taxes. I know you would agree.
    The other reason why our number is different, you know as 
well as I do that we are going to make permanent all of those 
tax cuts, at least if the composition of the Congress remains 
majority Republican. And that is why I think our numbers are 
somewhat more valid than the projections you have here, but I 
don't want to be argumentative any more than I have been, and I 
appreciate your response, and thank you, Mr. Chairman.
    Chairman Nussle. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. And I want to welcome 
our witness as well. At the outset Mr. Spratt has said that his 
reputation precedes him and followed that by saying it is a 
good reputation, and it is. It is of being bright, capable and, 
most important to me and this committee, to have a personal 
commitment to good public policy. And there has been a lot of 
political rhetoric back and forth today. I wasn't here for all 
of it, but I have heard some of it and I appreciate your 
response to the last query. But in general, we are delighted 
that you are in a position you are in because we all have a 
challenge ahead of us.
    And I will say briefly in response to my friend Mr. Moran 
when you add up everything, including the estate tax, the top 
income taxpayers in this country will pay a bigger part of the 
burden than they do now after all the Bush tax cuts, the 2001 
tax cuts, the 2003 economic growth and jobs package, and it is 
something to keep in mind. The top 1 percent is now paying 37 
percent of the taxes. If Warren Buffett wants to pay more that 
is great. He ought to. But I take my economic advice not from 
Warren Buffett and others out there who play with money and 
invest, but the entrepreneurs who are going to create those 
jobs, and I hope we will keep a focus on that.
    I would ask you, Mr. Bolten, if you would comment, which I 
know is hard for you to do in the White House, on Mr. 
Greenspan's testimony yesterday and specifically whether you 
agree with his statement where he said that the $350 billion 
tax cut package, the economic growth and jobs package enacted 
earlier this year, was helpful and his prediction that those 
tax cuts will provide a considerable lift, which were his 
words, in the second half of this year to our economy.
    Mr. Bolten. I do strongly agree with that.
    Mr. Portman. Mr. Greenspan is testifying again today in the 
Senate and I am sure he will reiterate that, but the point that 
I am trying to make is that these tax relief measures that we 
put in place are not static. And Mr. Spratt had a chart up 
earlier, I don't know if I have access to the Democrat charts, 
indicating that the tax cuts were the cause of the deficit 
because it compared the tax cuts with our deficit, which takes 
into account not at all the dynamic impact of these tax cuts, 
which was true back in the 1960s with John Kennedy. It was true 
in the 1980s with Ronald Reagan, even true in the 1990s when 
the Republican Congress convinced President Clinton to put some 
tax relief in place in addition to the balanced budget 
agreement.
    I will also say that when I was first running for Congress 
in 1992, guess what, as a percentage of our GDP our deficit was 
4.7 percent. Today as a percentage of our GDP our deficit even 
with these new estimates of, let us say, $460 billion, even 
exceeding the numbers that CBO has provided us and OMB has 
provided us, is about 4.2 percent of GDP. And I think that is 
important to point out because the economists will tell you 
whether they are right, left or center that it is a percentage 
of our economy that is really important in terms of the impact 
on our economy of our deficit.
    Is that acceptable? No, it is not. There are two ways to 
deal with it. One is keeping spending under control and the 
other is growing the economy, and the tax cuts are going to 
grow the economy. And to my colleagues on this side of the 
aisle, are you for cutting spending and, if so, where? I would 
like to hear. We are trying very hard to keep to our budget 
that this committee passed on, unfortunately, a partisan basis 
which does keep spending under control. And second, how do you 
feel about the tax relief?
    I know, Mr. Spratt, you were on Fox News last night and you 
indicated that you do believe that tax cuts do stimulate the 
economy, and that is why you voted for the second tax cut. I 
believe that, too. We may differ on how much and which tax cuts 
are better or worse. But to say it is static and doesn't have 
any impact I think is not accurate. And certainly as Mr. Bolten 
has said, he would agree with Mr. Greenspan's testimony 
yesterday saying that those tax cuts were helpful in trying to 
get this economy going again.
    Another question I have for you is about jobs. How much 
impact have the economic growth packages and the tax cut in 
2001 had on jobs? What would it be like had those tax cuts not 
been in place? How many jobs would we have lost?
    Mr. Bolten. There have been several analyses of that, Mr. 
Portman. The chairman just highlighted one this morning that 
showed that the tax cuts saved 1.8 million jobs over the last 
year or two.
    Mr. Portman. Could we put up chart 3 or chart 4? That is 
the 1.8 million that I saw in our packet.
    Mr. Bolten. And the Treasury Department yesterday released 
a study with numbers roughly in the same range.
