[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 MID-SESSION REVIEW OF THE PRESIDENT'S FISCAL YEAR 2006 BUDGET REQUEST

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JULY 14, 2005

                               __________

                            Serial No. 109-9

                               __________

           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JIM RYUN, Kansas                     JOHN M. SPRATT, Jr., South 
ANDER CRENSHAW, Florida                  Carolina,
ADAM H. PUTNAM, Florida                Ranking Minority Member
ROGER F. WICKER, Mississippi         DENNIS MOORE, Kansas
KENNY C. HULSHOF, Missouri           RICHARD E. NEAL, Massachusetts
JO BONNER, Alabama                   ROSA L. DeLAURO, Connecticut
SCOTT GARRETT, New Jersey            CHET EDWARDS, Texas
J. GRESHAM BARRETT, South Carolina   HAROLD E. FORD, Jr., Tennessee
THADDEUS G. McCOTTER, Michigan       LOIS CAPPS, California
MARIO DIAZ-BALART, Florida           BRIAN BAIRD, Washington
JEB HENSARLING, Texas                JIM COOPER, Tennessee
ILEANA ROS-LEHTINEN, Florida         ARTUR DAVIS, Alabama
DANIEL E. LUNGREN, California        WILLIAM J. JEFFERSON, Louisiana
PETE SESSIONS, Texas                 THOMAS H. ALLEN, Maine
PAUL RYAN, Wisconsin                 ED CASE, Hawaii
MICHAEL K. SIMPSON, Idaho            CYNTHIA McKINNEY, Georgia
JEB BRADLEY, New Hampshire           HENRY CUELLAR, Texas
PATRICK T. McHENRY, North Carolina   ALLYSON Y. SCHWARTZ, Pennsylvania
CONNIE MACK, Florida                 RON KIND, Wisconsin
K. MICHAEL CONAWAY, Texas
CHRIS CHOCOLA, Indiana

                           Professional Staff

                     James T. Bates, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, July 14, 2005....................     1
Statement of Hon. Joshua B. Bolten, Director, Office of 
  Management and Budget..........................................     6
Prepared statement of Mr. Bolten.................................    10

 
 MID-SESSION REVIEW OF THE PRESIDENT'S FISCAL YEAR 2006 BUDGET REQUEST

                              ----------                              


                        THURSDAY, JULY 14, 2005

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee), presiding.
    Members present: Representatives Nussle, Bradley, Conaway, 
Mack, Putnam, Ryan of Wisconsin, Hensarling, McHenry, Crenshaw, 
Ros-Lehtinen, Diaz-Balart, Spratt, Neal, Baird, Allen, Cooper, 
Schwartz, Moore, Cuellar, Jefferson, Edwards, Davis, and Ford.
    Chairman Nussle. Good morning and welcome everyone, to this 
Budget Committee hearing. Today, I am pleased to have with us 
the Director of the Office of Management and Budget (OMB), Josh 
Bolten.
    Welcome back to the House Budget Committee.
    He is here today to discuss the administration's midyear 
update of our Nation's economic and budget outlook, which was 
released yesterday.
    So welcome back to the committee, Director Bolten. As is 
the tradition, you joined us at the beginning of this year to 
present the President's budget and your economic and fiscal 
outlook at that time. This report is an update of those 
findings.
    I think it is useful to review that discussion and to help 
put this report in context. The first chart, in February, you 
projected a deficit for fiscal year 2005 of $427 billion. 
Today, your projection for the fiscal year 2005 deficit has 
dropped dramatically to $333 billion, a reduction of $94 
billion, or 22 percent, over a span of just 6 months.
    And since you were with us in February of last year when 
you estimated the deficit of $521 billion, your deficit 
estimate has fallen now by $188 billion, or 36 percent, more 
than a third from that estimate. And I understand that these 
numbers mark the best improvement in the OMB deficit outlook on 
record for 6- and 18-month periods, it is the incredible 
shrinking deficit. It is the fastest and deepest correction of 
deficit on record, and I think it is something that all of us 
cannot only take credit for, but be proud of. We have work to 
do, but I think this good news, which we should pause and 
recognize a little bit about how we got here.
    You also reported yesterday that as a share of the Nation's 
economy, which is really the way to measure deficits, it is the 
way Chairman Greenspan measures deficits most, and economists 
measure deficits; that the deficit for the current year has 
returned to levels consistent with the average of the past 30 
years and that is at about a 2.7 percent level. Now, no one is 
here to say that we are satisfied, but to suggest that we are 
somehow at some kind of record amount would, to me, seem 
unreasonable. We are at a very manageable level if we continue 
the current management plan we are under. And maybe most 
important, you projected the surge in revenues and the decline 
in the deficit will continue beyond the current fiscal year, 
with the deficit falling to just 1 percent of GDP by 2008 and 
continuing at that low level through 2010.
    Included in that assumption is additional funding for the 
war, and the policy proposals to fund Social Security. So we 
are clearly making significant improvement in our budget 
outlook in a relatively short amount of time.
    I don't want anyone to mistake this for just some lucky 
coincidence or that this good news should somehow precipitate 
some kind of a new behavior. The good news, you reported 
yesterday--a strong economy, higher revenues, and falling 
deficit projections--all of these are a result of successful 
leadership and policies of the President and Congress to create 
jobs and control spending.
    It is clear the tax relief plan that we passed in 2001, 
2002, and 2003 helped to bolster our economic recovery and 
continues to boost strong sustained economic growth and job 
creation. And even with accelerated tax relief, our strong 
economy is boosting tax revenues and driving Federal tax 
receipts up nearly 15 percent over the same period last year.
    No one was predicting back in 2001 coming out of a 
recession, the gut punch of 9/11, the emergencies, the extra 
spending for terrorism, and the extra spending for homeland 
security, that we would have either this fast recovery in the 
economy this quickly or this kind of sustained growth and 
ability to pay down this deficit as quickly as we have 
achieved.
    Here is some of the best evidence of our strong economy: 
Real GDP has increased for 14 consecutive quarters with the 
strongest growth in 5 years and one of the strongest sustained 
performances in nearly 2 decades. Over the past 25 months 3.7 
million new jobs have been created and unemployment has fallen 
from 6.3 percent, its highest, just 2 years ago, to 5 percent 
last month. That means 95 percent of the people who want a job 
in this country have got a job. Total employment is at a record 
high of 141 million jobs and people working, and growth in 
business equipment investment is at its best record level in 6 
years.
    Home ownership rates are at record highs, and a consensus 
of the private Blue Chip forecasters--you don't have to believe 
the Government forecasters; talk to the people who watch this 
all the time in the private sector, and they say this kind of 
economic growth and job creation is on track to continue.
    Your budget last year on the discretionary spending 
reminded us of the obvious and that was that the rate we are 
growing was out of control. And at that time, I think we all 
were cautiously optimistic that Congress could actually stick 
to its budget. For the first time in a long time, we slowed the 
rate of growth in spending. According to your own number, 
Congress held the spending growth to 1.4 percent down from the 
previous 5-year average of 6.3 percent.
    This year, not only have we passed all 11 appropriation 
bills in the House on time and ahead of schedule, but done it 
with tight limits on spending according to this year's budget 
resolution. So the budget is doing its part with a strong 
bipartisan support of those 11 appropriations bills.
    So the budget is doing its part; the economy is doing its 
part; the appropriators are doing their part; this Budget 
Committee is doing its part; and OMB is doing its part. 
Everyone is doing a good job and the deficit is falling. 
Clearly, this is good news for all of us, but we are far from 
finished.
    Of course, we have large deficits in the near term and we 
have been told not only by you, Director Bolten, but everybody 
from CBO (Congressional Budget Office) Director Holtz-Eakin to 
Federal Reserve Chairman Greenspan. And while solid economic 
growth and controls on discretionary spending are critical in 
our efforts to reduce the deficit, we must continue, even 
combined, they are not enough.
    With the enormous set of challenges and costs heading our 
way in the future; including retirement of the baby boomers; 
skyrocketing medical costs; shoring up the need to sustain the 
health and retirement systems; we need to get our arms around 
the largest part of the Federal budget, and that is mandatory 
spending.
    Go to chart No. 7; people have seen this before. Our 
mandatory spending or our spending that operates on autopilot 
every year, currently takes up 54 percent of our total budget. 
On chart 7, you will see that will continue to grow and 
eventually consume 61 percent of our budget if we don't put 
some constraints on that spending and some reforms in the 
process. It would squeeze out every other priority: education; 
veterans; ag; science; you name it, it is squeezed out if we 
don't get our arms around Medicare, Medicaid, and Social 
Security. The spending is going way beyond our means and far 
beyond our ability to sustain it in the long term.
    Nobody should sound the dinner bell today because we have 
got good news on the deficit and because it is coming down at a 
record pace. We have seen it as compared to our GDP at one of 
the lowest rates, no one should get on the gravy train and 
suggest that now is the time to bust the budget, now is the 
time to go over our spending constraints and appropriations, 
now the time is to go further in developing mandatory spending.
    I am extremely proud of this committee being at the 
forefront of this effort. I know we can always suggest that 
there is more to do, and of course we know there is more to do.
    Director Bolten, I commit to you that we will work 
together, side by side with you, to accomplish the job of 
continuing to grow the economy, continuing to restrain the 
nonsecurity spending, continuing to make sure that we reform 
our mandatory programs to make sure that this good news is 
sustained far into the future.
    With that, I will turn to Mr. Spratt for any comments he 
would like to make.
    Mr. Spratt. Mr. Chairman, thank you very much indeed. And, 
Mr. Bolten, glad to have you back and look forward to your 
testimony.
    Mr. Chairman, a spike in revenues is welcome news anytime, 
but I think in this case, it warrants a wary welcome at most. 
We have no assurance that these revenues will be recurring, and 
in any event, they leave the deficit at $333 billion, making it 
the third largest in nominal terms on record.
    Bear in mind, back in 2001, the Bush administration 
projected a surplus of $269 billion for this year, assuming 
that all their tax cuts would pass. This year's deficit will be 
$600 billion off that mark.
    Also bear this fact in mind: The bottom line gets worse 
before it gets better. The deficit OMB projects for 2006 is 
$340 billion. That includes only $13 billion to sustain our 
deployments in Iraq and Afghanistan. When you adjust for the 
likely cost for those deployments for the full fiscal year, the 
deficit for next year 2006 has to be somewhere north of $350 
billion. So it is a little early to start cheering.
    Whatever the deficits are over the next 5 years, the 
deficits over the last 5 years have left us a long-lasting 
legacy of debt. Even if the debt begins to taper off in 2007, 
there is a mountain of debt that has been built up since 2001.
    When the Bush administration sent us their first budget, on 
page 3, right at the front, the administration proposed to 
retire $2 trillion in debt within 10 years. Far from paying off 
this debt, the statutory debt ceiling has been raised three 
times in the last 4 years by $2.2 trillion to make room for the 
budgets of the Bush administration. And during 2006 the debt 
ceiling will have to be raised again by some $750 billion, over 
$3 trillion in debt ceiling increases in less than 5 years. As 
a result, the Congressional Budget Office observes in its 
monthly budget review for June, just published, that interest 
on the national debt has become the fastest growing category of 
spending in the budget, up $18 billion, 14.5 percent, this year 
over last.
    Even the Bush administration projects that the cost of 
interest on the debt will rise by almost $100 billion between 
now and 2010. Once more, the buildup of debt doesn't end even 
if deficits do come down. Let us hope they do.
    Look on the last page of the MSR, Mid-Session Review, page 
44, Debt Subject to Statutory Limitations. And you will see the 
debt issued by the Treasury increases from $7.9 trillion this 
year to $10.7 trillion in 2010, a huge spike in the debt.
    It is true that revenues collected are up, but they are 
still below revenues projected. When the Bush administration 
proposed and sold its budget with big tax cuts in 2001, the 
Office of Management and Budget at that time projected that the 
individual income tax would produce $1.118 trillion in 2004, 
$1.118 trillion, assuming its tax cuts would pass. In fact, the 
individual income tax generated $809 billion in revenues in 
2004; that is $309 billion less than OMB projected. This 
revenue shortfall, $309 billion, accounts for roughly three-
fourths of the deficit in 2004.
    OMB further projected that the individual income tax will 
produce and generate $1.157 trillion in 2005. Based on revenues 
collected so far, it appears that the individual income tax 
will generate about $929 billion in revenues for 2005, $228 
billion less than OMB projected. This shortfall accounts for 
about two-thirds of the deficit in 2005.
    What should concern all of us is that the spike in revenues 
that we are seeing may not repeat itself or fully recapitulate. 
Two-thirds of the increase in individual income taxes over the 
last 9 months has come in the form of nonwithheld taxes. These 
are typically taxes paid on one-time capital gains, one-time 
bonuses, stock options, and the type of income that may not 
recur.
    Beyond 2005, all of your revenue projections assume that 
the alternative minimum tax (AMT) stays in place. You make no 
assumption about repairing it, fixing it, replacing it, or 
repealing it. That means revenues of $642 billion higher than 
they would be between 2006 and 2015 if the AMT were fixed to 
affect no more than the 3 to 4 percent of tax filers who are 
affected by it today.
    Politically, I think it is inevitable we do that, and yet 
you don't address it at all in your budget, and it has a huge 
effect on revenues.
    Some of the increase in corporate income taxes are due to--
actually, increase in taxes are due to the fact that the bonus-
expiration provision expired on December 31. The most serious 
shortcoming of the MSR: It dodges the big event, the elephant 
in the room. What happens on December 31, 2010, because that is 
when the tax cuts passed in 2001, 2002, and 2003, the extenders 
and other things, will come up for renewal.
    The Office of Management and Budget's forecast for the 
future stops after 5 years, or in 2010, so we don't see the 
effect of extending the Bush tax cuts. Using OMB's March 
baseline, the best we have got, we picked up where OMB left off 
in 2010 and we ran the budget out through 2015.
    Put up chart No. 5 please, the table; we will have it when 
we come around to questions then.
    Let me tell you what we did, because I think it is very 
basic and very fair. We assume the Bush tax cuts and the 
popular tax cuts like the R&D tax cut will be extended and we 
use the Joint Tax Committee's estimates of what the revenue 
effects will be.
    We assume that the alternative minimum tax will be fixed, 
politically, we think it is inevitable. The Treasury Department 
tells by 2010, 30 million Americans will be paying AMT instead 
of regular taxes, we assume it will be fixed.
    We adjust outlays for the cost of our deployments in Iraq 
and Afghanistan using CBO estimates after 2006. And we take up 
the President's Social Security proposal at the point he leaves 
off, extending it from 2010 to 2015. The President put in the 
first 2 years of implementing his Social Security proposal; we 
put in the balance through 2015. Here is the result we arrived 
at, and we show you the chart--a deficit, over $600 billion, in 
2015, and cumulative deficits over $4 trillion from 2006 
through 2015.
    So that is why we propose our wary welcome for the latest 
news of the deficit, for the spike in revenues. We don't see 
the deficit declining over the long run, 10 years, we see it 
rising. When realistic items like those I just described are 
factored into your forecast, we think it will set us back and 
not move us forward.
    If OMB's projections are taken to imply that we are on a 
path to a balanced budget, we can just sit back and grow our 
way out of the budget, we think it is dangerously misleading on 
the eve of fully phasing in and making permanent all of the tax 
cuts, leading people to believe that the deficit will keep on 
declining when in fact it may be about to explode. That is why 
we propose a wary welcome to the news today.
    We look forward to questions that will allow us to probe 
further the concerns we have, but we thank you for being here 
and the work you do for our country.
    Chairman Nussle. Director Bolten, welcome to the committee. 
Your entire testimony, as written and presented, the report 
will be made part of the record and you may proceed as you 
wish. Welcome.

