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



 
       CBO'S BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2004-2013

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, SEPTEMBER 4, 2003

                               __________

                           Serial No. 108-13

                               __________

           Printed for the use of the Committee on the Budget


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









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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
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, September 4, 2003................     1
Statement of:
    Douglas Holtz-Eakin, Director, Congressional Budget Office...     7
Prepared statement:
    Hon. Jim Nussle, a Representative in Congress from the State 
      of Iowa....................................................     3
    Mr. Holtz-Eakin..............................................    13


       CBO'S BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2004-2013

                              ----------                              


                      THURSDAY, SEPTEMBER 4, 2003

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:07 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Shays, Thornberry, 
Hastings, Portman, Brown, Putnam, Garrett, McCotter, Diaz-
Balart, Hensarling, Spratt, Moran, Hooley, Baldwin, Moore, 
Lewis, DeLauro, Edwards, Scott, Capps, Baird, Cooper, Emanuel, 
and Davis.
    Chairman Nussle. Good morning. This is a full committee 
hearing in which we will hear from the Congressional Budget 
Office and the very distinguished director of that office about 
the budget and the economic outlook for fiscal years 2004-13, 
which was released last Tuesday.
    Before I begin, I would like to acknowledge Rich Meade and 
his new arrival. His daughter was born just before the August 
recess. We welcome Rich back and congratulations on your new 
addition.
    Today our witness is Dr. Doug Holtz-Eakin, the Director of 
the Congressional Budget Office.
    Dr. Holtz-Eakin, once again, welcome back to the committee. 
We look forward to your testimony here today. And welcome back 
to the rest of the committee members. I hope everyone has had 
an enjoyable and productive August. I know I did.
    And today we will pick off--we will pick up where we left 
off in July--and maybe even pick off, not the director though. 
But we will pick up where we left off in July, looking at the 
Federal budget.
    As you may recall, we talked to the OMB Director just 
before we left. And really, since our last hearing some things 
have changed and some things have not. What has not changed is 
that we still have substantial--and, in fact, slightly larger 
than previously forecasted short-term deficits--$401 billion 
for this year, $480 billion for next year as predicted by the 
Congressional Budget Office. What has not changed is that these 
deficits do matter. I believe that, I have always believed 
that, and that is in part why we continue to address them in 
the hearings we have today.
    There are maybe some who don't think that deficits matter, 
but I will leave that to their opinion. I believe deficits do 
matter.
    What has not changed is that this report generated the 
usual round of finger-pointing. And if you didn't hear it, I 
did, but that may be because I come from Iowa, and these days 
there is always somebody else to blame for just about 
everything. And what has not changed is that many of these same 
people who are pointing fingers really don't have any answers. 
There are a few brave souls that have come out and suggested--I 
am not sure if it is bravery or lunacy, depending on your point 
of view--but have decided that raising taxes at this point in 
time, with the economy just barely getting moving again, would 
be the thing to do.
    I don't believe raising taxes at this time would or should 
be an option.
    So now let us talk about what has changed since we have 
met. Since OMB released its report in July and since CBO closed 
its books on its report over 2 months ago, our economy has for 
the first time in a long time shown some signs of turning the 
corner to sustained economic growth. We have had higher than 
expected real GDP growth in the second quarter, stronger tax 
relief-induced retail sales and manufactured durable good 
shipments and orders in July, surging manufacturing activity in 
August, and an outlook for higher than previously expected real 
GDP growth in the second half of the year. And even without the 
most encouraging recent economic news, CBO does project the 
economy, quote, ``poised for a more sustained recovery.'' That 
is the good news.
    Of course, if you don't have a job yet from this recovery, 
the economy has not yet turned the corner. And so there is more 
work that must be done. So with that in mind, let us go over a 
few things that I think most of us can agree on.
    First, we share a concern over these deficits. Second, we 
should be able to agree at this point that the tax cuts did not 
cause these deficits. And according to CBO, had we not passed 
the tax cuts, we would still have substantial deficits, about 
$200 billion, and there would be many more Americans out of 
work. And, finally, the recent economic news makes it clear 
that the tax relief measures are doing precisely what they 
intended to do, albeit at a slower rate than we would have 
liked, and that is to help stem the job loss and get the 
economy moving in the right direction.
    So now that the economy is moving forward, we all need to 
shift our focus to the other side of the ledger, which is 
spending. CBO has done several models of the baseline, and 
every one showed even greater problems ahead if we continue at 
our current rate of spending. And as Director Holtz-Eakin has 
testified to this committee before, we cannot simply grow our 
way out of this problem. It must be a combination of economic 
growth and spending restraint.
    We have been very, I think, generous in our spending over 
the past few years. I enjoyed sending out the news releases to 
my constituents as much as anyone in the Congress and anyone on 
this committee. But, my friends, the times have changed. Just 
like the families and businesses we represent, we must adjust 
our spending to reflect the current circumstances. And let me 
just be clear. I am not saying and never have said that we have 
to cut programs, benefits, or services. This is not about cuts. 
What this is about is getting our spending down to a level that 
is sustainable, which at present it is not.
    For the past several years, government spending has well 
exceeded the rate of inflation. This committee has spent a 
great deal of time and effort this year discussing how best to 
reduce waste, fraud, and abuse within our Federal Government's 
mandatory programs. That effort is well under way in the 
committees of this Congress, and I have no doubt that our 
efforts will pay off in more efficient, reliable, well-executed 
programs and in tax dollars better spent. Even if it is one of 
those dollars better spent, that is better than we were the day 
before.
    But while the bulk of our Federal dollars are spent on the 
mandatory side, we cannot pretend that our discretionary 
spending does not count. Many of you have claimed dire concern 
at the size of the current deficits. Trust me, I share that 
concern.
    So what I would suggest to you is this: Let us not add to 
it. I think that sounds pretty reasonable. Let us not on the 
one hand bemoan the deficits, then on the other hand demand 
more spending. Let us all try and control ourselves. Let us all 
acknowledge that we are not going to have any extra money for a 
while, and actually stick to the budget. Let us try that for a 
change as well.
    At present, we have passed 11 of the 13 appropriation 
bills, and I think we have done a pretty good job so far. But 
the challenge for the remainder of the session of Congress is 
to hold the line on the budget resolution level for 
discretionary spending.
    Let us not lose the lessons of the past few years or of 
this report. CBO's report shows that it is incumbent on 
lawmakers to control spending if they truly care about 
achieving a balanced budget. We have to control what we can 
control.
    Let us use our time today with Director Holtz-Eakin to 
discuss to what extent we must curb our spending to get these 
deficits under control. And let us use this hearing to commit, 
all of us, to doing what we know we need to do to get our 
budget back in balance, keep the economy growing, and rein in 
this body's out-of-control spending.
    I want to thank the Director for his report and for the 
many options that CBO has put in here. It is, I think, a 
detailed report and one that I know we can use and will be 
useful as we march ahead toward controlling this problem.
    And now I would like to turn to Mr. Spratt for any comments 
he would like to make.
    [The prepared statement of Mr. Nussle follows:]

  Prepared Statement of Hon. Jim Nussle, a Representative in Congress 
                         From the State of Iowa

    Good Morning. Today the Budget Committee will hear from the 
Congressional Budget Office on its economic and budget update The 
Budget and Economic Outlook: Fiscal Years 2004-13 which was released 
last Tuesday.
    Our witness today is Dr. Douglas Holtz-Eakin, the Director of the 
Congressional Budget Office. Dr. Holtz-Eakin, once again, welcome back.
    Also, to this committee, I welcome of you back. I hope everyone had 
a productive August recess, and an enjoyable Labor Day.
    Today, we will pick up just where we left off in July the outlook 
of our Federal budget. Since our last hearing, some things have 
changed, and some things have not. What has not changed is that we 
still have substantial, and, in fact, larger than previously-forecasted 
short-term deficits $401 billion this year, and $480 billion next year 
as predicted by CBO. What has not changed is that I still believe these 
deficits are a problem and that they must be addressed. What has not 
changed is that this report generated the usual round of finger-
pointing about the cause of these deficits. And what has also not 
changed is that those same people who are more than willing to point 
fingers when our fiscal situation gets tough once again failed to offer 
any sort of solution to get these deficits under control, or even 
extend themselves to join with the efforts already under way.
    Unfortunately, that too has not changed.
    Now, let's talk about what has changed since we last met. Since OMB 
released its report in July, and since CBO closed the books on its 
report over 2 months ago, our economy has, for the first time in a long 
time shown signs of turning the corner to sustained economic growth. 
We've had higher than expected real GDP growth in the second quarter, 
stronger tax-relief-induced retail sales and manufacturers' durable 
goods shipments and orders in July; surging manufacturing activity in 
August; and an outlook for higher than previously expected real GDP 
growth in the second half of the year. And, even without the most 
encouraging, recent economic news, CBO does project an economy quote 
``poised for a more sustained recovery.''
    So, with this in mind, let's go over some things I think most of us 
can agree on: First, we all share a concern over these deficits. 
Second, we should be able to agree, at this point, that the tax cuts 
did not cause these deficits.According to CBO, had we not passed the 
tax cuts, we would still have a substantial deficits--about $200 
billion but there would be many more Americans out of work. And 
finally, the recent economic news makes it clear that the tax relief 
measures are doing precisely what they were intended to do albeit at a 
slower rate than we would have liked and that is to help stem the job 
loss, and get the economy moving in the right direction.
    So, now that the economy is moving forward, we all need to shift 
our focus to the other side of the ledger and that is spending. CBO has 
done several models of the baseline and every one showed even greater 
problems ahead if we continue at our current rate of spending. As 
Director Holtz-Eakin has testified to this committee before, we cannot 
simply grow our way out of this problem it must be a combination of 
economic growth and spending restraint. We have been very, very 
generous with our spending in the past few years.
    I enjoyed sending out the good news press releases to my 
constituents in Iowa as much as everyone else in this Congress. But my 
friends, times have changed. Just like the families and businesses we 
represent we must adjust our spending to reflect the current 
circumstances. Let me be clear: I am not saying and never have said 
that we need to ``cut'' programs, benefits or services. This is not 
about cuts. What this is about is getting our spending down to a level 
that is sustainable, which at present, it is not. For the past several 
years, government spending has well exceeded the rate of inflation.
    This committee has spent a great deal of time and effort this year 
discussing how we best reduce waste, fraud and abuse in the Federal 
Government's mandatory programs. That effort is well under way in the 
committees of this Congress, and I have no doubt that our efforts will 
pay off in more efficient, reliable, and well-executed programs, and in 
taxpayer dollars better spent. But while the bulk of our Federal 
dollars are spent on the mandatory side, we cannot pretend that our 
discretionary spending doesn't count.
    Many of you have claimed dire concern at the size of the current 
deficits. Trust me, I share your concern. So what I would suggest to 
you is, let's not add to it.
    Sound reasonable?
    Let's not, on one hand, bemoan the deficits, then on the other, 
demand more spending. Let's all try that. Let's all acknowledge that 
we're not going to have any ``extra'' money for awhile, and actually 
stick to our budget. Let's try that, too.
    At present, we have passed 11 of the 13 appropriations bills, and 
we've done a pretty good job. But the challenge for the remainder of 
this session of Congress is to hold the line on the budget resolution 
level for discretionary spending.
    Let's not lose the lessons of the past few years or of this report. 
CBO's report shows that it is incumbent on lawmakers to control 
spending if they truly care about achieving a balanced budget. Let's 
use our time with Director Holtz-Eakin to discuss to what extent we 
must curb our spending to get these deficits under control. And let's 
use this hearing to commit all of us to doing what we KNOW we need to 
do to get our budget back to balance. Keep the economy growing, and 
reign in this body's out of control spending.
    Thank you, and I now turn to Mr. Spratt for any opening comments he 
may have.