    Mr. Portman. Chart 4 is the unemployment number and it 
shows that instead of a 7.8 percent unemployment we are talking 
about unemployment in the 6 percent range if these tax cuts had 
not been in place. How about the GDP growth? Do you think it is 
stronger than it would have been without the tax cuts?
    Mr. Bolten. Yes, absolutely. And the Treasury Department's 
study released yesterday, I believe, showed GDP 2 percent 
higher than it otherwise would have been.
    Mr. Portman. Two percent higher. Thank you very much again 
for your testimony today and, more important, what you will do 
for this committee over the next year to put together a budget 
for the next fiscal year and working with us to try to get 
through this deficit.
    Chairman Nussle. Go to Mr. Spratt for one question, and 
then Mr. Shays will wrap up our hearing with questions.
    Mr. Spratt. Mr. Bolten, let me ask you to turn to page 39 
in your booklet there on summary table No. 7. This shows 
receipts and outlays as a percentage of GDP. Have you got it?
    Mr. Bolten. Yes, sir.
    Mr. Spratt. If you look under 2004, next year, when we have 
the largest deficit in our Nation's history, $475 billion, 
revenues at that point are also at a historic low, 16 percent 
of GDP, Gross Domestic Product. That is the lowest level since 
1950, 16 percent. In order to get from $475 billion in deficit 
to about 300 and change in--rather to get to $226 [billion] in 
2008, you got to have an increase in the percentage take of the 
GDP for taxes of 2 full percentage points. Now 2 percent of GDP 
doesn't sound like a lot, but that chart shows that is 2 
percent of $13.671 trillion. That comes to at least $270 
billion. So all of the improvement in the deficit from 475 down 
to 226 is due to this increased amount of revenues stemming 
from the fact that we have a systemic change, an increase not 
because the economy is getting better but because the tax 
system is collecting more. At that point in time by our 
calculation enacted tax cuts will reduce taxes as a percentage 
of GDP by 1.7 percent each year. So you are assuming that 
notwithstanding that reduction, 1.7 percentage points of GDP 
due to tax cuts, you will still be able to increase the revenue 
take of GDP by 2 full percentage points. How do you do that? 
What is the underlying assumption for that significant shift in 
tax payments over a relatively short period of time?
    Mr. Bolten. I will let one of the experts perhaps after the 
hearing go into greater detail with you on this, but I think 
the estimate is sound for a couple of reasons. First of all, if 
you will look back at 2002, we did move in just 2 years with a 
2 percent drop in the revenues as a percentage of GDP.
    Mr. Spratt. That was before most of the tax cuts were 
implemented.
    Mr. Bolten. True, but the really important effect here is 
not the tax cuts, it is the mix of what the economy and the 
revenues consist of. What we had in the late 1990s and early 
part of this decade was a large bubble of Treasury receipts 
from not just corporate income tax but from high wage earner 
income tax and from capital gains. And we saw those just fall 
off very radically with the collapse in the stock market and 
with some recovery in the stock market and some substantial 
growth in the economy. I think these estimates most economists 
will agree are all within the reasonable range. And there is 
one additional factor, and that is the bill that you all 
enacted, the 2003 bill that you enacted, has a bonus 
depreciation provision which allows companies to write off 
their depreciation expenses very rapidly in 2003.
    Mr. Spratt. As I understand from your numbers, that is one 
tax that you are going to cut that you are going to allow to 
expire.
    Mr. Bolten. That is correct. We have assumed all taxes 
extend except for the bonus depreciation which was intended to 
be short-term and precisely because we wanted to stimulate the 
investment in the short years, in 2003 and 2004. But the result 
of that in the numbers is that we see a large drop in revenues 
in 2003 and 2004 because they are able to write off that 
amount, but then a substantial recovery in the numbers in 2005 
and beyond.
    Mr. Spratt. Mr. Bolten, is that a lesson to be learned? By 
allowing that tax cut to expire, by repealing one of the 
substantial tax cuts, you are improving the deficits 
substantially by 50 percent?
    Mr. Bolten. The lesson applies exclusively, and I mean 
exclusively, to accelerated depreciation provisions, which are 
designed to move investment from one period where it is 
expected back to another.
    Mr. Spratt. I won't pursue that. I asked you earlier for a 
10-year run out of what your estimate of the diminution 
reduction in the surplus due to economical and technical 
effects, miscalculation over the 10-year period, 2002-2011 is 
and if you could give us that for the record I would appreciate 
it. And secondly, if you could break out the economic and 
technical effects and explain to us the different elements of 
each and how much is economic and how much is technical, we 
would like to have that.