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

    Mr. Bolten. Thank you, Mr. Chairman and Mr. Spratt. Thank 
you for the warm welcome back to the committee and the high 
tone of the debate that you both set here.
    Mr. Chairman, before I begin, I want--I don't normally 
recognize folks that come with me to these hearings, but I want 
to depart from that today because joining me at the table 
today, one seat over to my right, is Dick Emery, who has served 
in the Federal Government for 39 years, 20-some of those years 
at OMB. He is the senior civil servant at OMB. He heads our 
Budget Review Division, which is really at the nerve center of 
all that OMB does. He is retiring tomorrow, and I just wanted 
to acknowledge him. He has served Presidents and Budget 
Directors of both parties with extraordinary capability and 
loyalty.
    I know I speak for a long succession of Budget Directors 
when I express our collective thanks to him and our best 
wishes.
    Chairman Nussle. Congratulations, and we wish you all the 
best in your retirement. And thank you for your service to our 
country.
    Mr. Bolten. Mr. Chairman, I am pleased to send Dick off 
with some good news.
    Since last February, when we released the 2006 budget, the 
Nation's fiscal outlook has improved dramatically. The U.S. 
budget deficit is falling and falling fast. The 2005 shortfall 
will be $94 billion less than we projected--less than what we 
projected 5 months ago.
    We are seeing what happens when you have a strong economy--
more businesses investing, more people working, more income, so 
Americans can spend and invest as they see fit. We are also 
seeing more revenues coming into the Federal Treasury.
    We arrived at this point, I believe, largely because of 
this President's policies and this Congress' policies that have 
promoted growth, especially the tax relief that many members in 
this room were instrumental in putting in place.
    Those policies have strengthened the economy, which is now 
producing better-than-expected tax revenues. Of the $94 billion 
decline in the deficit from last February, $87 billion comes 
from stronger receipts, $7 billion comes from lower-than-
expected outlays.



     
    Even as the Nation devotes the substantial resources needed 
to fight and win the war on terror, the deficit is now 
forecasted to fall from $412 billion, or 3.6 percent of GDP, in 
2004 to $333 billion, or 2.7 percent of GDP, in 2005. At its 
currently forecast level, the U.S. budget deficit for 2005 
would be smaller than the deficits in 15 of the last 25 years 
and, Mr. Chairman, as you pointed out, only slightly above the 
40-year historical average deficit of 2.3 percent.
    Under the President's fiscal policies, the budget deficit 
is forecast to continue to fall to $162 billion in 2009, or 1.1 
percent of GDP, less than half the size of the average deficit 
over the last 40 years. That would significantly surpass 
President Bush's goal of cutting the deficit in half from its 
projected 2004 peak of $521 billion, or 4.5 percent of GDP.
    This rapid improvement in the budget picture demonstrates 
the significance of policies that contribute to sustained 
economic growth. The implementation of the administration's 
growth agenda, especially tax relief, restored growth, and 
investment to the economy after multiple shocks, including a 
stock collapse, corporate scandals, and the terrorist attacks 
of September 11. Tax relief proposed by the President and 
enacted by this Congress in each year from 2001 to 2004 reduced 
income tax rates, raised incentives for small businesses to 
invest in new equipment, dramatically reduced the tax rate on 
dividends, and capital gains and phased out the death tax.
    Once fully in place, tax relief produced the desired 
results. The economy has grown by 12.4 percent since the 
recession ended at the end of 2001. Employment is up by 3.7 
million jobs since May of 2003 and the unemployment rate has 
fallen to 5 percent, lower than the average unemployment rate 
in each of the last three decades. Both inflation and interest 
rates have remained low and business investment is strong.
    Our improved budget outlook is largely a product of 
collections of tax revenue which have grown significantly 
faster than projected 5 months ago. After 3 straight years of 
decline due to economic weakness, tax receipts will have risen 
for 2 consecutive years as of the end of 2005. This Mid-Session 
Review projects that tax receipts will rise 14 percent from 
last year, the largest such year-over-year increase since 1981. 
Federal receipts as a share of the economy are projected to 
continue rising in future years as well.
    Mr. Chairman, we can't yet identify with certainty the 
composition of income that yielded this greater-than-expected 
surge in tax receipts. The detailed data that would permit such 
an analysis won't be available for many months. The data so far 
does show, however, that all major categories of receipts--
corporate income tax, payroll taxes, and individual income 
taxes--all of those are outpacing our original forecasts.
    This experience of the Federal treasury generally has been 
matched at the State level, as nearly all States are also 
reporting income tax collections above forecasts.
    Our improved deficit picture in the budgetary window does 
not rely on assumptions that receipts will continue to grow at 
this year's rate. Rather, these forecasts are well within the 
range of experience in times of solid economic growth. With 
these future gains, Federal receipts are expected to rise to 
17.4 percent of GDP in 2005. By 2010, the ratio is projected at 
18.1 percent, just about the historical average, even assuming 
full extension of the President's tax relief program.
    Tax relief has had a significant positive impact on the 
economy, and that stronger economy is the source of the 
improved tax receipts that we are able to report today. To 
sustain economic growth, it is critical, Mr. Chairman, that 
Congress makes tax relief permanent. Allowing this tax relief 
to expire would endanger the economy's prospects, placing into 
doubt gains in job creation and business investment that 
contribute to increases in tax revenues and further reductions 
in the size of the deficit.
    Maintaining a strong economy will also require other 
progrowth policies. The President's agenda for economic growth 
includes passing a national energy bill; opening markets abroad 
through accords like the CAFTA (Central America Free Trade 
Agreement), which is soon to be before the House; instituting 
regulatory reforms and limiting lawsuit abuse.
    In this and future years, spending discipline will play a 
vital role in deficit reduction. Each year of President Bush's 
administration, he and the Congress have brought down the rate 
of growth in discretionary spending unrelated to defense and 
homeland security. This committee has demonstrated a continued 
focus on spending restraint.
    I am grateful for the partnership we have with you, Mr. 
Chairman, and other members of this committee. I know the 
President appreciates your hard work on behalf of the American 
people to restrain spending and strengthen our economy.
    Thanks to your work, Mr. Chairman, Congress passed a 2006 
budget resolution that holds overall discretionary spending to 
an increase below the projected rate of inflation, and it 
assumed an actual reduction in nonsecurity discretionary 
spending compared to last year's level.
    Mr. Chairman, I am grateful, too, for the committee's 
leadership in seeking mandatory savings through the 
reconciliation process. This committee produced a resolution 
agreeing to $70 billion in savings, and ultimately, the entire 
Congress agreed to $35 billion in savings. This is the first 
time since 1997 that Congress will have employed the expedited 
reconciliation process to reduce mandatory spending.
    As you noted, Mr. Chairman, the House Appropriations 
Committee has demonstrated a similar resolve. Under the 
leadership of Chairman Lewis, the appropriations bills have 
been completed in the House on schedule, all within the limits 
set by the budget resolution. We also appreciate the House's 
support during the appropriations process to help meet our 
goals for halting spending on poorly performing programs. 
Through this work, the House has agreed to terminate or reduce 
nearly two-thirds of programs proposed for termination or 
substantial reduction in the President's budget, achieving more 
than $6 billion in savings.
    Even so, as you noted, Mr. Chairman, much work remains to 
be done. The administration looks forward to cooperating with 
the Congress to produce a final set of spending bills that 
remain within the President's overall request and achieve a 
reduction in nonsecurity spending while meeting the Nation's 
priorities.
    The Mid-Session Review we are presenting today contains 
some items not included in the 2006 budget. The budget 
resolution passed by the Congress just recently assumes an 
additional $50 billion in 2006 for the continuing costs of 
operations in Iraq and Afghanistan. This review assumes 
enactment of that funding, which would increase outlays by $37 
billion in 2006 and $13 billion in 2007 and beyond. The 
administration expects to request additional 2006 funding from 
the Congress when requirements for these operations can be 
estimated more reliably. This review does not reflect the 
effect of undetermined, but anticipated supplemental requests 
for operations beyond 2006.
    This update also includes the estimated budget impact from 
the creation of personal accounts under the President's Social 
Security reform proposal. Transition financing for these 
accounts would not begin to take effect until 2009 under the 
President's proposal, and it is easily accommodated within the 
President's deficit reduction goal.
    Although transition financing for Social Security is 
incorporated into our deficit projections, it should not have 
the same effect on capital markets as traditional Federal 
borrowing. First, such financing would bring forward 
obligations already owed in the form of future-promised 
benefits, and as a result, would reduce existing future 
obligations by a roughly equal amount.
    Second, unlike debt issued to fund government spending, 
there would be no net impact on national savings, amounts 
deposited in personal accounts would be saved in a personal 
account and invested in the capital markets.
    As the Nation's near-term fiscal outlook improves, Mr. 
Chairman, we have the opportunity and responsibility, as you 
emphasized, to confront the real fiscal threat--a long-term 
budgetary picture of steadily rising deficits from mandatory 
spending programs. President Bush has proposed to address 
Social Security's long-term insolvency while offering a better 
deal for today's younger workers. As we continue to address the 
Nation's long-term fiscal challenges, spending discipline and 
progrowth policies, especially sustained tax relief, will be 
essential to our success.
    Mr. Chairman, thank you for having me here today and I 
would be pleased to take your questions.
    [The prepared statement of Mr. Bolten follows:]

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

    I am pleased today to report on the Office of Management and 
Budget's Mid-Session Review of the Budget of the U.S. Government.
    Since last February, when we released the 2006 Budget, the Nation's 
fiscal outlook has improved dramatically. The U.S. budget deficit is 
falling, and it is falling fast. The 2005 shortfall will be $94 billion 
less than we projected just 5 months ago. We are seeing what happens 
when you have a strong economy--more businesses investing, more people 
working, and more income, so that Americans can spend and invest as 
they see fit.
    And with all those economic gains, we are also seeing more revenues 
coming into the Federal Treasury. We have arrived at this point largely 
because of this President's and this Congress' pro-growth policies, 
especially tax relief. Those policies have strengthened the economy, 
which is now producing better-than-expected tax revenues.
    Of the $94 billion decline in the deficit from last February, $87 
billion comes from stronger receipts; $7 billion comes from lower-than-
expected outlays.
    Even as the Nation devotes the substantial resources needed to 
fight and win the War on Terror, the deficit is now forecast to fall 
from $412 billion, or 3.6 percent of GDP, in 2004 to $333 billion, or 
2.7 percent, in 2005.
    At its currently forecast level, the U.S. budget deficit for 2005 
would be smaller than the deficits in 15 of the last 25 years and only 
slightly above the 40-year historical average of 2.3 percent.