    Mr. Spratt. Thank you very much, Mr. Chairman.
    And Dr. Holtz-Eakin, welcome to our hearing, and thank you 
for the good work that underlies the August update.
    Since May of 2001, every CBO report on the budget has been 
worse than the one before it, and this update is no exception. 
It shows that when the books are closed on fiscal 2003--less 
than 30 days--the deficit will hit an all-time high, $401 
billion. This exceeds the largest deficit heretofore recorded, 
$290 billion, which was incurred in the last fiscal year of the 
first President Bush.
    The deficit CBO forecasts today is $156 billion more than 
the deficit CBO forecasted for this year, 2003, as recently as 
last March. And get this: the deficit for this year, forecasted 
today, $401 billion, is $760 billion worse than the deficit 
predicted for this year in 2001--$760 billion worse in one 
fiscal year.
    This record, bad as it is, will last for just one year 
because next year the deficit will be even worse. Next year, 
the deficit, as forecast here, is $480 billion. If you back out 
the surplus in Social Security, and I think you should, the 
surplus next--the deficit next year will be $644 billion.
    Six months ago CBO came here and they projected a surplus 
over the next 10 years of $891 billion, deficits in the near-
term, surpluses in the long-term, netting out to a surplus of 
$891 billion cumulative. Of course, that depended on a critical 
assumption, and that is that all of the expirations in the tax 
cuts passed in 2001 and 2003 will actually be allowed to expire 
as scheduled. But in 6 months' time that estimate of the 
surplus has moved $2.287 trillion in the wrong direction to a 
deficit of $1.397 trillion.
    The worst news of all is that these deficits are here to 
stay. In budget parlance, that is structural, not cyclical. 
They are rooted in the budget, they are not going to go away, 
fade away as the economy picks up. On the contrary, CBO assumes 
growth that averages more than 3 percent a year for the next 10 
years, as this chart indicates, more than 3 percent for the 
next 10 years. And these deficits don't decline. They hover 
around $300 [billion] to $400 billion a year as we pile on, as 
a result, $3 trillion in additional debt over the next 10 
years.
    Now, it may seem to some who read this report superficially 
that the deficits do diminish over time. But, if so, you should 
read on and read carefully.
    In the first sentence of the first chapter, CBO starts out 
by saying, quote: If current laws and current policies do not 
change, deficits will be $401 billion this year and $480 
billion next year.'' The problem is, we all know that current 
laws and current policies will change.
    Nevertheless, by the laws we pass, budget rules and budget 
procedures, CBO cannot assume that the billions of dollars in 
tax cuts enacted in 2001 and 2003 and stipulated to expire will 
be renewed and extended. CBO has to assume that these tax cuts 
will expire as scheduled, even though the Bush administration 
says that all of these tax cuts will be renewed and will be 
extended. CBO's assumption that they will be allowed to expire 
as scheduled as $1.564 trillion back to revenues. It is an 
assumption that the alternative minimum tax won't be altered, 
and we know politically will have to be fixed, or it will 
capture more than 30 million taxpayers within 10 years. That 
adds $400 billion more to revenues.
    And since CBO cannot presume what Congress is about to 
pass, it also can't presume that there is any cost for 
prescription drug coverage under Medicare, which takes $400 
billion out of spending. They also assume that discretionary 
spending, which has grown, as the chairman has noted, 7 to 8 
percent, will be reined in and held to the rate of growth of 
inflation only, at current services expectation.
    Given the fact--as you can see from the chart we are about 
to put up, this bar chart--that 95 percent of the growth and 
discretionary spending over and above current services for all 
of discretionary spending--95 percent of the excess over and 
above current services--has gone to homeland defense, national 
defense, New York City relief, and airline relief, it is hard 
to believe that we can hold it, rein it in to the level that--
at least to a level of inflation only.
    When you just seize assumptions for political reality, what 
is likely to happen in law and in policy, easily, you add $2 
[trillion] to $3 trillion to CBO's 10-year surplus--10-year 
deficit, which is already $1.4 trillion. And there is the 
bottom-line result. Instead of having a surplus of $211 billion 
in 2013, we have a deficit of $363 billion. The resulting 
public debt over this period of time is about a $3 trillion 
addition from $4.4 trillion at the end of fiscal year 2004, to 
$7.4 trillion at the end of 2013. Resulting deficits total 
$3.429 trillion.
    Now, you can argue with the assumptions we have inserted in 
order to make the CBO baseline forecast a realistic political 
document, but for the most part we have tried to be not 
contentious, and practical and farsighted in putting those 
numbers in there. It is clear to me, we are looking at least in 
the range of $3 trillion in additional deficits.
    When OMB brought its mid-session review here in July, I 
read it from cover to cover. And when I got through, I said, 
what disappoints me most is there is no shock, no shame, and no 
solution. OMB responded to these massive deficits by simply 
saying, they are manageable, and by saying as to solutions that 
if we continue to pursue our progrowth policies. We can grow 
out of this problem, at least holding out that hope; and then 
pointing to the possibility, the prospect by their reckoning 
that in 5 years the problem will be cut at least in half, even 
though they excluded from that 5-year projection the enormous 
costs we are now incurring for the deployment of troops in Iraq 
and Afghanistan.
    Well, I don't think, Mr. Chairman, that these deficits are 
manageable for that period of time. I think this is a looming 
disaster. And, frankly, I think it is a moral outrage, 
mortgaging our children's future so that we can have it all, 
and mortgaging also--undermining two programs which the people 
of this country look to as bedrock: Social Security and 
Medicare. Because these deficits, if they are allowed to occur 
as projected here, will do nothing more than put a ticking time 
bomb under Social Security and Medicare for years to come. 
There is a day of reckoning coming.
    I am glad to see that the Director has acknowledged that 
long-term deficits, particularly when they are perceived to be 
permanent or intractable, can indeed be a detriment to the 
economy, because I fervently believe that; and I think what you 
have put before us is a call to action. We need to act now 
before these deficits become so intractable, so difficult to 
deal with that we simply can't turn this problem around.
    Thank you again for coming. We look forward to your 
testimony.
    Chairman Nussle. Director, welcome. And we are pleased to 
put your entire testimony into the record, and you may proceed 
as you feel necessary.

   STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Holtz-Eakin. Mr. Chairman, thank you. Congressman 
Spratt, members of the committee, thank you for the chance to 
be here today.
    What I thought I would do is briefly summarize what I think 
are some of the key features of our summer update. The entire 
report has been available for a little over a week, and I 
submitted for my written testimony a summary of that report.
    I thought I would begin by talking about facts in our 
baseline projection, highlight three key features of those 
particular projections, and then close with a short discussion 
of the economic outlook, after which I would be happy to answer 
your questions.
    Let me begin with facts, which are summarized on the first 
slide and which are available in front of you.
    Our baseline projection anticipates a deficit of $401 
billion in fiscal 2003, $480 billion in fiscal year 2004, $341 
billion in fiscal year 2005, and total deficits of $1.4 
trillion between 2004 and 2013. The pattern is that these 
deficits occur all in the first 5 years; the last 5 years show 
a very tiny surplus. The pattern throughout the budget window 
is for sharp near-term deficits, followed by diminishing 
deficits, and a return to surplus in 2012.


    The fiscal year 2004 deficit is the largest in dollar 
terms; however, relative to GDP, 4.3 percent, it doesn't rival 
the 6 percent that occurred early in the 1980s, which was the 
largest number.
    The final basic feature of the baseline projections is the 
debt-GDP ratio, which is about 37 percent at the onset of the 
budget window, rises to about 40 percent and then diminishes to 
30 percent over the course of the budget window.
    Now, I think there are three key features of our baseline 
projections that merit attention in thinking about them. The 
first and perhaps the one that might not need to be repeated, 
but I think is worth highlighting for you, is that they are 
baseline projections and are constructed according to the rules 
of the baseline projections. In particular, they must follow 
the implications of current law on both the receipts and the 
outlay sides.
    For these particular projections two features stand out. On 
the receipts side, they assume the sunset of the tax cuts that 
were put in place in 2001 and also the ones passed by Congress 
earlier this year; and on the outlay side, we follow the 
baseline rules in including the fiscal year 2003 supplemental 
appropriation in the baseline appropriations and then inflating 
those appropriations at the rate of inflation. In effect, that 
supplemental appears in each year of the budget window, 
properly adjusted for inflation.
    The second key feature is that the basic patterns in these 
projections are very similar to our March baseline projections. 
They have the feature of having large near-term deficits 
diminishing over the budget window and ultimately coming to 
surplus. In this case, the near-term deficits are larger, they 
reflect the actions taken earlier in the year both to cut taxes 
and to increase outlays, resulting in higher near-term 
deficits; and the budget comes to balance later in the budget 
window than had been anticipated in March.


    The mechanics by which we come to balance over the budget 
window is on the revenues side. Revenues grow at an average 
rate of 7.5 percent over the budget window, rising from about 
16.2 percent of GDP at their low in 2004 by 4.3 percentage 
points, or 20.5 percent of GDP at the end of the budget window 
in 2013.
    On the outlay side, mandatory spending grows at an average 
rate of 5.2 percent over the budget window. That can be 
contrasted with GDP growing at about 5.1 percent over the 
budget window, so a little bit faster than GDP. Discretionary 
spending follows the baseline rules and grows at an average 
rate of 3.2 percent of GDP, or more slowly than the economy as 
a whole.
    The final point that I would highlight about our baseline 
projections is that they are subject to an unusual amount of 
uncertainty. Baseline projections always face uncertainty. They 
face uncertainty from the evolution of the economy in ways that 
cannot be anticipated; they face uncertainty from the evolution 
of the relationship between the economy and the budget, 
technical factors in the lingo of our reports, which shift 
through time. And we have in our report tried to document these 
usual sources of uncertainty so that Members of Congress can 
appreciate that, as we go farther out in the budget window, 5, 
6, 7, 10 years, the degree to which these projections would 
occur, even if we stuck to current law, becomes less and less 
certain.
    However, in this instance, we also felt there is a 
substantial amount of uncertainty in the budget outlook that 
derives from policy choices facing the Congress, and we 
attempted to show the boundaries of the implications of some of 
the policy choices that were clear and about which we had some 
guidance.
    In particular, on the receipts side, the tax cuts may or 
may not sunset as a policy choice, and that delivers some 
uncertainty to our baseline projections. There is uncertainty 
about whether in fact the alternative minimum tax will evolve 
on its current path, involving many more taxpayers toward the 
end of the budget window. To quantify the degree of that 
uncertainty, we took the most simple approach we could think 
of, which is, to remove the mechanism by which more people end 
up on the alternative minimum tax, namely due to inflation 
alone, and index the AMT for inflation.
    In addition, each House of Congress has passed the Medicare 
prescription drug bill with a budget total of $400 billion over 
the budget window. We took as our guidance in that area the 
year-by-year information on the Medicare prescription drug 
bill, as passed in the budget resolution earlier this year.
    And also, on the outlay side, the path of discretionary 
spending, as has been mentioned, may not follow the level in 
the baseline rules of 3.2 percent. One might want to remove 
from that baseline projection the 2003 supplemental alone, and 
then follow that baseline projection. We present information 
about that.
    One might imagine either slower discretionary spending 
growth--and we show the implications of slower growth in our 
alternatives as well--or one might imagine that discretionary 
spending will grow at the pace of recent experience. As 
guidance for that, we took the average rate of discretionary 
spending growth over the past 5 years, which is 7.7 percent--
that excludes the 2003 supplemental--and showed the 
implications of that through the budget window. That 7.7 
percent was representative of both defense discretionary and 
nondefense discretionary spending over that window, in which 
they grew at about that rate, at 7.8 and 7.6 percent, 
respectively.
    And within the nondefense discretionary spending, we 
experienced rapid growth in a wide number of budget areas--
health, education, aviation, and housing to name a few. So we 
felt that was representative of the kinds of things that we 
could quantify.
    What I show in the chart are the implications for the 
future path of fiscal balance at the extremes of different 
combinations of those possible policy futures. And I think they 
highlight the importance of the policy choices that face 
Congress. To the extent that one were to put together the upper 
extreme, we would arrive at balance sooner and reach larger 
surpluses. If one were to put together the bottom end of that 
band, those deficits would reach, at the end of the budget 
window, 7 percent of GDP, larger than the historic high as a 
fraction of GDP, and would involve a level of debt-to-GDP that 
is more than twice as high as that in the baseline projection.