    Mr. Bolten. To the extent we feel we can provide reliable 
estimates we will do that.
    Chairman Nussle. We will go to Mr. Shays to wrap things up.
    Mr. Shays. Thank you very much, Mr. Chairman. I didn't 
think the chairman's tie was all that great, so he said I would 
go last. But I wanted to go last as well because I wanted to 
hear how my colleagues would respond to your primary point, 
that $278 billion--the deficit would be $278 billion if there 
had been no tax cut and that still stands. And the bottom line 
is there would be a deficit and the reason there would be a 
deficit, and you pointed out so eloquently of a slowing economy 
and increased government spending, which fits into the fact 
that during our time on this committee when we voted out our 
budget resolution, our Democratic colleagues added $982 billion 
to our budget resolution, nearly a trillion dollars. And it 
didn't stop there on the floor of the House.
    And if we would put up chart No. 9. And it is interesting 
when you look at this chart because zero is baseline, so there 
is even increased spending if no bar went up at all. But the 
difference between the two packages and our Democratic 
colleagues added $890 billion to the overall package on the 
floor, or at least attempted to. Now having said that, if you 
turn to chart 8--don't put it up yet. Let me just make this 
point. My first choice and I would think it would be yours as 
well is that we would have tax cuts accompanied by restraint in 
spending. And we did have Alan Greenspan come before our 
Financial Services Committee and make the point--he urged 
restraining Federal spending to protect the national fiscal 
health, but he also acknowledged that the tax cuts were 
helpful, but he said if it had been accompanied with a 
restraint in spending it would have done an even better job.
    Now my second choice would be tax cuts in a sluggish 
economy even if not accompanied by a restraint in spending. And 
the thing that our Democratic colleagues didn't point out in 
their chart was when we had deficits under their reign, we had 
deficits when times were good. What would have been the outcome 
if we hadn't under a Republican Congress restrained spending 
brought deficits into surpluses? What would the deficits be 
today had we not done that?
    Mr. Bolten. I don't have an estimate for you, Mr. Shays, 
but the numbers would be substantially larger than they are 
today.
    Mr. Shays. Clearly they would be off the chart. Let me just 
ask then, the other reason I was so eager to stay to the end 
wanting to hear your testimony obviously and all of it and to 
hear how you responded to the questions, but I would like, Mr. 
Chairman, to put in the record a request that you made with 
my--to our colleagues. You requested that if they didn't agree 
with the tax cuts that they support Mr. Rangel's bill, H.R. 
436, to repeal the tax cuts because they were clearly very 
critical of the tax cuts. And there is no one on the list. And 
I would like to put on the record the sheet as it is and point 
out that not one of our Democratic colleagues who said they 
didn't like the tax cuts were willing to repeal them.
    Chairman Nussle. Without objection.
    [The information referred to follows:]
    
    
    Mr. Shays. And let me finally say to you my Democratic 
colleagues are in an awkward position. They support significant 
increases in spending but do not acknowledge that ever 
increasing spending is growing the deficits. And they criticize 
the tax cuts but do not support reinstating the tax cuts.
    And go to the last chart and I will ask you a question in 
this. My biggest concern is we do have deficits when times are 
bad. And this is chart No. 8. Even under this Republican 
Congress, we are seeing a significant increase in spending, not 
as much as the Democrats would like us to spend. I would like 
you to comment about that increased spending. I would like you 
to answer how we are making sure that these deficits don't 
become institutionalized.
    Mr. Bolten. Well, first with respect to the spending, I 
think that underscores the importance of the work of this 
committee, which I am committed to cooperating in the months 
ahead of ensuring that we have sound budget resolutions that 
are enforceable, that ensure that we keep as tight a lid as we 
possibly can on spending that is not absolutely essential.
    Second, the way that we are going to ensure that budget 
deficits do not become a permanent part of the fiscal scene is 
principally to ensure that we have an economy that is strong, 
robust, with plenty of jobs for people who want to work. That 
is the most important thing we can do. And the tax cuts which 
the Congress enacted and the President signed over the last 
two-and-a-half years have been the best measures to ensure that 
we get back to that economy that will put us on the right path 
toward budget balance.
    Mr. Shays. I thank the gentleman and I thank you, Mr. 
Chairman.
    Chairman Nussle. Mr. Garrett, since you returned, do you 
have a quick question? Otherwise--then if there is nothing 
further to come before the committee, we thank you for your 
testimony. We welcome your partnership and look forward to 
working with you. And with that, the committee is adjourned.
    [Whereupon, at 12:25 p.m., the committee was adjourned.]