    Under the President's fiscal policies, the budget deficit is 
forecast to continue to fall, to $162 billion in 2009, or 1.1 percent 
of GDP--less than half the size of the average deficit over the last 40 
years.
    That would significantly surpass President Bush's goal of cutting 
the deficit in half from its projected 2004 peak of $521 billion, or 
4.5 percent of GDP.
    This rapid improvement in the budget picture demonstrates the 
significance of policies that contribute to sustained economic growth. 
The implementation of the Administration's progrowth agenda, especially 
tax relief, restored growth and investment to the economy after 
multiple shocks, including a stock market collapse, corporate scandals, 
and the terrorist attacks of September 11, 2001.
    Tax relief proposed by the President and enacted by Congress in 
each year from 2001 through 2004 reduced income tax rates, raised 
incentives for small businesses to invest in new equipment, 
dramatically reduced the tax rate on dividends and capital gains, and 
phased out the death tax.
    Once fully in place, tax relief produced the desired results: The 
economy has grown by 12.4 percent since the recession ended in 
November, 2001. Employment is up by 3.7 million jobs since May of 2003, 
and the unemployment rate has fallen to 5 percent, lower than the 
average unemployment rate of each of the last three decades. Both 
inflation and interest rates have remained low, and business investment 
is strong.
    Our improved budget outlook is largely a product of collections of 
tax revenue, which have grown significantly faster than projected 5 
months ago. After three straight years of declines due to economic 
weakness, tax receipts will have risen two consecutive years. This Mid-
Session Review projects that tax receipts will rise 14 percent from 
last year--the largest such year-over-year increase since 1981. Federal 
receipts as a share of the economy are projected to continue rising in 
future years as well.
    We cannot yet identify with certainty the composition of income 
that yielded this greater-than-expected surge in tax receipts; detailed 
data that would permit such an analysis will not be available for many 
months.
    The data so far do show, however, that all major categories of 
receipts--corporate income taxes, payroll taxes, and individual income 
taxes--are outpacing forecasts. This experience of the Federal Treasury 
generally has been matched at the state level, as nearly all states are 
reporting income tax collections above forecasts.
    Our improved deficit picture in the budgetary window does not rely 
on assumptions that receipts will continue to grow at this year's rate. 
Rather, these forecasts are well within the range of experience in 
times of solid economic growth.



    With these future gains, Federal receipts are expected to rise to 
17.4 percent of GDP in 2005. By 2010, the ratio is projected at 18.1 
percent, just about the historical average, even assuming full 
extension of the President's tax relief program.
    Tax relief has had a significant positive impact on the economy, 
and that stronger economy is the source of the improved tax receipts 
that are reported today. To sustain economic growth, it is critical 
that Congress make tax relief permanent. Allowing this tax relief to 
expire would endanger the economy's prospects, placing into doubt gains 
in job creation and business investment that contribute to increases in 
tax revenues and further reductions in the size of the deficit.
    Maintaining this growing economy will also require other pro-growth 
policies. The President's agenda for economic growth includes passing a 
national energy bill, opening markets abroad through accords such as 
CAFTA, instituting regulatory reforms, and limiting lawsuit abuse.
    In this and future years, spending discipline will play a vital 
role in deficit reduction. Each year of President Bush's 
administration, he and Congress have brought down the rate of growth in 
discretionary spending unrelated to defense and homeland security.
    This Committee has demonstrated a continued focus on spending 
restraint. I'm grateful for the partnership we have with you, Mr. 
Chairman, and other members of this Committee; I know the President 
appreciates your hard work on behalf of the American people to restrain 
spending and strengthen our economy.
    Thanks to your work, Congress passed a 2006 Budget Resolution that 
holds overall discretionary spending to an increase below the projected 
rate of inflation, and assumes an actual reduction in non-security 
related discretionary spending compared to last year's levels.
    I am grateful, too, for the Committee's leadership in seeking 
mandatory savings through the Reconciliation process. This Committee 
produced a Resolution agreeing to $70 billion in savings, and 
ultimately, the entire Congress agreed to $35 billion in savings. This 
is the first time since 1997 that Congress will have employed the 
expedited Reconciliation process to reduce mandatory spending.
    The House Appropriations Committee has demonstrated a similar 
resolve. Under the leadership of Chairman Lewis, the appropriations 
bills have been completed in the House on schedule, all within the 
limit set by the Budget Resolution. We also appreciate the House's 
support during the appropriations process to help meet our goals for 
halting spending on poorly performing programs. Through this work, the 
House has agreed to terminate or reduce nearly two-thirds of programs 
proposed for termination or reduction in the President's Budget, 
achieving more than $6 billion in savings.
    Even so, much work remains to be done. The Administration looks 
forward to cooperating with the Congress to produce a final set of 
spending bills that remain within the President's overall request, and 
achieve a reduction in non-security spending while meeting the Nation's 
priorities.
    The Mid Session Review we are presenting today contains some items 
not included in the 2006 Budget. The Budget Resolution passed by the 
Congress assumes an additional $50 billion in 2006 for the continuing 
costs of operations in Iraq and Afghanistan. This Review assumes 
enactment of this funding, which would increase outlays by $37 billion 
in 2006 and $13 billion in 2007 and beyond. The Administration expects 
to request additional 2006 funding from the Congress when requirements 
for these operations can be estimated more reliably. This Review does 
not reflect the effect of undetermined but anticipated supplemental 
requests for operations beyond 2006.
    This update also includes the estimated budget impact from the 
creation of personal accounts under the President's Social Security 
reform proposal. Transition financing for these accounts would not 
begin to take effect until 2009, and is easily accommodated within the 
President's deficit reduction goal.
    Although transition financing is incorporated into our deficit 
projections, it should not have the same effect on capital markets as 
traditional Federal borrowing. First, such financing would essentially 
bring forward obligations already owed in the form of promised future 
benefits, and as a result, would reduce existing future obligations by 
a roughly equal amount. Second, unlike debt issued to fund government 
spending, there would be no impact on net national savings, because 
every dollar of transition financing would be saved in a personal 
account and invested in the capital markets.
    As the nation's near-term fiscal outlook improves, we have the 
opportunity and responsibility to confront the real fiscal threat: a 
long-term budgetary picture of steadily rising deficits from mandatory 
spending programs. President Bush has proposed to address Social 
Security's long-term insolvency while offering a better deal for 
today's younger workers.
    As we continue to address the nation's long-term fiscal challenges, 
spending discipline and progrowth policies, especially sustained tax 
relief, will be essential to our success.