    We also face some uncertainty that we were unable to 
quantify in our budget projections--in particular, the future 
path of the budget as it is affected by ongoing operations in 
Iraq and the global war on terrorism. We have since then done 
some analysis at the request of Senator Byrd, which I would be 
happy to discuss if the committee is interested. And there has 
also been recent interest in the particular costs of addressing 
energy problems in the aftermath of the blackout in August. 
Those kinds of uncertainties are not reflected in these numbers 
in any way.
    Looking forward, I think that using debt-to-GDP as a fiscal 
indicator is a useful thing for the committee. The numerator, 
the debt, summarizes in a cumulative fashion all differences 
between receipts and outlays as the policies get put into 
place. The denominator reflects the performance of the economy, 
which is also affected by policy choices. And I wanted to spend 
the closing few minutes of my remarks talking about our outlook 
for the path of the economy for both the near-term and the 
long-term.
    Our projections have two pieces. The near-term projections 
are CBO's attempt to forecast to the best of its ability the 
cyclical recovery of the economy from the recent recession and 
the dynamics of that recovery. Over the longer term, after 2 
years, we make no attempt to anticipate business cycle 
fluctuations of any type, but instead focus on the long-term 
growth of potential GDP, the full employment level toward which 
the economy typically returns, and get the long-run path of the 
economy in some rough sense.
    Our short-term forecast does show that the economy does 
pick up in the near-term, rising to close to 4 percent real GDP 
growth in 2004. In the path of that recovery, unemployment 
comes down somewhat slowly, lingering in the neighborhood of 6 
percent over the next 18 months. That reflects the net effect 
of two opposing forces. As the economy picks up, we do 
anticipate that job creation will rise and payroll employment 
numbers would improve.
    At the same time, however, our reading of the evidence is 
that during the recent cyclical downturn, a greater than 
typical number of individuals chose not to participate in the 
labor force. As the economy begins to grow more quickly and 
jobs begin to be created, those individuals will likely return 
to the labor force. That increase in the labor force 
participation will slow the decline in the unemployment rate in 
the absence of other influences.
    We expect that inflation will remain modest in the near-
term and that, as a result, we will not have any sustained 
impacts of inflation on our economy.
    Now, this particular forecast really hinges on, I think, 
our reading of the degree to which sustained economic growth 
is, in fact, about to begin; and the key to that really comes 
in two pieces. On the up side, the economy will only have 
sustained economic growth if we have a resumption of robust 
business investment, and our reading of the evidence is that we 
have begun to see a firming of business fixed investment. 
Financial conditions, which we talk about in the report, which 
include not just the stance of monetary policy as evidenced by 
the Federal funds rate, but also a broader index of financial 
conditions, have moved from having a net negative posture in 
the economy to being roughly neutral and, as a result, will no 
longer restrain business investment.
    Our reading of the degree to which businesses have 
accumulated a capital overhang and, as a result, had excess 
capital to work off seems to suggest that the process has 
largely run its course with some sectoral exceptions. And as a 
result, on the up side, it does appear that we are about to see 
a more sustained growth in business fixed investment that will 
provide economic growth.
    The other main ingredient in sustained economic growth 
would be the absence of a falloff in household spending, 
particularly in personal consumption expenditures. The risk of 
that falloff would stem from households' desire to rebuild lost 
wealth perhaps from the falloff in equity markets over the past 
several years. We look at the risk of the potential for a sharp 
rise in the saving rate that would be coincident with such a 
falloff, and our reading of the evidence is that particularly 
in the presence of a fiscal policy that will over the next 2 
years provide $120 billion to the household sector, and in the 
third quarter of this year alone $120 billion at an annual 
rate, the household sector could actually raise its savings 
rate and maintain its rate of consumption without risk of near-
term falloff in the overall rate of economic growth.
    Over the longer term, we expect the economy to average 
about a 3.3 percentage-point growth between 2005-08, and then 
at the end of the budget window, for the years 2009-13, to grow 
at an average rate of 2.7 percent.
    Now, as this committee is probably aware, the key to long-
run economic growth is productivity growth, and it is worth 
highlighting that the decline in our long-term economic growth 
rate is not the result of a forecast that we expect 
productivity growth to decline. On the contrary, our baseline 
includes a labor productivity growth of about 2.1 percent, 
which is quite close to the levels reached in the post-1995 
acceleration productivity. Instead, that slower rate of 
economic growth reflects a slowdown in the rate of growth in 
the labor force that is the first leading edge of the impacts 
of the retirement of the baby boom population.
    As those workers begin to retire, we will see a slowing in 
the growth in the labor force and the overall hours available 
to the economy. Our projections reflect that slowdown both on 
the economic side and also on the budgetary side where we, at 
the same time as we see this economy slowing down, in those 
last years we will see growth in the number of Medicare 
beneficiaries, for example, rise from something like 1.5 
percent a year to between 2 and 3 percent a year. So within 
this budget window on both the budgetary and economic side we 
will begin to see the initial impacts of the retirement of the 
baby boom population.
    The final point I would make about our baseline projections 
is that they reflect a good-faith effort for us to incorporate 
the impacts of current policies on both the path of the economy 
and on the receipts. In particular, the future path of fiscal 
policy can have a substantial effect on economic performance.
    On the spending side, the degree to which additional 
spending raises deficits and crowds out investments is 
incorporated into our projections of the future of both capital 
accumulation and, thus, productivity growth.
    On the receipts side, we are faced with a fairly tricky 
analytic problem, quite frankly, because the future path of the 
economy will depend on what individuals and businesses expect 
about the future of tax cuts. It may be the case that 
individuals expect tax cuts to be permanent; it may be the case 
that they expect them to sunset on schedule as provided by the 
law; and it may be the case that individuals and firms believe 
something in between.
    In constructing our baseline projections, we followed the 
spirit of baseline projections and assumed that individuals 
expect the tax cuts to sunset as provided in the law. This 
affects our underlying economic forecast as the increase in tax 
rates has incentive effects on labor supply that would diminish 
the supply of labor toward the end of the projection window and 
as the increase in deficits in the near-term and decrease in 
the long-term affects the rate of capital accumulation in the 
economy.
    At the level of receipts, we know that the provision of a 
sunset in the tax code provides incentives to shift activities 
across years. We have done our best to accommodate that in our 
baseline path for receipts, but would acknowledge that the 
particular structure of these sunsets raises even greater 
uncertainty about how the private sector will actually behave 
than might normally be the case.
    At any rate, I thank the committee for your patience in 
this quick overview of our report, and I look forward to 
answering your questions.
    [The prepared statement of Mr. Holtz-Eakin follows:]

  Prepared Statement of Douglas Holtz-Eakin, Director, Congressional 
                             Budget Office

    Mr. Chairman, Congressman Spratt, and Members of the Committee, I 
am pleased to be here today to discuss the Congressional Budget 
Office's (CBO's) update of its baseline budget projections for 2003-13. 
CBO projects that the Federal Government will incur deficits of $401 
billion in 2003 and $480 billion in 2004 under the assumption (mandated 
by statute) that current laws and policies remain the same (see table 1 
on page 5). Those deficits reflect the recent economic slowdown as well 
as legislation enacted over the past few years that has reduced 
revenues and rapidly increased spending for defense and many other 
programs. Although such deficits for this year and next year would be 
smaller than those of the mid-1980s relative to the size of the 
economy, they would reach record levels in nominal dollar terms.
    The economy now seems poised for a more sustained recovery. CBO 
anticipates that gross domestic product (GDP) will rise by nearly 4 
percent in calendar year 2004 after growing by less than 2 percent in 
the first half of this year. Signs of faster growth in consumer and 
business spending, rapid growth in Federal purchases, tax cuts for 
businesses, and a slightly more accommodative monetary policy have 
improved the economic outlook for the rest of 2003 and for 2004.
    Partly because of that economic growth, CBO's baseline projections 
show deficits that diminish and then give way to surpluses near the end 
of the 2004-13 period--under the assumption that no policy changes 
occur. In particular, the baseline assumes that the major tax 
provisions of the Economic Growth and Tax Relief Reconciliation Act of 
2001 (EGTRRA) will expire as scheduled in 2010. It also assumes (as 
required by the Balanced Budget and Emergency Deficit Control Act of 
1985) that budget authority for discretionary programs will grow at the 
rate of inflation--which is projected to average 2.7 percent over the 
next 10 years. Furthermore, the baseline does not include possible 
policy changes such as the introduction of a prescription drug benefit 
for Medicare beneficiaries. Various combinations of possible actions 
could easily lead to a prolonged period of budget deficits, although 
other scenarios could be more favorable. In addition, economic and 
other factors that deviate from CBO's assumptions could affect the 
budget considerably--in either a positive or a negative direction.
    Regardless of the precise course of the economy and future policy 
actions, significant long-term strains on spending will begin to 
intensify within the next decade as the baby boom generation begins 
reaching retirement age. Driving those pressures on the budget will be 
growth in the largest retirement and health programs--Social Security, 
Medicare, and Medicaid. Federal spending on those three programs will 
consume a growing proportion of budgetary resources, rising as a share 
of the economy from 8 percent in 2002 to a projected level of nearly 14 
percent in 2030.
                           the budget outlook
    CBO projects that if current laws and policies remain unchanged, 
the recent surge in Federal budget deficits will peak in 2004. In the 
ensuing years, under CBO's baseline, deficits decline steadily and give 
way to surpluses near the end of the 10-year projection period. 
Deficits are projected to total $1.4 trillion between 2004 and 2008; 
the following 5 years show a small net surplus of less than $50 
billion.
    Revenues have slid from a peak of 20.8 percent of GDP in 2000 to 
16.5 percent this year and are anticipated to drop again next year, to 
16.2 percent. From that point on, the trend reverses, as projected 
economic growth pushes revenues in the baseline up from 17.4 percent of 
GDP in 2005 to 18.7 percent in 2010. Under current laws and policies, 
revenues are projected to climb more rapidly thereafter because of the 
expiration of EGTRRA, reaching 20.5 percent of GDP in 2013.
    Whereas revenues are expected to diminish in 2003, CBO anticipates 
that total outlays will rise--from 19.5 percent of GDP in 2002 to 20.2 
percent this year. Under the assumptions of CBO's baseline, outlays are 
projected to peak at 20.5 percent of GDP in 2004 and then to begin a 
gradual decline as a share of the economy. By 2013, outlays are 
projected to account for 19.3 percent of GDP. That decline is mostly 
attributable to the baseline's treatment of discretionary spending, 
which is assumed to grow at the rate of inflation over the projection 
period (or at about half the rate of growth projected for the economy).
    Since CBO last issued baseline projections in March, the budget 
outlook has worsened substantially. Half a year ago, CBO estimated that 
the deficit for 2003 would total $246 billion, the deficit for 2004 
would decline slightly to $200 billion, and the cumulative total for 
the 2004-13 period would be a surplus of $891 billion. Now, CBO's 
estimate for this year's deficit has risen by $155 billion and for next 
year's by $280 billion. For the 10-year period from 2004 through 2013, 
projected deficits have increased and projected surpluses have 
decreased by a total of nearly $2.3 trillion (see table 2 on page 6).
    Compared with the projections in the March baseline, revenues have 
declined by $122 billion for 2003 and by $878 billion for the 2004-13 
period. Changes resulting from legislation, mostly the Jobs and Growth 
Tax Relief Reconciliation Act of 2003 (JGTRRA), account for the 
majority of the decline through 2005. After that, technical estimating 
changes explain most of the drop in projected revenues relative to 
those in the March baseline.
    Outlays are $33 billion higher for 2003 than previously projected 
and a total of $1.4 trillion higher over the 10-year period, largely 
because of legislation enacted since March. Extending supplemental 
appropriations enacted in April and August over the 2004-13 period, as 
required for CBO's baseline projections, accounts for $873 billion of 
that total, and additional debt-service costs resulting from both tax 
and spending legislation account for most of the rest.
                          the economic outlook
    CBO's forecast for the next year and a half anticipates that the 
growth in overall demand for goods, services, and structures will pick 
up. The growth of consumer spending will remain modest because 
consumers are likely to save much of the money that they receive from 
the accelerated tax cuts under JGTRRA to rebuild their wealth. 
Businesses are likely to begin to restock, rather than draw down, their 
inventories and to increase their investments in structures and 
equipment. As a result, real (inflation-adjusted) GDP is expected to 
grow by 3.8 percent in calendar year 2004, up from 2.2 percent in 2003 
(see table 3 on page 7). CBO's forecast assumes that the rapid rise in 
the Federal Government's spending will contribute to growth for the 
next few quarters, but thereafter, under the assumptions in CBO's 
baseline, such growth will slow.
    CBO does not anticipate a quick reduction in the unemployment rate 
from its current level. Typically, the unemployment rate falls when the 
growth of real GDP exceeds the growth of potential GDP (the highest 
level of production that can persist for a substantial period without 
raising inflation). But even though the GDP growth that CBO is 
forecasting exceeds its estimate of potential GDP, CBO expects that the 
unemployment rate will average 6.2 percent for calendar years 2003 and 
2004. In part, the sustained high rate of unemployment reflects caution 
on the part of employers, who--if they follow recent patterns--are not 
likely to resume hiring immediately as demand begins to grow. In part, 
it also reflects the likelihood that people who have been discouraged 
in their job searches by the economic weakness of the past few years 
are now likely to resume them--and be tallied among the unemployed.
    The near-term outlook is subject to a number of risks. Foreign 
economic growth and foreign demand for U.S. goods may deviate from the 
assumptions in CBO's forecast. The residual effects of certain economic 
developments in recent years--the large reduction in households' equity 
wealth, the fall in the personal saving rate, businesses' productive 
capacity that remains under-used, and the increased dependence on 
foreign financing--may also continue to dampen growth more than CBO 
assumes. However, favorable economic fundamentals--such as low 
inflation and rapid growth of productivity--may set the stage for 
another long period of robust growth.
    Between 2005 and 2008, the growth of real GDP is projected to 
average 3.3 percent, and between 2009 and 2013, 2.7 percent. In CBO's 
projections, the growth of real GDP slows as the gap closes between GDP 
and its potential; once that gap has been eliminated, real GDP grows at 
the same rate as potential GDP.
    CBO expects that inflation, as measured by the consumer price index 
for all urban consumers, will average 2.5 percent from 2005-13, while 
the rate of unemployment will average 5.3 percent. The projection for 
the rate on 3-month Treasury bills averages 4.6 percent during the 
2005-13 period and that for 10-year Treasury notes, 5.8 percent. All of 
those projections are virtually identical to the ones published by CBO 
last January.


                                                                  TABLE 1.--PROJECTED DEFICITS AND SURPLUSES IN CBO'S BASELINE
                                                                                    [In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Actual                                                                                                       Total,     Total,
                                                                  2002     2003     2004     2005     2006     2007     2008     2009     2010     2011     2012     2013   2004-2008  2004-2013
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
On-Budget Deficit (-).........................................     -317     -562     -644     -520     -425     -421     -434     -426     -417      298     -143     -105     -2,444     -3,833
Off-Budget Surplus\1\.........................................     -160     -162     -164     -179     -199     -219     -237     -255     -273     -289     -304     -317       -999     -2,436
Total Deficit (-) or Surplus..................................     -158     -401     -480     -341     -225     -203     -197     -170     -145       -9     -161     -211     -1,445    -1,397
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
\1\ Off-budget surpluses comprise surpluses in the Social Security trustfunds as well as the net cash flow of the Postal Service.