    Chairman Nussle. I appreciate your testimony and I 
appreciate the willingness you have to come before this 
committee and come up to the Hill and talk to us individually.
    I don't have any questions at this point. I think I have 
made my statement pretty clear and so I will defer my question 
time. And I will recognize Mr. Spratt for--just so members, 
know, my understanding is we have four votes at any point here, 
so I wanted to give Mr. Spratt the chance to ask those 
questions.
    We may have a vote and recess for that vote, so just so 
members are alerted to that schedule. Mr. Spratt.
    Mr. Spratt. Mr. Director, thank you again for your 
testimony. Let me clarify what you are doing here in this so-
called Mid-Session Review.
    What you are doing here is updating the budget submission 
you made in February based upon what has happened to revenues 
and what has happened to spending in the interim in preparation 
for our bringing to final conclusion all of the budget in the 
latter months of this fiscal year. In other words, you have 
reflected the increase in revenues. You have reflected some 
expenditure reductions and increases that weren't included.
    But this is the tip of the big pyramid, and the base of the 
pyramid is the February budget and it is still part of the 
assumption on which you are resting your presentation this 
morning. Let me show you what I am driving at.
    From pages 19 to 44, you have recapitulated the major items 
in your 2006 budget. You assume taxes and spending will be 
enacted and carried forward in the projection you make here. 
For example, just picking a few things at random: Perkins 
loans, I picked them, $5.9 trillion, almost $6 trillion. We are 
going to go to the colleges that have been allowed to keep 
those funds and revert the funds to the Federal Treasury. You 
are assuming that that will still be made law somehow--$5.9 
billion.
    I will lower the price tag for you.
    Mr. Bolten. I knew it was a lot.
    Mr. Spratt. Still part of your assumption.
    Mr. Bolten. Are we continuing to assume the President's 
proposed policies in our budget projections? The answer is yes. 
Both those that save money and those that cost money, not all 
of which we are likely to achieve.
    Mr. Spratt. You would allow them to raise their prices, 
market rates, as opposed to having a rate fixed upon historic 
cost. That generates about $12.4 billion in revenues.
    I am not telling you, but throwing out some things that are 
highly controversial that I doubt will be enacted by this 
Congress; but they are assumed in your budget both with respect 
to revenues and expenditure reductions. We are still assuming 
then, the PMA price setting was changed as a matter of law?
    Mr. Bolten. We are continuing to assume all of the 
administration's policies, both those that cost money and those 
that save money. We don't anticipate getting all of them, but 
my expectation is, there will be an offsetting effect between 
the two of them; and we will, in fact, as we did last year, 
come out roughly where we expected to come out, or as we are 
this year, even better.
    Mr. Spratt. As I read the charts, you are also expecting 
over 10 years a $42-billion reduction in the cost of Medicaid, 
still assuming that $12-billion reduction over the first 5 
years, $42 billion over the full 10 years?
    Mr. Bolten. I don't have the exact numbers off the top of 
my head, but I believe that is roughly accurate. In the budget 
resolution adopted by this committee and the Congress there is 
a substantial reduction likely from Medicaid, assuming that 
will be accomplished through the reconciliation process.
    Mr. Spratt. As I recall, it was $10 billion over 5 and no 
designation of what it would cost in the outyears.
    One thing that is built into your baseline automatically is 
an adjustment in physician payment rates under Medicare as a 
result of something called the ``sustainable growth rate,'' 
which is a policy administered by MedPAC. As I understand what 
you presented here, you say that certain things are going up, 
but they have been offset by the decrease in physicians' pay 
and doable medical equipment rates that will be dictated by the 
sustainable growth-rate factor.
    Are we still assuming that for 10 full years there would be 
percentage reductions every year for 6 years and no recovery of 
that in the baseline for Medicare spending? Physicians' pay 
will be cut this year, next year, and the following year with 
no restoration of it, it is a big number. If you simply froze 
it in place, I understand that the cost will be $50 billion as 
opposed to what is built into the baseline with the 
implementation of this sustainable growth-rate factor.
    Mr. Bolten. Mr. Spratt, we do assume the continuation of 
existing law. That sustainable growth rate is part of the 
Medicare law that was adopted by the Congress and signed by the 
President.
    Mr. Spratt. You are not proposing a change in the law?
    Mr. Bolten. That is the law until there is such a change or 
we have put in our budget requests a proposal to change it, 
then we do assume it. I understand there will be a great deal 
of interest in making some modification in that sustainable 
growth rate. My hope and expectation is, we will be able to do 
that within the budget levels that have been agreed to.
    Mr. Spratt. The point I am driving at is that all of these 
are fairly significant items, particularly when you take them 
in the aggregate, and they are all controversial; and I would 
say there is an odds-on chance of not making it through this 
budget season.
    A lot of this stuff you are proposing has been around the 
track many times. You would propose to charge $250 to 7 and 8 
Category veterans to use the veterans health care facilities. I 
think that is about as dead a duck as there is in Congress. It 
is not going to happen, and it is still here.
    You would propose to have the USDA pay to have the food 
inspectors paid by food processors. That has been around--for 
the 20 years I have been in Congress, it has never passed.
    There is a lot of stuff built into your assumptions and 
baseline, that bottom of the pyramid, that I don't think is 
going to happen; and it is going to have a big effect on your 
bottom line unless we come up with alternative policies--and I 
don't know what they are going to be--that will make up the 
difference.
    Mr. Bolten. Mr. Spratt, that makes the point I was trying 
to make and that is, we assume in our budget projections the 
implementation of the President's proposal, which is the proper 
thing to do and always has been done.
    Mr. Spratt. The question I am raising, is it realistic to 
make those assumptions at this point in time?
    Mr. Bolten. I think it is.
    Mr. Spratt. Do you think it is realistic that Congress 
would pass a $250 fee for veterans?
    Mr. Bolten. We can talk about the veterans policy. But the 
point I am getting at is, we have in fact proposed that policy 
in the past and we have in fact come in at or below the 
aggregate spending levels, just as we are this year.
    The point I am trying to make is, yes, we include all of 
our policies. Some of our policies save money, some of our 
policies cost money; we don't expect to get all of them.
    When we get to the final budget tabulation at the end of 
the year, we will be at or maybe even better than where we 
expected to be at the end of the year. We are ending up with a 
final deficit figure very much lower than we expected to end up 
with, and yet we have many of those same policies that 
ultimately were not enacted assumed in our budget. We had other 
policies that would have cost money that weren't adopted.
    Mr. Spratt. The point I am trying to make is, if a major 
part of your budget is based upon politically unrealistic 
assumptions about fees that have been proposed and rejected in 
the past, then the results you are holding out may not be 
attainable.
    Mr. Bolten. I think the results we are holding out are 
entirely attainable, and our record shows not only are the 
results attainable, but in fact we can exceed them. We are 
exceeding our expectations this year in just the last 5 months 
by $94 billion.
    Mr. Spratt. Let us go to revenues, because that is the 
biggest development since last February.
    Last February you had a pretty robust estimate for this 
year and next year with respect to revenues. It now turns out 
it wasn't robust enough. The revenue growth has been even 
greater than anticipated. I think you have added $87 billion to 
2005. You are adding $95 billion to the baseline, already a 
substantial number for 2006. And over the 5-year forecast, you 
are adding $406 billion to what you are projecting in the way 
of revenues back in February.
    Most of the spike that we are seeing in revenues, if you 
take individual income tax, for example, is based upon factors 
that may not be recurring. It is 66 percent of the increase in 
individual income taxes over the last 9 months is attributable 
to nonwithheld income, which means typically taxes levied on 
stock options, salary bonuses, and capital gains, which may or 
may not be repeated in the following year.
    I believe you used to be an employee of Goldman Sachs, let 
me show you Goldman Sachs.
    Mr. Bolten. I am smiling.
    Mr. Spratt. We have been preempted by the floor.
    Mr. Bolten. I remember the days when I made a lot more 
money.
    Mr. Spratt. You didn't get to deal with big numbers like 
this.
    Here is what Goldman Sachs says. We see the propects for 
additional cyclical reduction limited to 2005. The tax bonanza 
has been concentrated in the final settlements of 2004 tax 
liabilities. This is why it suddenly appeared in April and May. 
Thus the lion's share of this year's extra tax receipts 
reflects last year's strong profits, and that means conditions 
are not conducive.
    You have carried these increments that have been added this 
year and assume they will repeat themselves over the next 5 
years. Do you think that is defensible?
    Mr. Bolten. I think we have made very moderate projections 
going forward. First of all, with respect to the analysis you 
have just identified, I have great respect for and I know the 
folks who produced these estimates, but I don't think they are 
suggesting that our estimates are necessarily far off, No. 1.
    And No. 2, this same team projected last year that the 
deficit in 2005 would be $450 billion. We are actually coming 
in at $333 billion, and that is just over the course of a 
little more than a year that this team's calculations have been 
off.
    We are indeed making, very moderate projections going 
forward. The increase in revenue this year at over 14 percent, 
as the chairman pointed out, is remarkable. It is the largest 
increase in revenue in 25 years, maybe the largest real 
increase in much longer than that. We are not assuming, 
however, that we are going to get that kind of 14 percent 
increase year over year.
    If you will look at--Mr. Spratt, if I may call up a chart. 
If I could call up chart 6, what you see there in the medium 
blue line is 2005, where we have receipts going up 14 percent. 
In the years succeeding that, our projections show receipts 
growing by about 6 percent, which is entirely consistent, in 
fact a relatively moderate expectation for years of solid 
growth in the 3 to 3.5 percent range, as we are now projecting.
    Mr. Spratt. That 16 on a pretty big base, because you have 
the $87 billion, $95 billion additions, assuming that the surge 
will carry forward.
    Mr. Bolten. Two points about that. First, with respect to 
those elements that may have been--that may be one-time in this 
14 percent increase, we were aware of those. Those are things 
like the bonus depreciation, the repatriation of profits, and 
even some of the elements of the increase in individual income 
tax; and those were accounted for in our 2005 estimates.
    But more than that, as you look into the outyears and you 
look at historical precedent, when an economy is growing, there 
is very little precedent for an actual fall in revenues from 
the base you are operating from. So in terms of----
    Mr. Spratt. I am not saying your fault, whether the surge 
at today's level can be predicted forward. You do taper it off 
a little bit. I notice the numbers, but 8 into--5 into 406 
comes out to $80 billion a year. You have a fairly substantial 
increase there that you are assuming will carry forward.
    Mr. Bolten. I think so, but I think the projections going 
forward are quite moderate and based on moderate assumptions on 
economic growth.
    Mr. Spratt. I have one more question, and we will be back.
    Chairman Nussle. We will resume following the final vote on 
the floor.
    [Recess.]
    Chairman Nussle. We will resume the budget hearing. Mr. 
Spratt indicated that he had one final----
    Mr. Spratt. Just in time.
    Chairman Nussle. All right. I was actually going to 
preserve your chance and go to Mr. Neal. But I will let you 
ask--you said you had a final question. And then we will go to 
Mr. Neal.
    Mr. Spratt.
    Mr. Spratt. Mr. Director, I would like to show you our 
effort to try to extend this 5-year forecast to a 10-year 
forecast using assumptions about numbers that are either yours 
or CBO's, and this is a bit crowded. Do you have a copy of it 
in front of you so that you can see it?
    Mr. Bolten. I do, Mr. Spratt, and I appreciate the courtesy 
of your staff in bringing it to me during the break.
    Mr. Spratt. What we have tried to do is take this chart 
through 2010, using your numbers, and then match it with the 
CBO baseline for March of this year, and it is an uneven match. 
I will grant you there is not a complete interface there, but 
nevertheless we have connected the two.
    And when you look at the bottom line, the very bottom line 
in red, you will see what concerns me. The reason I ended my 
testimony, my statement, with the concern about the dire 
results we are looking at in those years, and why we don't 
think that we are looking at a situation where the deficit is 
going to decline and disappear. In fact, if all of the tax cuts 
renew, if the popular tax measures like the R&D tax credit 
renewed, if all of these renewed as of 2010, if the AMT is 
fixed--and we think politically it has to be, Treasury 
Department tells us 30 million tax filers will be paying that 
AMT instead of the regular rate in 2010--if you assume those 
things, if you put in the cost of the war--and let me tell you 
what that is. We are assuming here as CBO assumed, they did a 
model. CBO in effect said, look, we are not comfortable putting 
in the full amount of the supplemental and running it out for 
10 years, we think that overstates the cost of the war; on the 
other hand, zero doesn't give you an accurate forecast. So they 
tried to determine what would be, in the second 5 years from 
2010 through 2015, what would be a fair approximation. And what 
they have assumed is that beginning after 2006, the number of 
troops will draw down in Afghanistan and Iraq to about 20,000 
in each theater, 40,000 altogether, and that level will be 
maintained as a steady state for the whole time frame here. The 
cost of that is $384 billion.
    We have assumed that the first 2 years of the 
implementation of the President's Social Security privatization 
plan will be enacted as you presume. Heretofore when we have 
done that, we have been on rather tenuous ground, but now you 
put those two numbers in your budget, so we are just hooking up 
8 more years of what we expect to be the likely cost of that in 
the first 10 years, per the actuaries at Social Security. When 
you put all of that together, the bottom line after 2010 goes 
dramatically upward from $275 to $478 to $481 billion in 2012 
to a deficit of $534 billion in 2013, to, finally, a deficit of 
$629 billion in the year 2015. The cumulative deficit for 2006 
through 2015 will be $4.2 trillion. I don't think you would 
call that a desirable result. Where are we wrong?
    Mr. Bolten. Mr. Spratt, I believe the assumptions are wrong 
in many places. First of all, in those subsequent 5 years that 
are outside the budget window that we project and publish, you 
are using a CBO baseline that I expect even CBO doesn't agree 
with at this point, because you are using their March baseline, 
and my guess is that when they come out in August this will 
improve as well. We have not consistently agreed with the CBO 
baseline as the right way to go forward, even if we were back 
in March.
    Second, I am gratified that you have assumed the inclusion 
of $173 billion in transition financing for the President's 
Social Security personal accounts. May I report to the 
President that this reflects some support on your part.
    Mr. Spratt. On Social Security?
    Mr. Bolten. Yes, sir.
    Mr. Spratt. I wouldn't want to misrepresent that to the 
President.
    Mr. Bolten. All right. I will defer on that, but I am 
gratified that you have included that number in there.
    Mr. Spratt. I am simply picking up with where you left off 
using the actuaries' numbers.
    Mr. Bolten. But I do want to highlight that number in 
particular, because the--as I mentioned in my prepared 
testimony, the transition financing that does need to be 
incorporated into our deficit calculations is very different 
from the addition of government spending because it is not in 
the aggregate adding to the overall debt of the United States 
in any substantial way. When we do transition financing for 
these personal accounts, that is merely bringing forward an 
obligation that the Federal Government already owes to the 
retirees, letting them keep and invest some of their own money 
sooner than the Government would otherwise have to pay it back 
to them later.
    Mr. Spratt. But instead of having a balance in the Social 
Security trust fund resulting from the surpluses being 
accumulated there to about 2018, that money would be put in a 
private account, and therefore the surplus in the Social 
Security trust fund will be smaller as an offset to the rest of 
the budget.
    Mr. Bolten. Sure. And the obligations that the Government 
owes to that retiree later would correspondingly be smaller. 
What I am emphasizing here about that----
    Mr. Spratt. But for bookkeeping purposes, I think it will 
be just as we booked it here. I think it will still diminish 
the unified surplus.
    Mr. Bolten. Absolutely. But what I am pointing out here is 
that you would have to recognize the deficit effect, as we do 
in our own budget calculations going up through 2010, we would 
have to recognize the deficit effect of those--of allowing 
people to keep some of their own money in personal accounts.
    What I am pointing out is that is very different from 
increases in government spending which, overall, add to the 
long-term debt of the United States. I am assuming that, and in 
fact we should anticipate that along with the creation of these 
personal accounts there would be other reforms made to Social 
Security that would make the system sustainable on a long-run 
basis, bring it back into solvency. And I think the effect of 
all that on the budget cannot be viewed as anything other than 
a tremendous improvement over time.
    Mr. Spratt. But you are arguing effects now, the economic 
effects. What I am arguing for starters is just the bottom 
line; what are the numbers going to be. Look at the subtotal, 
the President's omitted agenda beginning in the year 2011. This 
is the sum of the further cost of the war, an AMT fix, and 
Social Security privatization for the most part, including debt 
service after those adjustments are made: $211 billion in 2011; 
$251 in 2012; $289 in 2013; $329 in 2014; and an additional 
$373 billion in 2015.
    Aren't those numbers pretty much by the book? Wouldn't you 
agree that if these policies are implemented we would have--or 
carried forward, we would have an adjustment to our bottom line 
in those relative magnitudes?
    Mr. Bolten. I think what I was trying to say, Mr. Spratt, 
is that I don't agree at all to the assumptions, and I don't 
think any fair observer would agree with the--as I said, the 
continuation of the CBO baseline. I don't think a fair observer 
would anticipate necessarily that we, in 2015--that is, 10 
years from now we would be spending $28 billion on the war in 
Iraq and Afghanistan.
    And with respect to the AMT that you have incorporated some 
calculations in there, the administration does believe that the 
AMT needs to be reformed. We believe that it can be reformed in 
the context of an overall budget-neutral fundamental tax 
reform.
    So I don't--I have to say I don't accept any of the 
assumptions that produce these numbers. And from my 
perspective, I don't think they at all change the outlook or 
the fundamental trajectory, the very positive trajectory on 
which our budget deficit situation appears to be headed not 
just in the next 5 years but in the years beyond.
    Now, if I can add one thing, Mr. Spratt. If you were to 
take this chart even farther out, I would be in complete 
agreement with you that we face a very serious problem that the 
chairman himself highlighted in his opening statement, and that 
is the tremendous unfunded liability in our entitlement 
programs: Social Security, Medicare, and Medicaid. That problem 
arises because of the retirement of the baby boom generation, 
the explosive growth in health care costs that we have 
experienced over the last several decades, and the actuaries 
project will continue, and those are problems that I think need 
to be addressed on their own.
    There is, in my judgment, there is nothing that can be 
done--even if we were to take your view of increased taxes, 
there is nothing that could be done on the basis of taxes or 
discretionary spending that could alter that trajectory in any 
substantial way. We need fundamental reform of our entitlement 
programs. But if what you are asking me about is the next 5 
years, probably even the next 10 years, I believe our budget 
trajectory is very positive and based on very sound policy.
    Mr. Spratt. But you sort of make my point, which is this is 
no time to be running huge deficits. We should be saving and 
preparing for the extraordinary demands that our entitlement 
systems and our aging society will impose upon us in the very 
foreseeable future. Indeed, if we kept our books the way the 
rest of the world and the whole business community keeps its 
books, by accrual accounting, these numbers would look several 
times worse than they apparently do, particularly since these 
are liabilities we know we have incurred already. These are not 
promises that are empty promises. We have promised people 
things based upon things they have done in reliance upon our 
promise; and knowing that, we should be booking those 
liabilities.
    But I am simply saying to you, I think adjustments of the 
magnitude we have got here for the omitted agenda are 
reasonable.
    Let me ask you about the alternative minimum tax. As long 
as it is on the books with no adjustment, no patch or anything, 
it means that you will actually have sort of a tax increase by 
virtue of the AMT. It is kind of a hidden increase in the 
budget, because every year people pay higher than the posted 
rates of taxes who are affected by the AMT. Wouldn't you agree 
it has to be fixed, changed, or repealed; something has to be 
done before it reaches $30 million tax dollars?
    Mr. Bolten. Yes, the administration does agree that the AMT 
tax----
    Mr. Spratt. But you don't have that anywhere in your 
projections over the next----
    Mr. Bolten. We believe that the AMT can and should be 
reformed in the context of overall budget-neutral fundamental 
tax reform.
    Mr. Spratt. And you would agree there is going to be some 
significant cost for Iraq and Afghanistan certainly after 2006, 
and probably for some years to come.
    Mr. Bolten. I was explicit about that in my testimony. But 
what I wouldn't agree to is that by 2015 anybody can tell us 
that we are spending $28 billion in Iraq and Afghanistan.
    Mr. Spratt. Well, that is 20,000 troops in Iraq and 20,000 
troops in Afghanistan and in the theater, it is about two 
divisions. Let us hope we are not. I hope you are right on that 
one. But it is not an unrealistic assumption on CBO's part. We 
will have a substantial troop presence. Particularly in a place 
like Afghanistan; 20,000 troops in a country that size is not a 
large assumption.
    Mr. Bolten. Mr. Spratt, I don't know how anybody can pre-
direct what the situation there will be in 2015 or in fact 
whether--if there is to be a continuing presence there a full 
10 years from now, whether that is not entirely absorbable 
within the regular defense baseline.
    Mr. Spratt. Well, the bottom line that we are not sharing 
today is we are looking after 2010 and we see some dire results 
after 2010; by our calculation, a deficit in the year 2015 of 
$629 billion and a total accumulation of debt of over $4 
trillion. So that gives us grave concern, No. 1, that we are 
not on the path to a declining deficit. And No. 2, if people 
get euphoric about today's numbers, it may take some of the 
unction, some of the impetus for moving forward and making 
those hard decisions away from us.
    Mr. Bolten. Mr. Spratt, I want to endorse your call against 
irrational euphoria and second the chairman's comment that this 
is not the time to ring the dinner bell, this the time to 
redouble our efforts at spending restraint. I believe the 
President's budgets reflect that, and we look forward to 
working with you to accomplish their objectives.
    Mr. Spratt. Thank you, sir.
    Chairman Nussle. Mr. Bradley.
    Mr. Bradley. Thank you very much, Mr. Chairman. Pleasure to 
be here this morning.
    Director Bolten, I am glad that you are here with good news 
on the budget. Going from $521 billion projected a year or so 
ago to $333 billion is indeed not just a step in the right 
direction but significant progress. And I think it is important 
to note that a growing economy is incredibly important for 
that, coupled with fiscal restraint.
    And so I am pleased that your message has stayed that we 
need to continue to grow the economy and exercise fiscal 
restraint.
    Let me, since I am on both this committee and the Veterans' 
Committee, let me touch on briefly an issue where there has 
been some projection snafus, and thankfully, due to, among 
others, the leadership of the chairman of this committee as 
well as the administration, progress made to fix those 
veterans' spending problems.
    But my question is: Are you assured that the projections 
that you have given us over the last couple of weeks--there is 
the $975 million shortfall and now potentially another $300 
million in this fiscal year and perhaps as much as $1.7 billion 
in fiscal year 2006--are you relatively assured that those 
numbers now are accurate and they will not change again?
    Mr. Bolten. Mr. Bradley, thank you for that comment and 
thank you for the question. We did have a substantial error in 
our 2005 and 2006 calculations in the amount of money that 
would be needed for veterans medical care. The error was based 
principally on a miscalculation of how many veterans would be 
coming new into the system. The Veterans Administration was 
projecting about 3 percent less than the 5.2 percent increase 
in the population that they ultimately are now seeing coming 
into the system in this year in 2005, and we now have to 
project forward into 2006.
    Secretary Nicholson has done a good job of trying to get 
his hands around that problem. I know that you and some other 
members of the committee have been very actively involved in 
ensuring that he does do that. He has taken a very careful look 
at their projections. He has taken a very careful look at how 
the mistake was made and how we can prevent it in the future. 
And I think he has made a great deal of progress in that and he 
has the full support of OMB in ensuring that, because the 
President's direction to me on this matter is, as it always has 
been, to ensure that our veterans get the best possible quality 
care and the care that they have been promised and the care 
they are entitled to.
    Mr. Bradley. Thank you for that answer. I am pleased that 
you have taken steps in working with Secretary Nicholson to 
rectify the situation, make sure that the projections are 
correct in the future. And I hope that you can address this if 
you wish. Part of taking those steps is to increase 
transparency of budgeting, working with some of the outside 
veterans groups on the budgeting, and perhaps you can address 
that.
    But the second part of my question, and perhaps we could 
have slide No. 17, is the improved quality of care of the 
Veterans Administration hospitals and the facilities. There 
have been a couple of newsworthy news reports, both in ``U.S. 
News and World Report'' and the ``Washington Monthly,'' that 
have talked about the improving quality of care at the VA. And 
my question to you is that 10 years ago that wasn't the case, 
and there were a number of reports that said the quality of 
care was not that good.
    Would you discuss the changes that have been made to 
turning around that quality of care that is so important for 
our Nation's veterans? And perhaps as I look at these charts, 
that has a major component in why we have been able to turn 
that around.
    Mr. Bolten. Mr. Bradley, this administration came in with a 
high-priority task of ensuring that our veterans got the best 
possible quality health care. Historically that has not always 
been the case, and I think we have made tremendous progress in 
the 4\1/2\ years since this administration has been in place. I 
think Secretary Nicholson can report today that we are serving 
more than a million more veterans than we have in the past with 
better-quality health care on a faster basis than they have 
ever been able to do before.
    You noted some outside reports. I noticed that one of my 
colleagues just passed me an article that you referenced from 
``U.S. News,'' entitled ``Military Might: Today's VA Hospitals 
are Models of Top-Notch Care.'' Now, this is not a case for 
complacency. There is a still a great deal more that Secretary 
Nicholson believes needs to be done. There are still many 
elements of veterans health care that need to be improved--both 
in terms of dollars, as the chart you have just put up shows, 
and in terms of commitment to ensuring high-quality care. I 
think the record has been and will remain a very strong one.
    Mr. Bradley. If I might just have a few more seconds, Mr. 
Chairman, certainly anecdotally when I talk to veterans in my 
district, they are always concerned about the level of funding, 
but I always hear the quality of care is dramatically 
improving. Your or Mr. Nicholson's former predecessor, 
Secretary Principi, was very helpful in my district in opening 
up a new outpatient clinic, and those have been a tremendous 
success. So I would agree with you that there is always work to 
be done. But the VA health care system is among the best health 
care in our country today and certainly you and Secretary 
Nicholson and Secretary Principi deserve credit for that. And I 
thank the Chairman for yielding me the few extra seconds.
    Chairman Nussle. I thank the gentleman. One note of concern 
that I would forward is that obviously a lot of attention has 
been given to the underprojection this year. As I understand it 
this is on the heels of I believe at least 2, maybe 3 years of 
where we had more than enough resources available in VA health. 
So, I don't know if it is as much of a question, as it is a 
concern that we do want to hit this a little bit more on the 
dime, and it is difficult to budget without having accurate 
projections. I realize that is singing to the choir, because 
you can't do it either. This is the concern, and it makes news 
when it is underprojected, but this is not news. This has, 
unfortunately, been a projection challenge that has been 
ongoing for the last couple of years.
    I don't know if there is anything there that you would like 
to comment on, Director, but that is an observation that I 
have. We have got to hit this a little bit tighter if we are 
going to be able to make plans for the future in our VA health 
and VA budgets.
    Mr. Bolten. Mr. Chairman, if I may comment briefly. I think 
you are absolutely right. And there have been 3 consecutive 
years preceding this one in which there was more money 
requested by the administration and more money appropriated by 
the Congress for the medical care portions of the veterans 
services than was actually needed in that year. I think the 
appropriations have exceeded the VA medical care needs by over 
half a billion dollars in each of the proceeding 3 years. So 
our calibration----
    Chairman Nussle. I don't remember any complaints about 
overprojection.
    Mr. Bolten. Our calibrations haven't been precise and you 
certainly want to--in the case of VA medical care, I think you 
certainly want to overshoot than undershoot. The President and 
I know Mr. Bradley, other members, and you were all committed 
to ensuring that there is never a shortfall in what we provide 
our veterans.
    If I can add one other comment, though, to Mr. Bradley's 
comment, and that is that indeed the reputation and I think the 
reality of the quality of care in the VA system has improved 
substantially in recent years. This may have contributed to the 
additional unexpected inflow of veterans into the system, 
because it is an increasingly attractive system, particularly 
compared to what is available in the private sector. Secretary 
Nicholson believes that that may have contributed to the size 
of the unexpected inflow of the veterans into the system. That 
is not to excuse the error, but it must be a partial 
explanation.
    Chairman Nussle. Thank you. Mr. Neal.
    Mr. Neal. Thank you very much, Mr. Chairman. I think part 
of that is also the number of veterans who are using the 
prescription drug benefit of the VA? Is that a fair assessment?
    Mr. Bolten. My guess is it is. And my guess is the 
prescription drug benefit is one of the attractions that draws 
a lot of members into the VA.
    Mr. Neal. So you have people that perhaps might not have 
used it in the past, but because of the cost of prescription 
drugs they have moved in that direction.
    Mr. Bolten. Yes. What Secretary Nicholson told me is that 
you often have a situation where a veteran who is otherwise 
eligible for veterans care, but is getting his care elsewhere 
in the private sector but not getting prescription drug 
coverage, decides to go over to the VA to get the prescription 
drugs. They find out that they like the system overall and move 
all of their health care over into the VA system.
    Mr. Neal. OK. Thank you, Mr. Bolten. Let me ask you, when 
can we expect next year to receive a supplemental request for 
the wars in Iraq and Afghanistan?
    Mr. Bolten. I don't know that we will depend entirely on 
the actions on the ground. What I can tell you is that the $50 
billion reserve that this committee put into the budget 
resolution, which we are assuming in our projections going 
forward, will take us substantially--assuming that level or 
something like that level is actually enacted by the Congress, 
which I think is a reasonable expectation--will take us 
substantially into 2006. Exactly how far into 2006 it will go. 
I will continue to argue that we should wait as late in that 
process as possible before requesting supplemental funding so 
that we can get as precise an estimate as possible of how much 
money we will actually need before we make that request to you.
    Mr. Neal. Well let me ask you then, Mr. Bolten. You can 
state with certainly, however, there will be a request for a 
supplemental next year?
    Mr. Bolten. No, I can't state with certainty, but with a 
high degree of likelihood I think.
    Mr. Neal. OK. You mentioned that any fair observer, before 
when you were responding to Mr. Spratt's questions. Do you 
think Lawrence Lindsey was a fair observer of the budget 
process and the needs for dollars for Iraq and Afghanistan?
    Mr. Bolten. I think Larry Lindsey is a brilliant economist 
and I am sure others would say he is a fair observer.
    Mr. Neal. You know where I am going, Mr. Bolten. You know 
exactly where I am going. How come when he suggested that it 
was going to cost at least $300 billion, the reaction from the 
administration was so negative? I mean, the administration said 
that in some instances we are going to be welcomed as 
liberators; and others, we would be out of there in no time. 
And recently, I mean, a high-ranking member of the 
administration suggested that the insurgency was in its last 
throes.
    And I am just curious as to why, when Mr. Lindsey raised 
the specter of a $300 billion price tag, that there were such 
long frowns at the White House.
    Mr. Bolten. I don't recall exactly what it is that Dr. 
Lindsey said.
    Mr. Neal. He said it was going to cost $300 billion at 
minimum.
    Mr. Bolten. Well, regardless, I recall----
    Mr. Neal. You picked the term ``fair observer,'' Mr. 
Bolten. Any fair observer, I think you said. That is what we 
are trying to be here today, fair observers.
    Mr. Bolten. Dr. Lindsey, I don't recall what his projection 
was, I don't recall the context. I don't recall even the frowns 
at the White House.
    Mr. Neal. Would you recall that he was relieved of his 
responsibilities shortly thereafter? You don't recall that 
either?
    Mr. Bolten. No, I do recall that he left. I don't think 
there was any connection at all.
    Mr. Neal. Do you want to check with your assistants that 
are here about that $300 billion price tag? Would they agree 
with the number that I have offered?
    Mr. Bolten. It doesn't matter to me to answer this 
question.
    Mr. Neal. That is the point. The point that I am trying to 
make, Mr. Bolten, is I understand precisely what you are 
saying. It is very hard to gauge what this is going to cost. 
But that is the trouble when we look at--and I was a cosponsor 
with Mr. Weller of the depreciation issue, and I think you 
would agree that that has bumped up revenue.
    Mr. Bolten. I am sorry. Which proposal?
    Mr. Neal. The accelerated depreciation exploration.
    Mr. Bolten. Yes.
    Mr. Neal. So would you agree that that has bumped up 
revenue?
    Mr. Bolten. Yes, and that was included in our projections 
when we made our initial projection in 2005.
    Mr. Neal. And it is hard to suggest, for example, that all 
of the numbers that you have given us today have just been 
based upon administration strategy, isn't it, given the fact 
that we all know that we are going to need another supplemental 
for Iraq come perhaps next spring? I know administration 
officials have suggested to me that it could be in February or 
March of next year. Is that a fairly accurate suggestion?
    Mr. Bolten. I don't know when it will come forward. My 
expectation is we will need additional supplemental funding for 
the wars in Iraq and Afghanistan.
    Mr. Neal. And in the past, the two supplementals have not 
been put on budget; is that the case?
    Mr. Bolten. They have been emergency supplementals, which I 
believe was then, is now, and will be the right way to handle 
any sort of war funding.
    Mr. Neal. OK. I appreciate you responding to the question.
    But there are a lot of uncertainties, and I think that it 
is also fair for those of us who are a bit more skeptical on 
this side to at least raise the specter, these numbers being a 
temporary snapshot as opposed to a long-term snapshot, I think 
as Mr. Spratt has accurately pointed out.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you. Mr. Ryan.
    Mr. Ryan. Thank you Chairman.
    Let me just add on to what my friend Mr. Neal said. And 
then I just had a question about tax receipts. Slide No. 14 is 
what I am going to reference.
    Each year we have our deficit projections, we have our 
budget projections. The administration has their policies, 
Congress enacts its policies. It all comes out in the wash and 
the macro effect that we have seen is the deficit is down by a 
historic precipitous drop. And so in years past, we have had 
supplementals for Iraq and Afghanistan. We may have acted on 
some of the administration's policies, and we may not have 
acted on some of the administration's policies. That happens 
every single year.
    Taking all of that into effect, I think it is important to 
note that we have an incredible thing happening here. The 
deficit went down by $94 billion this year. We are down from 
$521 just a year ago, from our projections. That is good news, 
and that is very, very important.
    So what I wanted to simply ask you, Mr. Bolten, is I 
realize, you know, we want to take you for everything that you 
have in your budget that you propose and if we don't hit that, 
that is going to blow up our deficit projections; but we have 
not ever acted on everything that the administration has 
proposed in its budgets, yet we are still overperforming 
against the benchmark that we have plodded toward in performing 
on reducing this deficit. And one of the things that is doing 
this are income tax receipts and tax receipts in general.
    And so the question that I just really want to ask, which 
is really interesting to me, on slide No. 14, if you take a 
look at 2002 we had a large drop in tax receipts. In 2003 we 
had a significant drop in tax receipts. And in July of 2003, 
that is when the tax cuts were enacted. Now, the 2001 tax cuts 
were tax cuts that were slowly phased in over time. The 2003 
tax cuts were the acceleration of those 2001 tax cuts in 
addition to the--I think the bonus depreciation. So the tax 
cuts actually took effect really in 2003, in July I believe it 
was; and so then you see immediately thereafter, in 2004, a 
surge in revenues. In 2005 we have this huge $260 billion 
increase in revenues.
    So the question I have, Mr. Bolten, is to what extent since 
those tax cuts passed have we increased revenues above what we 
projected them to be? And how much of that is attributable to 
this declining deficit?
    Mr. Bolten. Well, first of all, Mr. Ryan, I think you have 
stated the case better than I did to begin with. You are 
exactly right that the revenue projections that we have, the 
good news we have today is the result of increased revenues 
coming into the Treasury as a direct result of economic growth 
that was ignited, I believe, by the tax cuts.
    The numbers you point out are accurate. The 2003 tax cut, 
which accelerated the reductions in rates, brought them 
forward. The following year, with those tax cuts fully 
implemented, was a year of rising receipts, after the first 3 
consecutive years of falling receipts since the 1920s.
    Mr. Ryan. So income tax receipts went up as well.
    Mr. Bolten. Yes.
    Mr. Ryan. So we lowered income tax rates, yet after that 
lowering of those rates, the rates from those lower tax rates 
were actually higher than they were before at the higher tax 
rates.
    Mr. Bolten. They were indeed.
    Mr. Ryan. What is the difference in projections? I think, 
you know, Austin may have that behind you there. What is the 
difference in projections that you had from 2003 on up when 
those tax cuts took place?
    Mr. Bolten. Mr. Ryan, I may have a number for that. If I 
don't have it at my fingertips I will submit it for the record, 
because it is a very substantial number. However, I don't have 
it fingertips.