                               TABLE 2.--CHANGES IN CBO'S BASELINE PROJECTIONS OF THE DEFICIT OR SURPLUS SINCE MARCH 2003
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                      Total,     Total,
                                   2003     2004     2005     2006     2007     2008     2009     2010     2011     2012     2013   2004-2008  2004-2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Deficit (-) or Surplus as     -246     -200     -123      -57       -9       27       61       96      231      405      459       -362        891
 Projectedin March 2003........
Changes
    Legislative
        Revenues...............      -53     -135      -77      -20      -13      -17      -11       -4        4        2        2       -263       -270
        Outlays................       46       92      101      105      117      129      140      150      162      172      184        544      1,352
                                ------------------------------------------------------------------------------------------------------------------------
          Subtotal.............      -99     -227     -178     -126     -130     -146     -151     -155     -158     -169     -183       -808     -1,622
    Economic
        Revenues...............      -16      -13      -12      -12      -15      -17      -19      -23      -20      -12       -8        -70       -151
        Outlays *..............      -12      -31      -34      -25      -16      -16      -17      -20      -24      -28     -118       -223
                                ------------------------------------------------------------------------------------------------------------------------
          Subtotal.............      -16       -1       18       21       10        *       -3       -6        *       11       21         48          7
    Technical
        Revenues...............      -53      -51      -51      -51      -55      -50      -45      -41      -39      -40      -34       -258       -457
        Outlays................      -13        1        6       12       19       27       33       39       44       47       51         66        280
                                ------------------------------------------------------------------------------------------------------------------------
          Subtotal.............      -40      -51      -58      -64      -74      -77      -78      -80      -82      -87      -86       -324       -737
Total Impact on the Deficit or      -155     -280     -218     -168     -194     -223     -232     -240     -240     -245     -248     -1,083     -2,287
 Surplus.......................
Total Deficit (-) or Surplus as     -401     -480     -341     -225     -203     -197     -170     -145       -9      161      211     -1,445     -1,397
 Projected in August 2003......
Memorandum:
    Legislative Changes to
     Discretionary Outlays.....
        Defense................       27       54       62       65       66       68       70       72       74       75       77        315        683
        Nondefense.............        6       14       17       18       19       19       20       20       21       21       22         87         19
                                ------------------------------------------------------------------------------------------------------------------------
          Total................       33       68       79       83       85       87       90       92       95       96       99        402       873
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
 
Note: * = between -$500 million and $500 million.



 TABLE 3.--CBO'S CURRENT AND PREVIOUS ECONOMIC PROJECTIONS FOR CALENDAR
                             YEARS 2003-2013
------------------------------------------------------------------------
                                     Forecast         Projected Annual
                               --------------------        Average
                                                   ---------------------
                                  2003      2004    2005-2008  2009-2013
------------------------------------------------------------------------
Nominal GDP (Billions of
 dollars)
    August....................    10,836    11,406  \1\ 14,09  \2\ 17,94
                                                            8          3
    January...................    10,880    11,465  \1\ 14,15  \2\ 18,06
                                                            4          6
Nominal GDP (Percentage
 change)
    August....................       3.7       5.3        5.4        4.9
    January...................       4.2       5.4        5.4        5.0
Real GDP (Percentage change)
    August....................       2.2       3.8        3.3        2.7
    January...................       2.5       3.6        3.2        2.7
GDP Price Index (Percentage
 change)
    August....................       1.5       1.4        2.1        2.2
    January...................       1.6       1.7        2.1        2.2
Consumer Price Index\3\
 (Percentage change)
    August....................       2.3       1.9        2.5        2.5
    January...................       2.3       2.2        2.5        2.5
Unemployment Rate (Percent)
    August....................       6.2       6.2        5.4        5.2
    January...................       5.9       5.7        5.3        5.2
Three-Month Treasury Bill Rate
 (Percent)
    August....................       1.0       1.7        4.2        4.9
    January...................       1.4       3.5        4.9        4.9
Ten-Year Treasury Note Rate
 (Percent)
    August....................       4.0       4.6        5.7        5.8
    January...................       4.4       5.2        5.8       5.8
------------------------------------------------------------------------
Sources: Congressional Budget Office; Department of Commerce, Bureau of
  Economic Analysis; Department of Labor, Bureau of Labor Statistics;
  Federal Reserve Board.
 
Note: Percentage changes are year over year.
 
\1\ Level in 2008.
\2\ Level in 2013.
\3\ The consumer price index for all urban consumers.