    Mr. Ryan. That is something I would be interested in seeing 
and we will get it later.
    The last point or question I have is Mr. Spratt correctly 
lined up the fact that we do have a tax tidal wave coming in 
this country at the end of the decade. We have the alternative 
minimum tax coming in each year. We have the President's tax 
cuts going away. In your baseline you do project, don't you, 
that we are going to extend those tax cuts, correct?
    Mr. Bolten. Our baseline assumes the permanent extension of 
all of the President's tax cuts except for those like the bonus 
depreciation which were intended to----
    Mr. Ryan. Which were already temporary. And I would just 
simply say--as a member of Ways and Means who serves on this 
committee as well--to Mr. Spratt that, you know, that is the 
reason we are having a tax commission, to rethink how we can 
better have a tax system to make us more internationally 
competitive, have a fairer, simpler tax system to improve our 
economy. But also to fix some of these problems that are on the 
horizon; not just the lack of permanency for these tax cuts and 
expiring provisions, but things like the alternative minimum 
tax. That is why we do have the President's Commission coming 
back, I think at the end of September now, to visit these 
issues.
    So it is not as if that is an issue that is just hanging 
out there that no one is paying attention to. Not only does OMB 
and this committee budget in our projections the extension of 
those tax cuts, we are also trying to think through how best to 
move forward with respect to the AMT and these other tax 
provisions so we can get this kind of success that we are 
seeing here today.
    I see my time has expired so I thank you, Chairman.
    Chairman Nussle. Thank you. Mr. Allen.
    Mr. Allen. I remember it wasn't so long ago when Alan 
Greenspan sat in that chair, and when asked about the effect of 
tax cuts, I think he accepted the tax cut reduction in taxes on 
dividends. But other than that, he said there is no significant 
continuing effect from the tax cuts passed in 2001 and 2003. 
That is what I recall.
    I have a specific question, and I am not going to--I can't 
call Alan Greenspan back to testify today, but that is my very 
clear memory of what he said.
    I wanted to ask you, Mr. Bolten, a question about the 
Medicaid program. The President's budget proposes deep cuts to 
the Medicaid program, and the actuaries at HHS (Health and 
Human Services Department) have estimated gross savings of $20 
billion over 5 years and net savings of $12 billion over years. 
When the CBO reviewed the President's proposals, they were 
unable to provide estimates for many of them due to a lack of 
detail. Representatives Spratt and Dingell sent a letter to you 
on April 13 of this year asking for more information about the 
administration's Medicaid proposals. The letter expressed a 
concern, which I share, that cutting Medicaid will merely shift 
cost to the States, which are already struggling with their own 
financial problems; secondly, to beneficiaries who can ill 
afford them; and third, to providers in the form of lower 
payment rates.
    The letter that was sent on April 13 requested estimates of 
the impact on States' analysis of the effect on beneficiary 
cost-sharing and coverage and the effect on provider groups. 
Representatives Spratt and Dingell have yet to receive an 
answer to that letter. And I will be glad to provide you with a 
copy.
    But the question is: Can we expect an answer soon--and by 
what date--to that particular letter? I will hand it to your 
staff.

                                   The White House,
                           Office of Management and Budget,
                                     Washington, DC, June 20, 2005.
Hon. John M. Spratt, Jr.,
Committee on the Budget, House of Representatives, Washington, DC.
    Dear Representative Spratt: Thank you for your letter of April 13, 
2005, regarding Medicaid proposals included in the President's FY 2006 
Budget.
    We support Congress's effort to restrain spending growth within the 
Federal Budget in the recently passed FY 2006 Budget Resolution. The 
President's FY 2006 Budget was designed to accomplish the same goal by 
addressing program integrity challenges currently facing Medicaid, 
which provides health insurance for more than 46 million Americans. 
Many States believe Medicaid's rules and regulations are overly 
burdensome, and the State-Federal financing system remains prone to 
abuse.
    The President's FY 2006 Budget proposed a range of program 
integrity proposals designed to restore the credibility of the Federal/
State matching system and address other payment concerns. The program 
integrity proposals would help reduce payment inefficiencies and curb 
questionable financing practices that have been used by a number of 
States to avoid the legally determined State matching funds 
requirements.
    Now that Congress has passed the Budget Resolution, we look forward 
to having further discussions with Congress on the specific Budget 
proposals. The Administration has not yet submitted any Medicaid 
legislation related to the FY 2006 Budget, but is eager to pursue our 
proposed reforms. We will continue to discuss these proposals with 
Congress as the authorizing committees develop their legislative 
proposals for FY 2006.
    Thank you again for your interest in the Budget and Medicaid. We 
look forward to working with the Congress to develop workable policies 
to make the Medicaid program more efficient while continuing to provide 
critical access to health care.
            Sincerely,
                                          Joshua B. Bolten,
                                                          Director.