    Chairman Nussle. Thank you.
    Since there has been some comparison to 2001 and the 
projections of CBO in May of 2001, let me just for the record 
make sure that we have this clear.
    In May of 2001, was funding for September 11 included in 
those projections?
    Mr. Holtz-Eakin. No.
    Chairman Nussle. The war with Iraq?
    Mr. Holtz-Eakin. No.
    Chairman Nussle. The war with Afghanistan?
    Mr. Holtz-Eakin. No.
    Chairman Nussle. Global war on terrorism?
    Mr. Holtz-Eakin. No.
    Chairman Nussle. The emergency spending for the Pentagon or 
New York City and victims?
    Mr. Holtz-Eakin. No.
    Chairman Nussle. How about the economic stimulus package 
that was voted on in a bipartisan way?
    Mr. Holtz-Eakin. No.
    Chairman Nussle. If we could put up chart No. 1, I would 
like to move to that.
    These are based on the report that you have showing that 
these are, by and large, spending-driven deficits. Each one of 
those instances that I am talking about required spending, 
required spending above and beyond the call of duty, above and 
beyond what was budgeted for as a result of profound emergency 
that this country is facing, has faced, and continues to face 
and will continue to face.
    And so I understand that there will be a continuation of 
comparing this to this huge change prior to 2001, but I am 
going to continue to remind colleagues and everyone that I can 
that obviously quite a bit has changed. If people want to 
continue to think in September 10 thinking, then they are 
certainly allowed to do that, but we need to think in September 
12 and beyond thinking, and it is going to require some new 
priorities.
    Spending-driven deficits not only have a macro impact, but 
on an individual basis--if you would show me chart No. 2. This 
is just amazing to me that spending, if you look at it on a per 
capita basis, what each taxpayer would be footing if in fact 
the spending continues at this rate, it is going to be 
astronomical. Spending at this rate is what is contributing to 
and causing the large deficits that we see, and spending has 
got to get under control.
    You made a comparison of the deficit to the economy. 
Certainly, in nominal terms, the deficit is as large as it has 
ever been in history. But compared in terms to the power of our 
economy, which you were talking about, the GDP, would you cover 
that one more time? Why is it better or why is it appropriate 
to talk of these deficits in terms of a comparison to the 
economy as opposed to comparison to previous total dollar 
deficits from years before?
    Mr. Holtz-Eakin. Well, I think the spirit is the same as 
the spirit when one applies for a mortgage or any other 
personal loan. The first question a lender will ask and the 
question capital markets will ask is, what is your income? What 
is your ability to repay this loan? And comparing the deficit, 
the borrowing relative to the income in the economy, the gross 
domestic product, is the appropriate comparison.
    Chairman Nussle. And in those terms, and I believe that was 
the chart you were showing--I don't know which chart that is, 
but it is the chart that is showing the comparison of CBO's 
March 2000 versus August 2003 baseline.
    Mr. Holtz-Eakin. Chart No. 2.
    Chairman Nussle. Chart No. 2, OK.
    That shows, I believe, the comparison as a share of GDP. 
And compared to the economy, how does this deficit stack up to 
previous deficits?
    Mr. Holtz-Eakin. Well, as you can see in the chart, the 
previous largest deficit is 6 percent of GDP in the early 
1980s. The fiscal year 2003 baseline deficit is 3.7 percent; 
the fiscal year 2004 baseline deficit is 4.3 percent of GDP, 
and it diminishes thereafter.
    Chairman Nussle. Now, I understand the next chart that you 
show. Showing the fact that there is uncertainty, 
demonstrates--if anything--that we should not be complacent as 
a result of this. But I do think that some perspective is in 
order.
    There seems to be some dispute as to how severely these 
deficits will impact the economy. Would you cover that? You 
covered it briefly, but would you cover that one more time as 
far as the impact, both currently and in the future how these 
deficits can and will impact the economy?
    Mr. Holtz-Eakin. Certainly.
    First, with respect to the particular lines on this chart, 
the CBO does not offer those as forecasts in any sense. We are 
trying to illustrate the range of possible outcomes under 
alternative policy choices, simply to highlight the fact that 
the ultimate path will depend heavily on policy choices.
    In terms of the impact on the economy, I think it is 
important to recognize that the ultimate impact of deficits is 
to diminish national savings. The mirror image of that is that 
it increases spending at any point in time. If the Nation 
decides to save less, it will spend more.
    At times when the economy is slack and the private sector 
is not spending, households and businesses, those actions can 
support private demand and minimize cyclical impacts. At times 
when the economy is at full employment, the diminishment of 
saving and spending places more pressure on the economy's 
capacity to produce. It can drive up interest rates and 
diminish capital accumulation, which slows the pace of economic 
growth going forward.
    In our current situation, I think, looking backward, given 
the cyclical status of the economy, there is no particular 
evidence that the deficits per se have had striking economic 
damage. However, looking forward, were we to run sustained 
sizable deficits, especially a magnitude of 7 percent GDP, then 
there would be harm to the rate of capital accumulation and the 
pace of future economic growth.
    Chairman Nussle. Then let me just close by--what I take 
away is that deficits do matter. They may not matter--they may 
not have a dramatic impact today, but they will if they are 
sustained. And I would agree with that, deficits to do matter. 
And you can control spending; that is the one thing that we can 
control, because there is a lot of uncertainty out there.
    The uncertainty in March of 2001, looking back, of course, 
is obvious. Looking forward may be just as obvious.
    So getting this under control by controlling spending and 
getting the economy to grow so that our income can grow, so 
that the GDP can grow, so that our comparison of these deficits 
in the future can continue to be as small or as slight as 
possible is the most important effort that we can put forward.
    As far as ticking time bombs, you know, I understand that 
there will be a complaint that there is a ticking time bomb for 
Medicare or for Social Security. But I can tell you that the 
time bomb is currently there if we do nothing. The bomb is 
already set to go off, No. 1. And No. 2, adding a trillion 
dollar drug package to it as what was offered on the floor by 
the minority party without it being paid for or offset even in 
their own budget, I think sets the bomb off even sooner.
    So I think we have to control spending, get the economy 
moving again. These deficits do matter, and sticking to the 
plan that we have in order to make sure that we get them under 
control, I think, is the best thing that we can do at this 
point.
    Mr. Spratt.
    Mr. Spratt. Thank you, Mr. Chairman.
    Let me show you once again chart No. 4, our chart No. 4, 
showing growth, budget projection already assuming growth. This 
one right here. There you go.
    Just a reminder that these are the rates of growth assumed 
by CBO and by OMB in their forecast for the next 10 years. They 
have got substantial growth, real growth factored into the 
forecast all the way, and the deficits don't go away even 
though the economy is growing for 10 straight years at 3 
percent real rate of growth.
    Now, let me show you in the battle of the charts, chart No. 
5 to contest your chart along the same lines. It is a layered 
chart just like yours. And I would ask Dr. Holtz-Eakin to 
comment upon it, but let me first explain it.
    A large part of the reason for the disappearance of the 
surplus is, in a sense, overestimation or misestimation. It is 
called economic and technical factors, but it means that the 
surplus, based upon projecting and forecasting conventions 
being used at the time, was overstated. That is the top layer. 
Back it out, and you have got a much-less surplus.
    The next layer is defense and homeland security. Homeland 
security is a rubric that didn't even appear in the budget 2 or 
3 years ago. Defense has been increased by more than we 
anticipated in 2001, and that adds substantially. The other is 
other spending.
    But the bottom layer is tax cuts. And the interesting thing 
about the bottom layer is, if you take it away, if you take the 
tax cuts away, the budget is back in balance in 2005.
    Dr. Holtz-Eakin, I know I am asking you to pass judgment on 
something you have just seen, but do you see any obvious flaws 
in this analysis?
    Mr. Holtz-Eakin. Indeed, we have attempted to do a similar 
kind of analysis. I won't pretend to be able to do chart math 
in my head; but we have done similar decompositions. I would be 
happy to work with you on it.
    Mr. Spratt. Could you share your chart with us or your 
background work with us?
    Mr. Holtz-Eakin. Yeah.
    Mr. Spratt. Have you got it available?
    Mr. Holtz-Eakin. I have it here.
    Mr. Spratt. How do your procedures break down amongst 
economic and technical adjustments?
    Mr. Holtz-Eakin. For the fiscal year 2004, economic and 
technical changes account for 41 percent of the change from 
2001; legislative changes account for 59 percent of the 
changes. Outlays are 24 percent of those, revenues are 31 
percent of those, legislative changes and net interest, I 
guess, would be the remainder.
    Mr. Spratt. Well, in 2004, is that the changes since March?
    Mr. Holtz-Eakin. Yes.
    Mr. Spratt. I was talking about----
    Mr. Holtz-Eakin. From January--sorry. From January 2001.
    Mr. Spratt [continuing]. Using the time frame '01 through 
'11?
    Mr. Holtz-Eakin. No. That is from January 2001.
    Mr. Spratt. OK.
    Mr. Holtz-Eakin. My apologies.
    Mr. Spratt. We might put a request in the record for you to 
at least check these numbers and maybe to replicate them using 
your own similar analysis.
    [The information referred to follows:]
    [CBO resolved this matter with the Member's office.]
    Mr. Spratt. But that brings up a point with respect to this 
year. We have seen the budget worsen by $156 billion since your 
last report in March. And if I read your report correctly, you 
say that two-thirds of that was within our control. Two-thirds 
of that was--more than two-thirds was legislative action.
    In the past, we have come to find that the economy has 
taken a greater toll, terrorism has taken its toll, war has 
taken its toll. But since March, the toll that has been taken 
has been taken by Congress itself, by legislative action, is 
that correct, two-thirds of it?
    Mr. Holtz-Eakin. Yes, that is correct.
    Mr. Spratt. And a large share of that was in the 2003 tax 
cut, or the previous--how much of that was due to the tax cut?
    Mr. Holtz-Eakin. For fiscal year 2004, $135 billion was in 
revenues on the legislative side, and $92 [billion] in outlays.
    Mr. Spratt. Of the $5.6 trillion that you forecast in 2001, 
do you know how much of that, for 2001-11, you would now 
estimate to be the applicable baseline surplus for 2001?
    Mr. Holtz-Eakin. Not off the top of my head, but we could 
get that.
    Mr. Spratt. Could you get us that for the record?
    Mr. Holtz-Eakin. Yes, sir.
    [The information referred to follows:]
    [CBO resolved this matter with the Member's office.]
    Mr. Spratt. Let me show you one other chart and ask you if 
this comports with your understanding, and that is chart No. 6, 
the bar chart showing increases in spending.
    What this chart shows is how much of the increment in 
spending over and above current services for defense and 
nondefense programs, where it went, where did the increment go 
after other programs were funded at current service levels.
    By our calculation, in each of 3 years 95 percent of it 
went to the Iraqi war, the response to terrorism, New York City 
relief, airline relief, things related to defense, war--and the 
war on terrorism in particular--and recovery from the 
catastrophe in New York.
    Does this square with your understanding of the increments 
in spending that we have been experiencing?
    Mr. Holtz-Eakin. Well, we can certainly check. I am not 
familiar with the percentages. I would be happy to do so.
    Mr. Spratt. Well, if you could check this, we would 
appreciate it. Because it shows how difficult it will be to 
rein in spending if what we are talking about is wartime 
spending, with 150 troops deployed who have to be supported, 
with the reconstruction cost about to come to us. CQ says that 
it could be $65 billion, per Bremer's request. It is going to 
be awfully hard to rein in that kind of spending and sustain 
the commitment we have made and the battle against terrorism.
    And one final point--two final points. Show me chart No. 16 
again. This is a little hard to see. No, it is not as hard as I 
thought to see. The top line is outlays, and interestingly 
enough, the outlays this year are still as a percentage of GDP 
lower than they were in the Reagan administration and lower 
than they were in the year 2000, when we had a surplus in the 
budget, a $236 billion surplus in the budget.
    But the interesting thing here is, this is an object lesson 
for how to rectify the problem. As you can see, in 1992, which 
was the year before Clinton came to office, the budget outlays 
started downward as a percent of GDP until they got to just 
over 18 percent of GDP. Every year during the Clinton 
administration spending as a percent of GDP came down.
    By the same token, we passed some tax increases in 1993 as 
part of Clinton budget, and they tended to tilt the code 
progressively toward upper bracket taxpayers who made out the 
best during the halcyon days of the 1990s. As a consequence, 
revenues as a percentage of GDP went up, and the difference 
between outlays in revenues there, which is about 3 or 4 
percent of GDP, is a surplus that emerged in those years.
    Now what we have got are outlays going up and revenues 
coming down, just the opposite of what we had before. And that 
is the definition of a deficit and a long-term deficit at that.
    We would like for you, if you would, to take these three 
charts--we will give you copies of them--and let us know if 
there is anything incorrect, wrong, analysis or facts, because 
this is the way we see the problem.
    [The information referred to follows:]
    [CBO resolved this matter with the Member's office.]
    Mr. Spratt. My one final point is, as I look at your 
projection, baseline projection, your current services 
projection, if you don't factor in the things that you have got 
on charts 1-6--Medicare, repeal the tax cuts, in particular--
you get to almost no deficit by the year 2011, close to the end 
of our time frame. The biggest factor there is your assumption 
that the tax cuts won't be repealed, they will simply repeal 
themselves, they will be allowed to expire as scheduled, as you 
put it.
    So basically you are telling us there, we should simply 
leave the code alone and let these tax cuts expire as they were 
proposed to expire when they were originally passed; we can see 
daylight by 2011.
    Mr. Spratt. We will be out of the deficit by 2011.
    Mr. Holtz-Eakin. And maintain the other projections, 
assumptions.
    Mr. Spratt. The other projections, too. Thank you very 
much.
    Chairman Nussle. Mr. Brown.
    Mr. Brown. Mr. Chairman, thank you for coming and being 
with us today, Director Holtz-Eakin.
    If I could pick that same chart back up that Mr. Spratt had 
earlier, would that be possible? The last chart that showed the 
decline I guess of--yeah, this one. That is correct. Right.
    It looked to me that the decline in the outlays was 
starting actually in 1982, and I just wanted to bring that to 
the attention of the group. I also would like to make a point--
--
    Chairman Nussle. Would the gentleman yield?
    Mr. Brown. Yes.
    Chairman Nussle. Just one other observation. It is kind of 
interesting that we are now calling the 1995 close-down-the-
government budget a Democrat budget. I think that is kind of 
interesting that we finally come full circle now and that is 
being claimed as a Democrat budget. That is kind of 
interesting.
    Mr. Spratt. Let me point out in fiscal 1983 outlays as a 
percentage of GDP you hit an all-time high of 23.5 percent for 
peacetime. It may look like 1982 on that chart but, in 1983, 
the midst of the Reagan years, 23.5 percent. When Bill Clinton 
left office, it was 18.5 percent, 5 full percentage points of 
GDP less than what it was in the peak of the Reagan years.
    Chairman Nussle. Would the gentleman continue to yield?
    I am just wondering, too, I don't remember one Reagan 
budget--boy, maybe my memory is slipping, but I don't remember 
one Reagan budget that came in that was not claimed to be dead 
on arrival. In fact, I don't remember a Bush budget that was 
not claimed to be dead on arrival. So it is kind of interesting 
how now all of a sudden these Presidents are in charge of 
spending when the Constitution under article 1 says that 
Congress is in charge of spending. Just kind of an interesting 
observation. So you may want to take that into consideration as 
you are analyzing these very interesting charts.
    Thank you for yielding.
    Mr. Brown. Mr. Chairman, one further question. If we had 
not passed the tax cuts, what impact would this have on 
receipts? I mean, you would have to take into account the 
increase in the productivity of the American people by giving 
them more money to spend. If we had not passed the tax cuts, 
would we be better off or worse off on that chart?
    Mr. Holtz-Eakin. The 2001 tax cuts I think are widely 
recognized as having provided some support for the household 
sector for personal consumption housing expenditures and the 
more recent ones for both consumption expenditure and 
investment.
    The precise numerical impact is, unfortunately, impossible 