    Mr. Bolten. Thank you, Mr. Allen. We will provide, if we 
have not already done so, we will provide a prompt response.
    But what I would like to say about the proposals in the 
President's program on Medicaid, which I very much hope will be 
taken up by the Congress and adopted in the reconciliation 
process, are not drastic cuts in the Medicaid system. They are 
proposed savings that will reduce the rate of increase in the 
cost of the Medicaid system from about 7.4 percent annually to 
about 7.2 percent annually. So the alarm that has been sounded 
about a drastic cut, I think is entirely unwarranted.
    Second, the President's proposals do not depend at all on 
reducing the provision of care to beneficiaries. What the 
President's proposals go to is program integrity to ensure that 
the Federal Government is paying only its fair share vis-a-vis 
the States, or even vis-a-vis individuals. We have a number of 
individuals who are out there who are effectively gaming the 
system by asset transfers and so on. The President's proposals 
are directed to trying to clamp down on the various games that 
have been played to attract Federal money where it does not 
belong, not an attempt to try to dig in at all on beneficiaries 
who are the poor people who need these medical services and the 
people we are trying serve.
    Mr. Allen. I understand that. And I certainly agree that 
those who are gaming the system need to--that issue needs to be 
dealt with, both with respect to individuals who are 
transferring their assets to family members so that they can 
qualify for Medicaid, and I understand you have issues with the 
way some of the States calculate their Medicaid reimbursement 
from the Federal Government. But back home at the State level, 
the kind of reductions that are being talked about in my State, 
and my understanding is around the country, are not perceived 
that way. They are perceived as reductions. And whether it is 
the rate of increase or the absolute amount makes no difference 
to the States because they have rising demand for Medicaid 
services all the time both in terms of costs and the number of 
people covered. And so it is perceived that the only way the 
States can cope with the kinds of reductions that are being 
proposed is by cutting benefits. Do you have a----
    Mr. Bolten. Well, I think what that highlights is that as 
Medicaid costs skyrocket, it is not just the Federal Government 
that bears an additional burden. It is really the States that 
are bearing the most difficult burden, which I think should be 
directing the conversation toward a rethink and reform of the 
way that we approach Medicaid so that we are sure that we are 
focusing our dollars on those most in need; not just for the 
benefit of the Federal Treasury but for the benefit of the 
State treasuries as well, which are increasingly stressed by 
their Medicaid obligations.
    Mr. Allen. I have just one very quick follow-up. You have 
included estimates for Medicaid cuts of $12.2 billion in your 
projections. CBO says the number is $7.6 billion. The budget 
resolution we passed says $10 billion. Isn't the $12.2 billion 
number that you have used overstating the savings, if either of 
the CBO or the budget resolution itself is the more accurate 
number?
    Mr. Bolten. I don't think so. I think it is a disagreement 
among the scorekeepers and actuaries as to what an individual 
policy will produce, and I think it is a legitimate 
disagreement that experts can disagree on. We believe that ours 
is more accurate. The fundamental point is that I don't think 
the policy changes are based on that. They are, I believe, good 
policy changes regardless of how much you believe they will 
ultimately save the Federal Treasury.
    Mr. Allen. OK. Thank you very much. I appreciate your being 
willing to respond to that letter promptly. Thank you.
    Chairman Nussle. I am just wondering, does the 
administration have a response to the letter requesting the 
Democratic leadership to appoint Members to the Medicaid 
Commission so that we can actually go through and reform the 
proposal, consider options, and consider what the Governors 
have called probably one of the most unsustainable policies 
that they have to deal with? I am just wondering if the 
administration has gotten a response to that letter yet.
    Mr. Bolten. Interesting question, Mr. Chairman. I don't 
know whether there has been a formal response. I do know that 
there has been no effort to contribute Members to that 
commission.
    Chairman Nussle. That is kind of what I thought. Mr. 
Crenshaw.
    Mr. Crenshaw. Thank you, Mr. Chairman.
    And thank you, Director, for being here today and bringing 
the good news about the economy growing and the deficit 
shrinking. And I know you believe, and I believe a lot of 
people believe, that the tax relief that we put in place has a 
significant impact on the economy and therefore revenues have 
grown. You let people keep more of what they earn, they get to 
decide how to spend, to save it, and invest it. But the other 
part is putting the brakes on spending that I think has helped 
bring about this good news.
    And I have the privilege of sitting on not only this Budget 
Committee but also the Appropriations Committee. And after we 
wrote the budget that when you take out homeland security and 
defense spending, the actual discretionary spending went down 
this year I think .8 percent. And the Appropriations Committee 
kind of followed the budget guidelines, adopted the spending 
bills, and the full House has now passed all of those. And so 
we have that in front of us.
    So we have kind of--I hope, as we have seen the tax relief 
work and then we have seen controlling spending work, part of 
that has to be evidenced by the good news that we see here 
today.
    So let me ask you a little bit about both sides of that. On 
the tax relief side, I think you just said that your 
projections include making permanent these tax relief packages 
we put in place, and I think that is good news. But we haven't 
done that yet. And so could you comment on what happens if we 
don't make those tax cuts permanent, which kind of is also 
another way of asking what if we hadn't have put these tax 
relief packages in place to start with, where would we be 
today? I don't think we would be talking about the good news 
that we have.
    But could you comment on that, on your view of where tax 
relief has brought us, and then what would happen if we didn't 
go ahead and make permanent the tax relief that we put in place 
before?
    Mr. Bolten. Mr. Crenshaw, thank you. Let me look back first 
and say where would we be today in the absence of the tax cuts 
that the President proposed and you all enacted. I think 
history will judge those tax cuts as among the best-timed and 
most effective tax cuts in the economic history of the United 
States. There have been a number of economic studies done that 
demonstrate that putting in place the tax relief in the way 
that you did and at the time that you did was essential to 
bringing growth back into the economy and especially to 
bringing job growth back into the economy.
    According to one study I believe done by the Treasury 
Department, there would have been in 2004, 3 million fewer 
people working in the absence of the tax cuts than actually 
ended up working, because we got the economy growing again. So 
that is looking backwards.
    Now, I don't think anybody can fairly disagree with that 
assessment now looking back in history. Looking forward, we do 
have a number of people disagreeing that we need to keep these 
tax cuts in place. I think it is essential that we do so. 
Raising the tax rates at this point, beyond what is included in 
the Tax Code as it now exists, in other words repealing some 
portion of tax cuts that you all put in place; whether it is 
the rates; whether it is the child credit; or the small 
business expensing, all of those elements I believe are 
important to sustaining the good economic growth that we are 
projecting out into the future years. We are not projecting 
spectacular economic growth, we have made conservative 
estimates. We are projecting growth in the 3 to 3\1/2\ percent 
range mostly out over the next 5 years.
    In order to realize those moderately good revenue increases 
that are on the chart that Mr. Spratt and I were talking about 
at the beginning of this hearing, we need to have that economic 
growth. If we don't have that growth, I believe that revenues 
will fall far off of our expectations, and our deficit 
situation could be substantially worse.
    Mr. Crenshaw. Thank you. Let me ask you just finally the 
question of--as we watched the deficit shrink so dramatically. 
Talk about your view of the deficit in terms of raw numbers, in 
terms of a percentage of GDP. I mean, where are we kind of 
historically; because it seems to me after this dramatic drop, 
the projected deficit being a little over $300 billion, where 
does that fit kind of in a perspective over the last 10 years, 
as a percentage of GDP or as a raw number? Because it certainly 
appears when it drops that dramatically, that that has to be 
good news.
    Mr. Bolten. If I may, Mr. Crenshaw, let me put back up 
chart 5, which shows our projections of the deficit as a 
percent of GDP. I emphasize, that is actually the right way to 
look at a deficit in the context of what are the resources 
available in our economy to pay off the debt created by that 
deficit. The dotted line you see there is the 40-year 
historical average. That is 2.3 percent over the last 4 years 
is the average deficit, it is the average budget position of 
the United States over the last 40 years. You will see that 
with these new numbers, we are bringing the 2005 deficit very 
close to that level. What we expect actually to happen is 2.7 
percent. That is just .4 percent over the 40-year historic 
average.
    Looking back over the last 25 years, assuming we do end up 
at 2.7 percent of GDP in 2005 that will be a smaller deficit 
than we have experienced in 15 of the last 25 years. It is not 
a place to stop for satisfaction. It is not a place, as the 
chairman emphasized, to ring the dinner bell, but it is a place 
to say well done so far; the economic plan is working.
    Now, we have more to do to ensure that we keep economic 
growth going forward and to ensure that we are not overspending 
while we are experiencing that growth.
    Mr. Crenshaw. Thank you. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman. I want there to be 
good news on the deficit. As policy cochair to the Blue Dog 
Coalition, we would welcome an administration's success on the 
deficit. But we also want the truth. We want facts, not 
fiction. I am a little worried that particularly my Republican 
colleagues may be a little overexcited today with the so-called 
good news that has been presented.
    Mr. Crenshaw mentioned earlier that he is an appropriator 
and that we have good news on spending reductions. Well, let me 
put in for the record the Cato Institute report which points 
out that the record for this administration is not one that you 
would want to brag on. The title of the report is called--and 
this is by Stephen Slivinski--it was issued May 3, 2005. It is 
called ``The Grand Old Spending Party: How Republicans Became 
Big Spenders.'' And it says in its summary that President Bush 
has presided over the largest overall increase in inflation-
adjusted Federal spending since Lyndon B. Johnson. Even after 
excluding spending on defense and homeland security, Bush is 
still the biggest spending President in 30 years.
    His 2006 budget, which you have recently revised 
projections on, doesn't cut enough spending to change his place 
in history either. So the time for self-congratulation is way 
premature.
    You had mentioned, especially in response to Congressman 
Spratt's question, that you are assuming the implementation of 
the President's proposals. Well, you probably know the old 
schoolyard phrase, ``The word `assume' makes an ass out of you 
and me.''
    Will the President of the United States enforce his budget 
by using his veto power or his rescission power or both, twin 
powers that he has never used in his Presidency? We have had no 
adult supervision of this Congress because President Bush is 
the first President since James Garfield in 1881 never to have 
used his veto, and poor Garfield was only in office for 6 
months. President Bush has never used his rescission power. 
President Clinton used it 163 times and president Reagan used 
it 602 times. But after 5 years, President Bush has never used 
his rescission power. So it is not enough to assume that the 
President's budget will be implemented.
    Y'all have let Congress run the show and Congress is not 
known for its fiscal restraint. We need a partnership here 
between the White House and Congress because the President's 
budget assumes, for example, $12 billion in Medicaid cuts. 
Well, the President will have the ability to enforce that. The 
President's budget assumes $10 billion in student loan cuts. 
Well, the President has the ability to enforce that. Will he do 
it?
    That is the challenge that we face, because getting 
overexcited about a relative decline in the size of the deficit 
looks a little ridiculous, because that means basically we are 
going to borrow a little bit less money from the Chinese this 
year to fund our overspending.
    It is like the navigator of the Titanic saying, well, the 
iceberg isn't as far off as we thought. It is little further 
off than we thought.
    Mr. Bolten, you are a very intelligent man and you know 
that your former employer is questioning a lot of the estimates 
you are making, because a business entity like Goldman Sachs 
looks at a more complete picture than artificial and 
constrained budget rules that we are obligated to use in this 
body. And the real budget deficit, even according to your 
numbers, seems to me to be these.
    While the deficit may look like $333 billion projected, you 
will also be borrowing $176 billion. From whom? Our Nation's 
seniors, by borrowing from the Social Security surplus.
    So the real deficit, the on-budget deficit that our Nation 
faces, even according to your own numbers, is over $500 
billion. In fact, it is $508 billion. Is that a cause for 
celebration or relief? Is that good news? Granted, it is 
slightly less huge than we thought, but it is still the third 
largest deficit in American history.
    And the other two prize winners were also contributed by 
this White House.
    Now you can say with some reason it is not, as a percentage 
of GNP, quite as large as some others, but this is not a record 
to be proud of. It took the first 204 years of our Nation's 
history to accumulate 1 trillion in debt. And now we are doing 
it almost every 18 months. And there has never been a President 
since Lyndon Baines Johnson to have sanctioned this much 
spending. And there hasn't been a President since James 
Garfield never to have used his veto.
    Will this policy change?
    Mr. Bolten. Mr. Cooper, I will endorse your call for a 
partnership between the Congress and those, including on the 
other side of the aisle, who have a genuine interest in forcing 
discipline. The President certainly does. He has had one and 
will continue to have one.
    On his behalf, on dozens of occasions last year, I included 
in Statements of Administration Policy a veto threat on 
appropriations bills if they exceeded the limits to which the 
Congress had agreed in its budget resolution and which the 
President had presented in his budget, the President's senior 
advisors would recommend that he veto the bill. In no case, Mr. 
Cooper, as the bills came down to the President for signature 
was it necessary for the President to exercise that veto 
because those appropriations lived within the budget limits 
that were set by the Congress in the budget resolution and in 
the President's budget. I anticipate we will be achieving 
similar success this year.
    The President's 2006 budget on the discretionary side asked 
for that discretionary spending to grow by no more than the 
rate of inflation, which is around 2.4 percent total 
discretionary spending and that there be an actual cut in the 
nonsecurity elements of discretionary spending. As Mr. Crenshaw 
and the chairman both emphasized, this House has delivered on 
that, has delivered appropriations bills. If the House versions 
were adopted, that would keep overall discretionary spending 
below the rate of inflation and would produce an actual cut in 
the nonsecurity elements related to that.
    I am very hopeful, as we take those bills into conference 
with what is produced in the Senate, we will come to a final 
resolution that produces those results that the President asked 
for, as they did last year which precluded the need to exercise 
a veto.
    On Social Security, Mr. Cooper, you are absolutely right 
that it has been the practice of this administration just as it 
has been the practice of administrations for decades going 
back, Democrat and Republican, to count the budget deficit on a 
unified basis, that is, including the Social Security surplus 
in the deficit calculations. That is the practice of CBO and 
the practice of everybody who looks at it. It is the right way 
to look at the borrowing needs of the United States because it 
is our cash position.
    If the concern is that money is being taken from the Social 
Security system and spent on current needs with just an IOU for 
the future, I would submit to you that the best way to prevent 
that from happening is to ensure individual retirees are able 
to keep money in their own accounts and invest it as they see 
fit rather than putting it into the Treasury coffers to be 
spent by the Federal Government.
    Chairman Nussle. Mr. Edwards.
    Mr. Edwards. Thank you, Mr. Chairman.
    Mr. Chairman, I am glad we are not adding over a billion 
dollars a day to the deficit, as we have been over the last 
several years, having gone from the highest surplus in the 
American history to the highest deficit. But I have a hard time 
thinking, Mr. Bolten, that my two children, two sons who are 8 
and 9, are going to celebrate as a historically positive event 
tax cuts that help take us from the largest surplus to the 
largest deficits in American history.
    And I have a hard time believing--while they may not 
understand it today, a hard time thinking that they will 
someday thank the administration and leadership in Congress for 
only adding this year $912 million a day to the national debt 
burden on their backs. When my children wake up tomorrow 
morning, they will have nearly a billion dollars more on their 
backs than they did today. I don't find that cause for great 
celebration. In fact, I think it is one of the powerful 
statements made today, how much the Republican leadership and 
Congress has changed--I think, in my opinion, even out of touch 
with a lot of Republican grass-roots thinking that we should 
celebrate a budget that is going to be $333 billion in debt 
added to our $7 trillion-plus national debt.
    The fact is, this is the third largest deficit in American 
history. The fact is, without the Social Security surplus, this 
year's deficit would be more than a billion dollars a day; in 
fact, I believe more than half a trillion dollars in 1 year.
    We have the largest trade deficit in American history. So 
the reality is that some of the economic growth we are seeing 
today is like a drug-induced high, except this time the drug is 
the deficit, and selling off American manufacturing, and basing 
jobs in foreign countries and borrowing money from them. And 
now we are starting to see the end result in what I think is 
unbelievable fiscal policy, the Chinese wanting to buy American 
oil companies. That is one of the end products of this unsound 
fiscal policy in my opinion.
    What really concerns me, if you look at classical 
economics, it would say that in a time of relatively low 
unemployment--which you are heralding, Mr. Bolten--and strong 
economic growth, we should have a surplus this year, not a huge 
deficit. And I don't think that portends well for the future.
    Let me point out, the fact is that the promise of reducing 
the deficit, that the administration's own policies created to 
reduce its own self-induced deficit by half over the next few 
years, is assuming we are going to balance that budget or 
reduce that deficit on the backs of veterans. I will say today, 
as I have said for the last 2 years, this administration has 
underfunded veterans health care services.
    The VA health care crisis we face in America right now 
should be a surprise to no one. It was not a surprise to the 
disabled American veterans last year, this year, or the year 
before last year. It wasn't a surprise to the American Legion, 
and it wasn't a surprise to the Veterans of Foreign Wars. And 
it wasn't a surprise to the Democrats on this committee, myself 
included, who offered 2 years in a row amendments to add $2 
billion to VA health care, which we said was needed to prevent 
cuts in veterans health care services during a time of war. 
Those amendments were rejected by virtually every Republican on 
this committee and not supported by the administration.
    I am glad, Mr. Bolten, OMB is now saying, the 
administration did get it wrong, and we are underfunding VA 
health care. But I do want to point out, I hope every veteran 
watching this today, Mr. Chairman, heard Mr. Bolten speak on 
behalf of the administration in saying, in his opinion, we 
funded the VA health care system too much money for about 3 
years running.
    Let me go on the record and say, every major veterans 
organization in America will vehemently disagree that we funded 
too much money for VA health care over the last several years. 
The reality is, some of that reserve fund that I assume you are 
referencing was being saved because the underfunding of the VA 
budget was so bad our VA administrators knew they had to cut 
out some very important services this year and last year to 
cover the shortfall that the administration was proposing.
    My question to you, Mr. Bolten: Does the administration 
stand by its projections for VA health care spending for the 
next 5 years? If so, do you admit that that is going to cause a 
cut in veterans' health care services? And if you don't stand 
by that projection, are you admitting that the country 
shouldn't really trust the numbers you are projecting that 
would reduce the deficit by half?
    Mr. Bolten. Mr. Edwards, let me address the veterans 
situation and emphasize, what I was stating about the previous 
3 years of veterans funding was a fact, and that is that the 
administration requested more than what was actually needed to 
be spent on veterans medical care. The Congress appropriated 
more than what was needed to be spent.
    Mr. Edwards. With that, I disagree strongly.
    Mr. Bolten. The record will reflect that very clearly, and 
it was contained in carryovers from year to year within the 
veterans care budget.
    If I can--put up chart 16, if we can. I think this 
graphically demonstrates, Mr. Edwards, this administration does 
not have a record of underfunding our veterans' needs. What you 
see here is that over the course of the preceding 8 years, 
spending within the Veterans Administration grew by $10 
billion. Over the course of the succeeding 4 years, it 
increased by $24 billion.
    We can go back a second to chart 15. The bulk of that 
increase was in veterans health care spending. The blue line 
represents the medical care spending, what you see, that has 
been increased by a total of 50 percent over the last year.
    Mr. Edwards. Didn't the number of veterans increase?
    Mr. Bolten. It did, by about 1 million people. With the 
various reports that I discussed earlier with Mr. Bradley, I 
think the report from the field has to be that over the course 
of the preceding years. The quality and the speed of care that 
our veterans are getting has improved, has improved 
dramatically, and may be one of the reasons why we are getting 
so many more veterans than we expected into the system.