to tell, because in the absence of the tax cuts it is quite 
likely that monetary policy would have been very different and 
the future path of the economy is just simply not knowable. So 
we know that in broad terms the economic impact was to support 
those sectors of the economy at a time when they are 
economically weak, but I don't know how much that would have 
specifically affected the overall performance of the economy 
and as a result the impact on receipts.
    Mr. Brown. But you would almost have to agree that it would 
have to have some positive benefit?
    Mr. Holtz-Eakin. It had some beneficial impacts in 
supporting the private demand in the economy.
    Mr. Brown. OK. Thank you.
    Chairman Nussle. We have two votes on the floor, so we will 
adjourn and come back after the second vote.
    [Recess.]
    Mr. Shays [presiding]. Sorry for the delay, Mr. Director; 
and we will commence our questions with Mr. Moran from 
Virginia.
    Mr. Moran. Thank you, Mr. Chairman.
    I wanted to refer to your very, very well done budget and 
economic outlook. It is nice to have you on board, and I think 
that the misgivings that some folks had have been put to rest, 
because it is a very good one and I think an objective report 
that you have provided us with.
    On page 12 you lay out the budgetary effects of policy 
alternatives that you were not required to include in your 
baseline but are fairly obvious in terms of their budgetary 
impact and their likelihood of being enacted.
    First place, the chairman and the ranking member and I 
suspect the leadership of the majority are absolutely 
determined to extend the expiring--the sunsetted tax 
provisions, and when that happens--not if, but when that 
happens--it is going to add another $1.6 trillion to the total 
deficit.
    We also know that the leadership of the House and Senate 
are going to fix the alternative minimum tax. So that is 
another $400 billion, as you say in your table on page 12.
    We also know that both parties have agreed to a Medicare 
prescription drug plan. The lowest number is $400 billion. It 
could be twice that, but we know that it is going to be at 
least $400 billion over the next 10 years.
    Then there is an issue as to discretionary appropriations, 
and given the fact that the Congress in the White House's same 
party under the leadership of the majority has increased 
spending by over 7 percent a year--and, of course, that is 
spending that has been requested by the White House. And it 
looks now--even today we read the papers. We are looking at 
another $60 billion for the war in Iraq, and that is probably 
just a starting point. If we go by current historical 
experience, in other words, the last few years, we talked about 
adding another $2.8 trillion to the deficit over the next 
decade. Let's be conservative and just add half of that, $1.4 
trillion.
    So we add all of that up, plus the deficit that you told us 
about everyone agrees upon is a reasonable but conservative 
estimate. So we are up to about $6.6 trillion in terms of the 
accumulated deficits over the next--well, excuse me, $5.2 
trillion. I am going to use the lowest number, $5.2 trillion, 
lowest number for spending. That is scary.
    One of the things that has come out that has yet to emerge 
in these hearings is the reaction on the part of the 
international community, the fact that we are borrowing all of 
this money and we are putting the rest of the world in a 
difficult situation. Because we are going to be taking about 
half a trillion dollars a year out of the money that would 
otherwise be available for capital investment.
    In fact, there was an article in the Wall Street Journal 
that quoted people in the International Monetary Fund, the 
leadership in the International Monetary Fund. The head, of 
course, of the fund is a Republican, Ken Rogoff, but he is very 
critical of U.S. economic policy. He delivered a sharp rebuke 
to the Bush administration's fiscal policy saying that the tax 
cuts were poorly timed and probably unnecessary. If enacted in 
full, they would significantly worsen the fiscal position not 
just of the United States but throughout the world. It is going 
to have an adverse effect upon developing countries, and it is 
going to create a gaping trade deficit. So he sees our budget 
spending from black into red, open-ended security costs and 
exchange rate, that is going to worsen the fiscal situation for 
other countries.
    You know, it is not the Democrats that are registering some 
of the most serious concerns. It is the other people that are 
watching our fiscal situation.
    Mr. Shays. The gentleman's time has expired.
    Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Dr. Holtz-Eakin, except for the fact that everybody in this 
room I think agrees that we have an untenable deficit and it 
appears to be getting worse, I am not sure there is a whole lot 
else we agree on.
    My concern isn't just with the deficit, though. My concern 
is with the amount of money that we are spending. If we could 
go to chart No. 2 again, please. If I am reading this 
correctly, in constant 1996 dollars, we have had a spending 
explosion per capita since 1996, where we have gone from 4,911 
to 6,111 on a per capita basis.
    Now we hear a lot about mortgaging our children's future, 
but whether we pay for it with cash or whether we pay for it 
with a credit card, ultimately somebody is going to have to pay 
for all this spending.
    So my first question is--and please forgive me; I am new 
around here as a freshman--but has Federal spending ever 
dropped from one year to the next in recent memory?
    Mr. Holtz-Eakin. In terms of nominal dollars, I would have 
to check. I don't know the answer. My suspicion is it has not 
dropped recently in total dollars. As a fraction of GDP, as you 
know, spending has both risen and fallen as a fraction of GDP.
    Mr. Hensarling. So GDP can increase and decrease, family 
income may increase and decrease, but in nominal dollars it 
appears that the Federal budget continues to grow, and at least 
if this chart is accurate, and I assume it is, it has been 
growing at an alarming rate since 1996.
    Earlier you mentioned about the damaging impact on the 
economy deficit spending can have, but how about total spending 
by the Federal Government? I mean, if I am reading these 
reports correct, discretionary spending has grown on an average 
of 7.7 percent for 5 years, and I think that you are assuming, 
if I am reading your report correctly, mandatory will grow by 
5.2 percent over the course of your budget. So assuming for the 
moment that was all paid for by cash and it comes out of the 
pockets of the American family, what are the impacts on family 
income in GDP growth if these spending trends continue? Do you 
have an opinion on that matter?
    Mr. Holtz-Eakin. Well, I think that those questions all 
fall in a common theme, and that theme is that should the 
Federal Government choose to have a program and to spend some 
money those resources will have to come from the private sector 
in some way. So the spending measures, the burden of the 
decision to go ahead and provide a program, which is presumably 
done on the basis of the merits, but the cost is what is given 
up in the private sector, it will, as you point out, be 
financed one way or the other.
    It will be financed either by taxes or by borrowing; and 
the real issue becomes then, for the particular taxes that one 
might choose to finance that, what would be given up in the 
private sector? Will it be consumption spending at that point 
in time or will it be some saving which will provide for future 
accumulation of capital and labor skills?
    And when one borrows, again, what is given up in the 
private sector? Are you giving up current consumption, higher 
interest rates? Do people forego buying something on their 
credit cards or does it crowd out capital investment for the 
future? In comparing the two ways of financing a given level of 
spending, that is really what you are trying to decide, which 
one will have the biggest impact on both the present and the 
future.
    Mr. Hensarling. We are asking you to engage in a number of 
10-year projections, which I am somewhat dubious about our 
ability to look into a crystal ball and particularly predict 
economic growth. It does seem like we have a fairly good 
indication of our ability to predict growth of government, but 
some on the other side of the aisle consistently point to 
economic growth tax relief as being the significant 
contributing factor to deficits. But since we just passed a 10-
year budget, if I am doing the numbers right, we passed $350 
billion of economic growth tax relief versus a $28.3 trillion 
worth of spending. If I am doing the math right, the economic 
growth tax relief, assuming it has zero impact on the economy, 
is 1.2 percent of $28.3 trillion. Wouldn't that suggest that if 
you wanted to do something about the deficit maybe you would 
look at the spending side, which appears to be 99 percent of 
the equation?
    Mr. Holtz-Eakin. Well, I am not sure where you are doing 
your math, but I will stipulate that it is correct. We can talk 
about it later.
    Going forward, the issue is really one can choose to 
address the deficit per se on either the receipts or the outlay 
side. That is a decision to either change the scope of 
government activities on the spending side or change the way 
you finance existing government spending on the revenue side, 
and you have both of those options going forward.
    Mr. Shays. Thank the gentleman.
    Let me just, for the benefit of the members--the list I 
have, there are no other Republican speakers except for me at 
the moment, and so what I have is I have Mr. Edwards next 
followed by Mr. Scott, followed by Mrs. Capps, followed by Mr. 
Emanuel, followed by Mr. Lewis and then Ms. Baldwin. So we will 
go with you, Mr. Edwards.
    Mr. Edwards. Thank you.
    Mr. Chairman, the Republican leadership in the House cannot 
have it both ways. It cannot pass budget resolutions year after 
year on a totally partisan basis and then deny responsibility 
for the consequences of those budgets. It seems to me that if 
you want to preach personal responsibility, you must first 
practice it. I believe the startling deficit numbers should be 
a wake-up call for the free lunch bunch, those who have 
preached the failed philosophy that we can have trillion dollar 
tax cuts, massive increases in defense spending and still 
balance the budget.
    This jobs growth and balanced budget dream and promise has 
turned into a looming economic nightmare. As a result of the 
free lunch fiscal policies, we now have the largest deficit in 
American history--let me repeat--the largest deficit in 
American history combined with the largest loss of jobs since 
Herbert Hoover.
    What do massive deficits mean to average Americans? Well, 
as a result of these deficits, businesses and family farms will 
be taxed because of higher interest rates on their loans to run 
their businesses, thus slowing economic growth. In the short 
run, it will mean more--it will be more expensive for working 
Americans to build a business, to buy a home, to buy a car or 
to pay off credit card debts.
    In the next decade these deficits will mean Social Security 
and Medicare benefits will be put at risk as millions of baby 
boomers start to retire, and in the long run our children and 
grandchildren will face massive tax increases to pay for the 
four to five hundred billion dollar annual interest charges on 
our huge national debt.
    Let's look at the consequences already this year. As a 
member of the House Appropriations Committee, I have witnessed 
this. The bill has come due this year for an irresponsible 
fiscal policy implemented by the Republican majority in 
Congress.
    First, military construction funds to improve homes, 
schools and Medicare clinics for the families of our military 
servicemen and women serving in Iraq are being cut this year by 
$1.5 billion, or 14 percent.
    Veterans who were promised by Republicans in the House in 
the budget resolution just a few months ago they get a $1.8 
billion increase over the President's request in VA health care 
spending woke up in August and saw that the leadership in the 
House had taken away every dime of that promised $1.8 billion 
increase for veterans' health care. As a result, veterans' 
health care, according to the Veterans' Administration, will be 
$1.9 billion less than that necessary to meet 2004 anticipated 
health care needs of veterans already enrolled in the VA health 
care system.
    So, as a result of all this deficit policy, we are cutting 
health care benefits to veterans during a time of war. What a 
terrible message to send to the 20,000 soldiers from my 
district at Fort Hood that are now in Iraq.
    The administration even continues to support cutting 
military impact aid education for military children's education 
programs by $173 million. So cut the kids's education funding 
while Mom and Dad get on the airplane to fly to fight in Iraq.
    Unfortunately and unfairly, Mr. Chairman, the people hurt 
by the Republican's failed economic policies are those who can 
least afford it, working parents who have lost their jobs, 
small businesses and families who have to borrow money to build 
a business or buy a farm. It hurts seniors who depend on 
Medicare and Social Security, and it hurts servicemen and women 
and veterans who have already made tremendous sacrifices on 
behalf of our Nation.
    Mr. Chairman, this is an awfully high price for millions of 
Americans to have to pay for failed economic policies that 
former President George Bush once called ``voodoo economics.'' 
To add insult to injury, Americans learned in the 1980s that 
the promise of massive tax cuts, huge defense increases and 
balanced budgets is a false promise that leads to huge national 
deficits. At least David Stockman, the architect of the Reagan 
tax cut of 1981, had the integrity to admit two decades ago 
that these numbers were a false promise, but to repeat those 
false promises 20 years later at the expense of seniors, 
veterans and children is inexcusable.
    The Republican party once took pride of being the party of 
fiscal responsibility. Now today it must take responsibility 
for massive deficits, millions of lost jobs and cuts to 
programs important to veterans and seniors and children.
    Despite all of that, Mr. Chairman, I will work on a 
bipartisan basis with my Republican colleagues to address these 
challenges, but I will not vote to cut veterans' benefits and 
children's programs and education programs to pay for a repeal 
of a dividend tax cut or a regressive tax system that leads to 
lost jobs and a massive deficit.
    Mr. Shays. I thank the gentleman.
    Mr. Scott, you are next, and my apologies. Mr. Kind, I made 
him my idol, Mr. Lewis, by mistake; and he----
    Mr. Kind. I am still your idol, Mr. Chairman.
    Mr. Shays. But you are not Mr. Lewis.
    Mr. Scott.
    Mr. Scott. Thank you.
    Can we get the Social Security chart up? I don't have that. 
Well, could you get chart No. 11? OK, this is the Social 
Security chart.
    Mr. Holtz-Eakin, does that accurately depict the Social 
Security cash flow for the next 30 or 40 years?
    Mr. Holtz-Eakin. It looks to be right.
    Mr. Scott. It shows that right now we are enjoying between 
Social Security and Medicare about a $150 billion surplus?
    Mr. Holtz-Eakin. Well, we can certainly check in the 
numbers, but----
    Mr. Scott. Looks about right.
    Out of that, the $400 billion deficit that we expect this 
year, is that before or after we raid the Social Security and 
Medicare trust funds for about $150 billion?
    Mr. Holtz-Eakin. The $400 billion deficit consists of $162 
billion in an off-budget surplus and a $562 billion on-budget 
deficit.
    Mr. Scott. Which means we raided the Medicare and Social 
Security trust funds for $162 billion?
    Mr. Holtz-Eakin. Yes, $162 [billion].
    Mr. Scott. So that if we don't count that, because we are 
going to have to--we are going to need that later on, the on-
budget deficit is $562 billion this year?
    Mr. Holtz-Eakin. The on-budget estimate is $562 billion in 
fiscal year 2003.
    Mr. Scott. And next year?
    Mr. Holtz-Eakin. It would be $644 [billion].
    Mr. Scott. A $644 billion deficit.
    Now, on----
    Mr. Emanuel. Would the gentleman yield for one quick 
question?
    Mr. Scott. I will yield.
    Mr. Emanuel. Mr. Director, if that is correct, the $640 
[billion]--what did you say? $644 billion? What percentage of 
that is the GDP?
    Mr. Holtz-Eakin. I don't----
    Mr. Emanuel. Would 5.8 be close?
    Mr. Holtz-Eakin. It is somewhere in that vicinity.
    Mr. Emanuel. So it would be equal to the largest deficit 
ever run as a percentage of GDP, which has always been used by 
the chairman as a correction to us that we are not running the 
largest deficit.
    Mr. Scott, I don't mean to take your time because I know 
you have got 5 minutes, but for the record in fact we are 
running equal to the largest deficit as we did in 1983, because 
in 1983 we didn't have a Social Security surplus as we do now, 
and if you didn't use Social Security surplus to do your math, 
we would be running at a deficit equal at the largest point in 
history to GDP--as a percentage of GDP.
    Mr. Holtz-Eakin. With all due respect, I don't think the 
numbers are comparable, because it is the unified surplus that 
represents the net drain on credit markets and has the economic 
impact.
    Mr. Scott. Reclaiming my time, you are talking about a 
deficit next year of $644 billion if you----
    Mr. Holtz-Eakin. That is our projection.
    Mr. Scott. OK. On page 4, table 1-2 of your report, how 
much do you project coming in in revenues from the individual 
income tax?
    Mr. Holtz-Eakin. In fiscal year 2004, $765 billion.
    Mr. Scott. And you are running a on-budget deficit of $644 
[billion]?
    Mr. Holtz-Eakin. Your projection is $644 [billion].
    Mr. Scott. Now, does that include the $60 billion that was 
just requested for the Iraq supplemental?
    Mr. Holtz-Eakin. It would include the inflated value of the 
fiscal year 2003 supplemental which had $60 billion for 
activities in Iraq and Defense Department.
    Mr. Scott. We just want the numbers to be in perspective, 
because we are getting $765 billion from the individual income 
tax, and we are $644 billion in deficit, just to give an order 
of magnitude.
    Now the chairman put up a chart that showed that we could 
actually get back in--if we didn't mess up the budget any worse 
than we are doing now, that we could be in surplus in about 8 
to 10 years. Did that chart assume that we are going to let all 
of the tax cuts expire as they are scheduled to expire?
    Mr. Holtz-Eakin. The baseline projection that I presented, 
the sunset----
    Mr. Scott. Can we get chart No. 9 and then chart No. 10?
    Mr. Shays. Let me just say to the gentleman, his time is 
running short here, but let's go through these, and then we----
    Mr. Scott. OK. Chart No. 9 and chart No. 10, if you will 
just put them up real quickly. That is what--if we don't make 
it any worse, we actually go up into surplus, although you are 
still raiding Social Security, but if we adopt in chart No. 10 
the Republican proposals, it is getting worse, you are at 4-, 
5-, $600 billion a year. Does that suggest that it would be 
dangerous to adopt the Republican proposals?
    Mr. Holtz-Eakin. I am not exactly sure that is the--to make 
the tax cuts permanent, AMT, Medicare prescription drug, are 
those the proposals?
    Mr. Scott. Right.
    Mr. Holtz-Eakin. And discretionary spending?
    Mr. Scott. Right.
    Mr. Holtz-Eakin. I think the message--if it is the blue 
line--we were looking at a unified deficit of roughly 7 percent 
of GDP, the lower boundary of the charts I presented. I can 
compare numbers later. To run sustained deficits of that size 
will have consequences for the accumulation of capital----
    Mr. Scott. When we run out of the Social Security surplus, 
will we be able to pay Social Security if we adopt those 
policies?
    Mr. Holtz-Eakin. The projections that we present are 
unified and thus reflect all cash flows into the Treasury for 
both mandatory and--from all receipts and then outflows for 
both mandatory and discretionary spending.
    Mr. Shays. The gentleman's time has expired. He has been 
going on about 6 plus minutes, and I feel that Mr. Moran may 
want a second on this.
    Are you gentlemen coming back? Because I will be coming 
back? We have a vote, unfortunately. So we will go to our vote 
and come right back, and then we can do a second round if there 
is that pleasure.
    [Recess.]
    Mr. Shays. We will call this hearing to order and say to 
you, Mr. Director, you have a very difficult task and we in 
Congress have a difficult task. The numbers don't look good, 
and in many ways nobody likes these deficits, and many of us 
got elected to eliminate these deficits. And here then again--
so the question is, you know, what do we do about it?
    I tend to come on the side of the equation that says when 
you have annual growth at 7 percent each year in spending or 
close to it when you look at mandatory and nonmandatory, it 
stares you in the face. If revenues don't grow at 7 percent a 
year even if you didn't have a tax cut, you have got a problem.
    I would like to know, without tax relief, the economy would 
have been worse. Is that true or false?
    Mr. Holtz-Eakin. Again, it is a difficult question, because 
we don't know what the other policy would have done in terms of 
monetary policy. What I think there is a broad consensus about 
is that over the past several years the tax cuts have supported 
the household sector, particularly personal consumption and 
housing expenditure.
    Mr. Shays. But it has been said that the 2001 recession was 
much milder than it would have been without the tax cuts that 
year, and you agree, but it just depends to what level.
    In a similar vain, would the current unemployment situation 
be worse if not for the tax cuts? If so, do you have an 
estimate of how much worse?
    Mr. Holtz-Eakin. I don't have an estimate for exactly the 
same reason, but cyclical unemployment would be the mirror 
image of the degree to which the economy is operating below its 
potential.
    Mr. Shays. In what ways would the tax cuts of 2001 and 2002 
contribute to the economic improvements we have begun to see? 
And you do agree that the economy is improving, correct?
    Mr. Holtz-Eakin. We do see, as our forecast indicates, an 
economy that will improve over 2003, 2004. Embedded in that 
improvement is a rise in business investment. In part that is a 
result of the partial expensing and section 179 investment 
incentives that were in the 2003 and earlier tax measures. That 
supportive business investment, we expect to have a modest 
impact in 2003, but more substantial, as much as a 5-percent 
increase in business investment, in 2004.
    The household sector has continued actually to be 
relatively resilient to the downturn, but we expect that the 
fiscal policies in place going forward will support its ability 
to rebuild its wealth through some saving as well as 
maintaining a healthy rate of consumption expenditure, and 
those two pieces are the key to sustained economic growth.
    Mr. Shays. Do you have any way of evaluating what the 
impact would be first if the tax cuts were repealed or if they 
were allowed to be discontinued as they are not renewed? Do you 
have any way to evaluate the impact of that?
    Mr. Holtz-Eakin. Well, as our report discusses in the 
chapter on the economic outlook, in our baseline projection we 
try to incorporate to the best of our ability the impacts of 
the sunset of the tax cuts toward the end of the budget window 
on the potential GDP of the economy. The net effect is a modest 
negative in which under the current fiscal policies, while they 
have some beneficial incentive effects through lower marginal 
tax rates, the accumulated deficits tend to crowd out capital 
accumulation enough that productivity growth is lower, other 
things equal. It is that net effect that we can quantify. 
Breaking apart the different pieces is not really very 
tractable.
    Mr. Shays. So the bottom line, we are seeing some 
significant deficits.
    We have some real question marks about what we need to 
spend in Iraq. Has the administration presented any document to 
you as to what they think we need to spend on the military side 
and then what they think we need to spend on the rebuilding 
side?
    Mr. Holtz-Eakin. No, they have not.
    Mr. Shays. Have you requested that information?
    Mr. Holtz-Eakin. No. We typically respond to requests from 
Congress and----
    Mr. Shays. Well, I am certainly going to make that request 
through you all to have that done. There is no doubt in my mind 
that when we look at all the things--and I voted for the tax 
cut. I believe that we were right in doing that, but I think 
that I would be irresponsible if I don't just put everything 
into play as to what our future needs are going to be.
    With that, I think that, Mrs. Capps, you have the floor. Is 
that correct? Yeah. You have the floor.
    Mrs. Capps. Thank you, Mr. Chairman; and thank you, Mr. 
Holtz-Eakin, for your patience with our back-and-forth schedule 
today.
    To continue the discussion on the effects of the tax cut on 
the deficit, particularly comments that have been made today 
and other times that the tax cuts did not cause these deficits, 
but to turn to page 15 of the budget outlook and quote you--or 
whoever put it together under your supervision at least--and 
this is a quote: ``Laws enacted in the past 5 months are 
responsible for nearly two-thirds of the increase in the 
projected 2003 deficit and for an even larger share, roughly 70 
percent, of the increase in the projected 10-year deficit, and 
one of the most * * *''--this is, I think, significant--``* * * 
one of the most significant of those laws from a budgetary 
perspective is the jobs and growth tax relief bill which is 
estimated to increase the deficit by $62 billion this year and 
by $288 billion over the 2004-13 period.''
    Then you do have a table 1-8 to substantiate that.
    I will ask you for a comment in a minute, but I'd like to 
be clear and proceed from that point about what is and is not 
included in the budget projections before us. These issues have 
been raised but not with an opportunity I think for you to 
respond.
    CBO is projecting a $480 billion deficit for the next year 
and a whopping $1.4 trillion deficit to be racked up over the 
next 10 years. But this understates the case--and this point is 
being made by several of my colleagues, but I want to talk 
about two or three of the issues which CBO's figures don't 
include, like a number of likely expenditures that Congress is 
poised to make. CBO by law has to assume only what is in the 
law when it figures the baseline budget, is that correct? But 
for us to get a realistic budget, I think we need to anticipate 
some sure markers as well.
    For example, today as we are here, my colleagues on the 
Energy and Commerce Committee are having a hearing on the 
blackout and the chairman wants to finish the conference report 
on the energy bill by the end of this month. I think we are 
going to be voting on conferees today. The energy bill has some 
$20 billion of subsidies to the energy industry in it, and 
these new costs to the Federal budget and the taxpayer are not 
included in your projection. If this bill becomes law by 
September 30, we would have to add these costs to our deficit 
projections, is that correct?
    Mr. Holtz-Eakin. That would be correct.
    Mrs. Capps. Then another topic that is of great interest to 
the Energy and Commerce Committee is the Medicare prescription 
drug coverage which could also be completed in the next couple 
of months. Hopefully, we will be coming back from the 
conference and voting on some kind of package, but it is 
supposed to cost at least $400 billion over the next 10 years 
and probably more if we include payments to rural providers 
that Senator Grassley and others, including me, are very 
concerned about. So, again, that $400 billion is not included 
in the projections, but we would have to increase our deficit 
projections if that becomes law, is that correct?
    Mr. Holtz-Eakin. That is correct.
    Mrs. Capps. If it becomes law, but it is quite--I mean, it 
is everybody's interest that it would become law.
    Again, not to rub this in, but your projections are 
assuming that the tax cuts will expire, because that is the way 
the bills were written. But it has been said over and over 
again by the White House and others that the tax cuts are going 
to be made permanent, and then that of course would change 
these potential costs as well, am I correct?
    Mr. Holtz-Eakin. Yes.
    Mrs. Capps. These changes would add $1.5 trillion in our 
deficit over time.
    Just a couple of others. What about any fixes to the AMT?
    Mr. Holtz-Eakin. They are not in our baseline.
    Mrs. Capps. And they are not in the baseline but this is 
going to begin to affect millions of middle-class taxpayers the 
next few years, and the President has indicated that he very 
much wants to fix this, and I think he has substantial support 
for doing that. That might cost, say, $400 billion in projected 
additional deficits, maybe closer to $700 billion if the Bush 
tax cuts don't expire.
    Well, this is something of concern to me, and I think it 
needs to be stated. Then is it correct that you will be coming 
back if these laws are enacted, if they are, with an additional 
set of deficit figures?
    Mr. Holtz-Eakin. In a typical course of events, anything 
that is passed between now and our January projection of the 
economic budget outlook would be incorporated in our baseline 
in January.
    Mrs. Capps. Finally, we have not included in my discussion 
any potential increases in defense spending or the mandatory 
costs of the extra debt service, am I correct?
    Mr. Holtz-Eakin. That is right.
    Mrs. Capps. Thank you very much Mr. Chairman.
    Mr. Shays. Thank the gentlelady.
    Mr. Baird is next, but he is not here, so I think we go to 
Ms. Baldwin.
    Ms. Baldwin. Thank you, Mr. Chairman, and thank you, Mr. 
Holtz-Eakin.
    As I read comments from some of my colleagues in the news, 
it appears that some of our former deficit hawks are becoming 
deficit doves these days, and I remain deeply concerned about 
our economic crisis, as I see it right now.
    Your August CBO baseline projection showed that just shy of 
$1.4 trillion will be added to our national debt by the end of 
a decade's time, and I think we all know that this number will 
actually be much higher.
    If we could have slide No. 3 up there, that would be 
helpful.
    Because of course by law your baseline projections don't 
include some of the things that have been outlined by previous 
members through their questioning but things that we feel are 
relatively confident are going to happen. I think we can all 
assume that these numbers are going to end up being much 
higher, and I am concerned about these deficits for many, many 
reasons, including their impact on Social Security, their 
impact on the next generations who come through, the impact on 
vital security, both national and homeland security issues, 
health issues, education priorities, and also the impact on the 
budget of average families in the United States. Right now an 
average family of four is paying, as I understand it, in excess 
of $2,000 a year just to service the interest on national debt 
without these additions.
    If we look at these additions, we are talking about 
doubling that over the course of a decade. Our staff puts the 
figure just over I think $4,500 a year, and for a Congress that 
is so concerned about providing tax relief, putting money in 
the pockets of these families, these numbers just have to make 
you wonder.
    Now the projections that you have shared with us assume 
that we can grow out of these budget deficits. Barring any 
drastic increases in domestic spending--and of course the chart 
indicates that, you know, we must assume some that aren't in 
this baseline--you have assumed rapid economic growth in the 
year 2004 and thereafter, 3.8 percent real economic growth for 
the year 2004, 3.5 percent for the year 2005 and at least 3 
percent growth through 2008.
    At that point, growth slows a bit in large part because of 
the retirement of the baby boom generation gradually from the 
labor force.
    In addition, when you look at all of the things that just 
are not currently assumed in the August CBO baseline but we 
assume will happen, when those costs are factored in, the House 
Budget Committee Democratic staff project that our debt will 
outrun the economy indefinitely.
    So I guess in terms of questions of you, sort of how big 
does a deficit have to be to hurt the economy? And the 
companion issue is, what sort of economic growth do we have to 
assume to grow our way out of this once these pretty clear 
items are added to your baseline after Congress acts?
    Mr. Holtz-Eakin. With regard to the first question, I would 
emphasize that there is no clear one-to-one relationship 
between Federal Government deficits and economic performance. 
We ran deficits that averaged about a little over 2 percent of 
GDP in the 1970s. We also ran deficits that averaged 2 percent 
over GDP in the 1990s, and economic performance differed 
greatly. Deficits are both the results of deliberate policy 
decisions but also the result of economic performance and as an 
outcome they reflect a great many factors. So I think 
emphasizing a clean relationship between what is the right 
deficit to get the right economic performance is not a good way 
to think about it.
    With respect to the question of what would economic growth 
have to be in order to, for example, stabilize the debt-to-GDP 
ratio under this set of policies, that is something that we 
could certainly investigate. I would hesitate to do that 
calculation in my head, but I do think that, in terms of 
framing the question, if there was a particular set of policies 
that was enacted going forward, one would want to identify the 
impact on the debt-to-GDP ratio and whether that did in fact 
stabilize at some point in time. If it did, then the economy 
would be capable of supporting not just the debt but the 
payments on that debt without any sort of tendency to explode 
in an ever-increased need for borrowing. I would be happy to 
work with you on that.
    Mr. Shays. Mr. Baird, you have the floor. We might be able 
to do both you and Mr. Cooper, and we are happy to come back to 
take advantage of you if you want to come back after the vote.
    Mr. Baird. I thank the chairman.
    I appreciate the report you have produced, and I have a 
couple of brief questions about it. Many of us in this body 
have pledged to put Social Security and Medicare in a lockbox. 
That includes the President of the United States as well as the 
chairman of this committee and most Members probably. At the 
same time, many people have called for a balanced budget 
amendment to the Constitution. If we put Social Security and 
Medicare in a lockbox and did not include it in the unified 
budget calculus, at what point would we be adhering to a 
balanced budget?
    Mr. Holtz-Eakin. I guess I would have to understand a 
little better what lockbox means.
    From an economic point of view, the administration of the 
on budget and off budget surplus is an intergovernmental----
    Mr. Baird. Let's suppose we----
    Well, we all voted for it. Maybe somebody in this body 
understood it, but let me guess that what we meant was that we 
shouldn't be borrowing from it and including it in a unified 
budget. In other words, we should report the--let me say it 
differently then. At what point will the on-budget numbers be 
in balance?
    Mr. Holtz-Eakin. Well, I can take a look at the table. I am 
not sure what the answer to that is, but I guess I could--in 
the baseline projection, the on-budget deficit is $104 billion 
in 2013, so at the end of this window it is not yet----
    Mr. Baird. In other words, if we honored our commitments to 
put Social Security and Medicare in a lockbox and if those who 
have called for a balanced budget amendment adhered to their 
own rhetoric, we don't need that rhetoric until at least 2013 
and possibly well beyond?
    Mr. Holtz-Eakin. Yeah. I think that--I guess so that I can 
understand the question--not to be difficult--but you can think 
of the balanced budget excluding the Social Security surplus, 
the off-budget surplus as a fiscal target, and the degree to 
which you legislate a fiscal target will be similar in spirit 
to the Hollings and----
    Mr. Baird. Folks have called for a constitutional amendment 
to require it, and they have said that the only exemption would 
be in a time of national disaster. So presumably either a 
national disaster continues till 2013 or we are not consistent 
with our own rhetoric, at least those who have said they 
support a balanced budget amendment and Social Security and 
Medicare in a lockbox.
    Let me point out an interesting thing. You, I think, fairly 
and accurately observe that the--you put the context of the 
deficit in relation to the Federal GDP. I did some looking, and 
my guess is that it is--and it is an estimate, but as a 
percentage of California's domestic product, the California 
deficit today is about 2.8 percent. How does that compare to 
the deficit as a percent of GDP in the United States?
    Mr. Holtz-Eakin. Fiscal year 2003 would be 3.7 percent in 
our estimates.
    Mr. Baird. So the Federal budget deficit is higher as a 
percent of GDP at the Federal level than is California's 
deficit as a percent of California's overall economy, and yet 
the State of California is seeking to recall their governor 
over the deficit.
    Mr. Shays. Would the gentleman yield?
    Does that include, though, debt service, in other words, 
the money that they legally can borrow? I don't think it does. 
I think it just includes their deficits, not their debt 
service.
    Mr. Baird. I don't know the answer to that, Mr. Chairman. I 
would be interested in that.
    Mr. Holtz-Eakin. More generally, clean comparisons between 
State-level accounts and Federal accounts are not easy. State-
level accounting often includes capital accounts in addition to 
the general fund and a variety of other things.
    Mr. Baird. That is helpful to know. And ours doesn't.
    I am sure it has already been addressed, but the chairman 
at the start talked about whether or not someone would be bold 
or foolhardy enough to raise taxes, and yet--do we have chart 
No. 1 of--maybe somebody has already addressed this in my 
absence. I was over at the floor. Do we have chart 1 from the 
chairman's own charts? Can we call that up? The chart where he 
basically saw that the tax cuts--the impact of the tax cuts on 
the budget had minimal----
    That is it. Thank you very much.
    I regret the chairman is not here, but it would seem to me 
that if indeed the tax cuts become such a small portion of 
impact at 2006, then the chairman himself must be advocating 
for a repeal of the tax cuts or, in other words, a sunset, 
which I think he tried to imply that if you support a sunset of 
the tax cuts then you have actually supported a tax increase.
    Can you get to that number, as reflected on his chart, 
without sunsetting the tax cuts? In other words, if you extend 
the tax cuts, can that red line get so small as that?
    Mr. Holtz-Eakin. If I understand the chart, it is what has 
happened since the March baseline provided by CBO, which is the 
top; and indeed legislation since March has largely had near-
term impacts on the tax line, which is I think the part at the 
bottom. Then there were legislative impacts on the outlay side 
in the supplemental, and the rest would be the economic. So 
that is what has changed since our March baseline.
    Mr. Baird. Maybe I didn't----
    Mr. Holtz-Eakin. And our March baseline included the 
sunset, as does the----
    Mr. Baird. So this chart includes a sunset?
    Mr. Holtz-Eakin. Both.
    Mr. Baird. Implying then that----
    Mr. Holtz-Eakin. The top line and the bottom line both have 
a sunset----
    Mr. Baird. I understand that.
    Mr. Shays. Let's see if we can get Mr. Cooper in before, 
unless he wants to come back after, because I know others will 
come. But do you want to do yours now or when we get back, Mr. 
Cooper?
    Mr. Cooper. I will try to be brief, Mr. Chairman.
    This is a grim day for the country, because we are 
basically facing the largest absolute deficits in our Nation's 
history and also the worst job performance. As I understand it, 
we have lost some 2.7 million jobs in the last 2 or 3 years. 
What advice would you have for this Congress? What do we need 
to be doing to promote job growth in this country? We have 
bills that we passed that are called growth bills, but they 
don't seem to be working. This is the worst job performance 
since Herbert Hoover was President. What can we be doing to put 
more people in America back to work?
    Mr. Holtz-Eakin. Well, as you know, the CBO is not in the 
position of providing policy advice and particular 
recommendations. I will point out that in our baseline 
projections we anticipate that the resumption of economic 
growth will, with the typical fashion, carry with it increases 
in payroll employment, something to be on the order of 150,000 
or so a month, but that the unemployment rate doesn't come down 
as fast as one might expect because people come into the labor 
force.
    The question then is whether policies would be desirable to 
make more quickly the return to full employment or to let that 
pace be satisfactory. Our baseline projection shows a return to 
potential GDP and full employment over the next several years, 
and it is an issue of timing--instead of do we have it or not.
    Mr. Cooper. Economic growth according to technical measures 
seems to be resuming. It was just revised upward for the second 
quarter. We had 3.1 percent growth in our economy in the second 
quarter of 2003, and yet the job performance doesn't seem to be 
there. At least it is not pulling overall unemployment down 
from the 6.2 percent level. So it suggests to me that maybe tax 
cuts are not the right medicine. We need to do more than that, 
and the other party has traditionally spurned direct government 
spending programs, public works program and other things like 
that where you can say with certainty that you are putting 
people to work.
    You don't have to rely on indirect effects to get people 
employed; you know you are putting people to work, and yet this 
administration has generally opposed efforts like that in favor 
of more indirect approaches, tax cuts.
    One of the reasons I appreciate you is you do seem to be 
willing to tell truth to power. On your other report, on our 
situation in Iraq you point out that our Army could be short-
staffed as soon as March of next year. But in this report that 
you issued to this committee, on page 45 you point out that the 
tax legislation that has been passed in the House of 
Representatives and the Congress since 2001, quote, will 
probably have a net negative effect on saving, investment, and 
capital accumulation over the next 10 years.
    That is a powerful condemnation of what this Congress and 
the prior Congress has passed into law, to have a net negative 
effect on savings investment and capital formation. Isn't that 
largely the source of new jobs? You have to have new savings, 
investment, and capital formation in order to create a 
genuinely growing economy, don't you?
    Mr. Holtz-Eakin. This particular comment is about the 
potential GDP, the long-run growth. The near-term job creation 
will be the return of the economy to full employment. So I 
would distinguish between the cyclical component--about which I 
think there is broad consensus that we have not seen a recovery 
in the labor market yet and would anticipate to have at some 
point--and then, the pace of long-term economic growth. And 
with respect to capital accumulations, that probably shows up 
more in wages per job than in the number of jobs over the long-
term.
    Mr. Shays. Let me just interrupt the gentleman. We have 4 
minutes left; we need to get back. I think the ranking member 
is not coming back. I don't want to have the Director stay if 
we are not coming back. So are you coming back? You two 
gentleman are coming back? Then we will come back. OK. I am 
sorry to hold you up, but that is your job, Right?
    Mr. Holtz-Eakin. That is my job.
    Mr. Shays. OK. Thanks. We are not adjourning. We are in 
recess.
    [Recess.]
    Mr. Hensarling [presiding]. The committee will come to 
order. And, Mr. Edwards, you are recognized.
    Mr. Edwards. Mr. Chairman, thank you very much. Let me say, 
first of all, in my 12 years in Congress I have never 
questioned attendance at a committee hearing, because we all 
are busy and have busy schedules, and I appreciate the chairman 
coming back to oversee the continuation of this. But out of 24 
Republican members of this committee, I am not sure if there 
were more than 4 or 5 that actually showed up for this hearing, 
and it just seems to me if one is going to be a proponent of 
the tax cuts as part of the heart and soul of our Nation's 
fiscal policy, then it would be certainly good to show up on 
the day when we have to face the bill collector, and admit to 
policies that have been a big part leading to the largest 
deficit in American history. And I think, Mr. Chairman, it is 
not that you and I might have differences over how we get out 
of this mess, but by the total lack of interest today. This is 
the first week after a 5-week break. We knew about this 
hearing, and while members do have other things on their 
schedules I would like to know how many of those things are 
more important in terms of priorities than dealing with the 
largest deficit in American history. And if I were an American 
citizen watching this hearing, I guess that would concern me, 
the lack of interest in this, and frankly even on the 
Democratic side. While we had more members attending before all 
of the votes, I would be the first to say I wish we had more 
Democrats here.
    Having said that, I do appreciate the chairman allowing us 
to continue with a few questions on this vitally important 
national issue. And perhaps maybe what we ought to do is hold 
this hearing again at a time when members would find it in 
their schedule the ability to deal with one of the most 
pressing problems facing our country with this committee having 
direct responsibility for that budget.
    Dr. Holtz-Eakin, what I would like to ask you is this, and 
you can tell me if these are ballpark numbers. But there has 
been a discussion about what extent of the tax cut has been a 
contributing factor to the deficit. According to a document put 
out by the House Budget Committee Democratic staff, I show that 
for 2004, if you count net interest costs, the 2001 tax cut 
cost $121 billion in lost revenues; the 2002 tax cut cost $34.8 
billion in lost revenues for fiscal year 2004; and then the 
2003 tax cut is $153 billion. If I add that up, including extra 
interest on the debt, which is a direct cost of deficit 
spending partly caused by tax cuts, I am talking about, 
according to the Budget Committee Democratic staff, $309 
billion of the deficit in fiscal year 2004 as a direct result 
of the tax cuts.
    Do you have any numbers to suggest that those are not in 
the ballpark?
    Mr. Holtz-Eakin. Well, table 1-8 shows the impact of the 
2003 tax cuts on our baseline projections, and we could 
certainly go back and check.
    Mr. Edwards. What numbers do you show?
    Mr. Holtz-Eakin. Well, for 2004 the total revenue changes 
are $135 billion. I think you said $150 [billion].
    Mr. Edwards. We used $153 [billion]. I think we counted 
some net interest on that. So let us just round it off to the 
nearest $50 billion. For those who had suggested that the tax 
cuts haven't really played a role in contributing to the 
largest deficit in American history, the fact is that somewhere 
between $250 [billion] and $300 billion of the 2004 projected 
deficit will be a direct result of the 2001 tax cut as well as 
the 2002 and 2003 tax cut, making the note, if I could, that 
the 2002 tax cut and the 2003 tax cut were after September 11 
of 2001 and the unexpected tragedy that our country faced.
    Let me ask just a series of quick--perhaps you can answer 
this yes or no--quick questions in terms of the numbers 
projected for the largest deficit in American history. It does 
not include the full cost for the $60 billion in today's 
Washington Post the President is asking for as an addition to 
the Iraqi war. Is that correct? It doesn't assume the full cost 
of that $60 [billion] to $70 billion. Is that correct?
    Mr. Holtz-Eakin. It does repeat the supplemental from 2003, 
so that was about $60 [billion] for defense and it is deflated 
above that. So that is in our baseline.
    Mr. Edwards. Some of that might be included in that?
    Mr. Holtz-Eakin. So to the extent that it covers that, it 
does.
    Mr. Edwards. With 9-percent increase in the number of 
veterans enrolled in VA health care, what do you assume for 
increased cost in VA spending between 2003 and 2004?
    Mr. Holtz-Eakin. I don't know that number, but it is in the 
report.
    Mr. Edwards. I will continue on, Mr. Chairman.
    Mr. Hensarling. The gentleman's time has expired. Mr. 
Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Director, can you give us an idea of the impact of 2001 
and 2003 tax cuts on stimulating the economy?
    Mr. Holtz-Eakin. Well, as I mentioned earlier, one could 
derive estimates of the impact of the tax cuts on household 
consumption and the degree to which that helped demand. One can 
provide estimates of the impact of the partial expensing in 
section 179 investment, expensing for small businesses on 
business investment.
    For the 2003 tax cut, our baseline includes some impacts on 
business fixed investment and thus GDP, which are modest in 
2003 and larger in 2004, perhaps contributing as much as a half 
a percentage point of GDP to additional growth. If one were to 
try to do a retrospective on the overall impact, it would be 
difficult to do because the existence of those policies changes 
the incentives of other policymakers, especially the Federal 
Reserve.
    So the net impact is very difficult to ascertain without 
making some specific assumption with what the Feds would have 
done in the absence of the tax cut.
    Mr. Scott. Are you familiar with the Joint Committee on 
Taxation models that came up with the conclusion that long-term 
there would be a fewer jobs as a direct result of the 2003 tax 
cut than if you hadn't passed it?
    Mr. Holtz-Eakin. I am familiar broadly, not in intimate 
detail, with the joint committee's efforts to do modeling 
similar to what we do with the analysis of the President's 
budget.
    Mr. Scott. Could we get number 11, chart number No. 11?
    Net interest on the national debt again goes from $322 
[billion] to $647 billion in your report. Is that right?
    Mr. Holtz-Eakin. I am sure----
    Mr. Scott. That is $647 billion interest on the national 
debt.
    Mr. Holtz-Eakin. I will just take that.
    Mr. Scott. 2013. That is on page 10.
    Mr. Holtz-Eakin. Net interest in 2013.
    Mr. Scott. No. Gross interest. Well, I assume you expect to 
pay Social Security back with interest.
    Mr. Holtz-Eakin. It has no net effect on the budget. That 
is an intergovernmental transfer.
    Mr. Scott. Well, and when the time comes--well, if you are 
going to repeal Social Security, then you don't have to worry 
about it; you can do net interest. If you are talking about 
replacing the money in the fullness of time, then you need to 
talk about gross interest.
    Is that right?
    Mr. Holtz-Eakin. But what we show in our baseline is the 
overall impact on receipts, outlays, and borrowing from the 
public that would allow you those gross interest payments that 
are intergovernmental transfers.
    Mr. Scott. The income tax generates $765 billion in income 
tax. That is on page 8--excuse me. That is on page 4.
    Mr. Holtz-Eakin. Yes.
    Mr. Scott. In 2013, you have $1.9 trillion.
    Mr. Holtz-Eakin. Yes.
    Mr. Scott. That assumes all those tax cuts expired. Is that 
right?
    Mr. Holtz-Eakin. Yes.
    Mr. Scott. And if we adopt the Republican proposals of 
continuing extending those tax cuts, it wouldn't be anywhere 
near that amount, would it?
    Mr. Holtz-Eakin. In our baseline total receipts would rise 
by 4 percent, a little more than 4 percentage points of GDP, of 
which 2.3 percentage points are due to the sunsets and the 
remaining 2 percentage points come from a variety of other 
sources, rises in real income, the alternative minimum tax, 
taxation of tax-deferred savings plans, and then some technical 
factors.
    Mr. Scott. Well, add these up. Because as we can tell from 
the Social Security chart, in a few years we are not going to 
have this gravy train Social Security generating $150 billion. 
We are $644 billion on budget deficit next year. Where are we 
going to get the money? If the income tax this year only 
generates about $765 [billion], where are we going to get all 
that extra money and then some to be able to come anywhere 
close to balancing the budget unless we repeal Social Security?
    Mr. Holtz-Eakin. It is a policy decision how one arranges 
the various pieces of the government budget.
    Mr. Scott. What kind of cuts would have to be made after 
Social Security starts running the deficit to come anywhere 
close to balancing the budget? Or are we just into a structural 
deficit where we don't care about deficits?
    Mr. Holtz-Eakin. If the question is about what happens 
after 2018 when the cash flow in the Social Security trust fund 
turns negative, our projections don't extend that far, and I am 
not exactly sure what policy it is that you would like me to 
look at.
    Mr. Scott. Well, I think the policy is you have got to 
repeal Social Security, or the numbers just don't add up.
    Mr. Hensarling. Mr. Scott, your time has expired, and 
members are advised there is approximately 8 minutes left in a 
vote.
    Dr. Holtz-Eakin, we appreciate your testimony and your 
patience with us today, and the committee stands adjourned.
    [Whereupon, at 1:30 p.m., the committee was adjourned.]

                                
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