    Now, as to our projections going forward, as to our 
calculations about how we will fully meet the needs of our 
veterans, as soon as the administration recognized that we did, 
indeed, have a shortfall, that there had been a miscalculation 
about how many veterans were coming into the system, Secretary 
Nicholson sought the additional funding. We got $1 billion in 
additional supplemental funding in 2005.
    There will be a 2006 budget amendment forthcoming that will 
take care of all of the needs we anticipate. I want to be sure 
that we are clear on the record that this administration's 
record on veterans medical care funding, I believe, is very 
strong.
    May I take 30 seconds, Mr. Chairman, and respond to one 
other thing in Mr. Edwards' presentation?
    Mr. Edwards. Mr. Chairman, if you extend his time, will you 
extend my time by the same amount?
    Chairman Nussle. You asked one question at the end and 
expected him within 3 seconds to answer the question. I have 
been very generous with time. I will give the witness an 
opportunity.
    Mr. Edwards. Just match the time that you add to him.
    Chairman Nussle. This is a hearing for the witness. If you 
would like to testify as a witness, we will extend the hearing 
and let you testify to your heart's desire. What we would like 
to do is get the testimony from the witness here today and move 
on.
    The witness may respond.
    Mr. Bolten. Thank you, Mr. Chairman. I will take only 15 
seconds because I will have a further chance to address this, 
but I would just say, Mr. Edwards, far from creating the 
deficit situation that the administration found itself in as it 
entered into office, I believe the administration's policies 
brought us out of that.
    The deficit that the President encountered as he was 
entering into office was already baked in, the result of very 
slow economic growth. The economic growth policy that this 
President and this Congress put into play is what has brought 
us out of that and enables us to show a declining deficit out 
over the next 5 years.
    Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. A lot of the discussion 
has turned on the utility of the tax cuts and the wisdom of 
extending those tax cuts, and I think you have gotten the gist 
of the argument that has played out. People on this side of the 
room tend to think that the tax cuts were a bit outside.
    I want to turn the conversation away from the size of the 
tax cuts to how the tax cuts were structured. One of the 
concerns that I certainly have, and I think a number of my 
colleagues on this side have, to an overwhelming degree the 
beneficiaries of these tax cuts were people at the top end of 
the economic sphere.
    It is obvious people who pay more taxes get bigger tax 
cuts. I am talking about the fact that people who are mid-
income wage earners, relatively low-income wage earners are 
still paying taxes. The amount of reduction over the last 
several years has been very low. I have seen data in my 
district, where the median income is not a high one, the 
average wage earner pocketed about $36 to $42 a month in tax 
relief.
    What I want to explore with you is, if a different policy 
had been pursued, if we had had roughly the same number of tax 
cuts, but it shifted the benefit more toward people of the mid-
income section, where we also have had a stimulative impact 
that you celebrate, could we have had an even greater 
stimulative impact?
    One of the things from the business section of the ``New 
York Times'' today, headline, ``How Long Can Workers Tread 
Water, Income Gains Go Mostly to the Affluent.'' We know well 
before seeing this that in our economy in the last several 
years, wages from the service and manufacturing sectors, where 
most people work, have been stagnant. We know there is a 
greater gap between skilled workers and unskilled workers than 
what we had 10 years ago. And the proposition that I would want 
you to comment on is, if we had pursued a strategy of 
concentrating our tax relief more toward middle-income 
Americans, what would the stimulative impact have been? Can we 
conclude that the stimulative impact would not have been as 
good, or greater than what we had?
    And the second question I want to pursue with you is 
related to that. In the budget submitted by your 
administration, there has been--the numbers ebb and flow a 
little bit, but by and large there has not been a commitment to 
worker training or to preparing workers to retool to do the 
work that is available in the wake of globalization, the work 
that is available in this new economy. And I am sure some in 
the administration would say there have been nominal increases, 
but I think you would agree this is an area of underinvestment 
in the budget and in our economy.
    What if we had a much greater investment in training people 
to do the work, sharpening peoples' job skills? What if we had 
a greater investment in K-12 education or for that matter in 
Perkins grants or Pell grants, all of the things that might 
allow the public education system in this country to move 
people into stronger economic footing? Would that not have a 
significant stimulative impact?
    And the final point I want you to cover is a generic point 
about this whole proposition, tax cuts lead to growth which 
leads to more revenue. Sometimes when I hear these arguments 
play out, they have a little bit of the force of theology. A 
lot of people on the other side of the aisle believe in this so 
much that they don't want to be too troubled by what the Old 
Testament says, but they really like the New Testament stuff, 
or they like the way it sounds.
    Just some basic numbers that I raised with you and Mr. 
Holtz-Eakin, with Secretary Snow, and with the chairman: As I 
understand it, you look at corporate tax receipts, and 
individual income tax receipts, right now they are about 16 
percent of GDP. That is the lowest level we have had since 
World War II--around 22 percent in the 1990s, around 28 to 30 
percent in the 1960s, around 25 percent in the 1980s.
    Obviously, in the 1980s, 1960s, and 1990s, we had sustained 
significant economic growth across all economic class lines; 
and if this theology had a little bit more force, it would seem 
we ought to be having some of the greatest growth we have had 
since World War II, based on tax rates going down so low. Those 
are the three propositions I want you to comment on in 15 
seconds or whatever time the Chair will give you.
    Mr. Bolten. Thank you, Mr. Davis.
    If the Chair would allow me a couple of minutes to respond 
on each of those. May I start with chart 9? I will take them in 
reverse order because I can remember the last one.



    This is a chart showing what percent of GDP is taken by the 
Federal Government in taxes. You see them dropping--the share 
of the GDP dropping off dramatically in the first 2 years of 
this administration. It might be facially attractive to some on 
that side to attribute that to tax cuts, but in fact there is a 
very little element of tax in that drop-off. It is principally 
related to bad economic performance.
    We experienced a stock market bubble at the end of the 
1990's and into 2000. With the bursting of that bubble, with 
the onset of recession at the beginning of 2001, Federal 
revenues just fell off of a cliff. This was before even the 
beginning implementation of any of the President's tax 
policies.
    The point I want to make to you with this chart is, what 
you see with our projections is here in 2005, we are actually 
restored to about a 17.4 percent of GDP tax take of the economy 
and projecting out. Going forward with the President's tax cuts 
fully implemented, we project ourselves out close to the 40-
year historical average of taxes being taken out of the 
economy.
    Mr. Davis. But you project slower growth over that period 
than we have had 40 years prior to that.
    Mr. Bolten. You mean the 5 years going forward? I think our 
growth is actually projected to be just about average solid 
growth. We are projecting between 3 and 3.5 percent GDP growth. 
That is consistent with Blue Chips and it is not spectacular, 
but it is healthy growth in the economy.
    Let me turn quickly to the training point because I don't 
want to try the chairman's patience here.
    The administration has made a strong investment in our 
training programs. They are indeed troubled because many of 
these programs are not delivering the kinds of results that 
they should be. Secretary Chao has been working, and will be 
working further, to try to ensure that our training programs 
are targeted to actually achieving results rather than just 
getting money out the door. I think she has made a number of 
improvements and there are more improvements on the way, but I 
would join in the sentiment that a well-targeted and effective 
training program can be very useful in preparing our citizens 
to participate in a strongly growing and--contributing to a 
strongly growing economy. So I would associate myself with that 
sentiment that you expressed.
    Finally, on taxes, if I could have chart No. 10, I want to 
begin by challenging your assumption that the tax cuts that the 
President and this Congress put in place somehow shifted the 
burden of taxation away from the upper income more toward the 
lower income. What this chart shows, the blue bars are what 
would be the tax take from these earnings categories if the tax 
cuts had not been implemented. The yellow bars show what they 
are now with the full implementation of the President's tax 
cuts.



    I will just take a set of bars in the middle, top 5 
percent, that is, people making over $140,000, so people doing 
reasonably well; in the absence of the President's tax cuts, 
those people would have been paying 51.7 percent of our total 
income tax take. After the President's tax cuts, they pay 54.1 
percent of the total income tax take.
    What has occurred with the President's tax cuts, although 
you correctly observed that if you are the one paying a lot of 
taxes and there is a cut, you are bound to be saving more 
dollars than somebody who is not paying a lot of taxes. What 
has occurred with the President's tax cuts is that a larger 
share of the burden of our income tax is now borne by our 
upper-income citizens than ever before. What you see on the 
right side there is the top 10 percent of income earners in 
this country are now paying close to 66 percent of the total 
income tax take in this country, up from 64 percent.
    So the economists can have arguments about what kind of tax 
cut is the most stimulative. I think most economists will tell 
you, depending on the situation, the one that produces the most 
economic growth may be the one that is targeted toward the very 
top rate, the very top marginal rate is the most effective 
thing to do. They may tell you that a cut in the capital gains 
tax or the dividend tax has been most effective in spurring 
business, investment and growth. Regardless of what the result 
of that argument is, the result of the President's tax cuts has 
been that the wealthy bear a greater share of our income tax 
burden than they did in the past.
    Mr. Davis. I will try to keep it inside 10 seconds.
    My concern, Mr. Bolten, is not so much the relative share, 
but the fact that the bottom line is that we have had slow wage 
growth. We have had rising tuition in a lot of States. We have 
had rising State income taxes. We have had rising prices. 
People are concerned about food and gasoline. And I would like 
to see some policy.
    Because, frankly, we have not had a sustained round of 
significant tax cuts for people earning under $80,000 in the 
last 30 years in this economy; and if we were so fixated on 
getting stimulation out of our tax cuts, I would want to see us 
move in that direction.
    Chairman Nussle. Ms. Schwartz.
    Ms. Schwartz. Thank you, Mr. Chairman. I appreciate it.
    What I wanted to ask, specifically, is about the interest 
payments that we are making on the debt. And I appreciate what 
was said already about the fact that we are seeing a smaller 
deficit being created this year than in the past. That doesn't 
say that we--as the chairman said in his opening remarks, 
rather large--he said, large deficits in the near term. I want 
to talk about what that means to the American people and the 
people in my district, who are not aware of how much money is 
going into interest payments by our Government.
    And just to reflect on it for a moment, we passed a 
bankruptcy law not too long ago in Congress that the President 
signed quite enthusiastically, and we actually did that, 
calling on individual families to take personal responsibility 
for their finances. But I think it is very important for the 
American people to say we may not be doing all that we could on 
the Federal level and acting responsibly in the way we create 
these budgets.
    And it is not just what we say, but what we do and what is 
reflected in these many charts. But basically the spending plan 
has to reflect basic budgetary principles. We have to meet our 
obligations. We have to work within the resources we have. And 
we have to make smart investments that will ensure the well-
being of our Nation now and into the future.
    And just answer this ``yes'' or ``no,'' if you would: Isn't 
it true that the Federal Government is spending more on 
interest payments on the debt that we have--more than we are 
spending on education, veterans' health care or the 
environment?
    Mr. Bolten. Ms. Schwartz, I don't know whether it is true 
or not. It may be true.
    Ms. Schwartz. I will give you some numbers and I am sure 
your team could help you. In 2004, the Government spent $160 
billion on interest payments, more than double the 
appropriations for education, training, and social services, 
which was $78 billion; five times more than the amount spent on 
the environment, which was $31 million; five times more than we 
spent on veterans' health care which was $29 billion.
    By the year 2010, under the current administration's 
policies, we will be paying $312 billion in interest payments, 
4 times greater than Federal funding for education, over 10 
times more than projected spending on the environment, and more 
than 10 times more than expected on veterans.
    That is stunning to me as a new Member of Congress that we 
are spending those sums of money.
    So while we may be proud that we have less of a deficit 
this year than previous years, we do have this enormous debt in 
this country that is costing us a great deal, and it is 
freezing out our ability to make the kind of investments that 
we need to in Americans, in education, in health care, and in 
the environment and some of the economic stimulus that will 
help us now and into the future.
    How do we get out of this box is what I would ask you 
about, given that you have said that we are actually pretty 
optimistic about things? The American people have to 
understand, the priority of this administration is really much 
more on paying this interest payment than getting our fiscal 
house in order.
    Mr. Bolten. Ms. Schwartz, I have to say I agree 
wholeheartedly with a lot of what you just said, and the 
priority for this administration is in fact on ensuring that 
there is growth in the economy. This is what people really need 
to prosper themselves, and to restrain spending, the 
combination of which brings us into some sort of fiscal 
balance.
    Let me put up chart 22, if I may, and just talk a little 
bit about that, because in celebrating the good news today, I 
had intended to be clear--and I know the chairman was clear in 
his opening remarks--in indicating that it is an improvement 
over where we have been, and I believe a strong vindication of 
the policies we have been pursuing.
    Does that mean it is time to ring the dinner bell? 
Absolutely not.
    What this chart shows is that as you look out into the 
future and as we plan our budgets, we need to be cognizant of 
where we are taking the situation in the future. You will see 
that the part that is growing enormously as a percent of GDP is 
the dark blue part, the entitlements and our mandatory 
programs. The green part, the interest payments of the Federal 
Government, are the obligations that we have to pay. There is 
no option about that. If there is a debt, you have to pay it.



    Ms. Schwartz. Unless we are doing well enough to pay down 
principal. That is what we ask people to do, as well.
    Mr. Bolten. That is the administration's objective, and we 
have urged a variety of measures of spending restraint. I don't 
believe you can get there by tax increases that will harm the 
economy and make it more difficult.
    Ms. Schwartz. In my remarks, I didn't make that suggestion.
    Mr. Bolten. Some of your colleagues have. If that is not 
the right way to go, then the right way to go is spending 
restraint, which the President has indicated in his budgets, 
and the House of Representatives has indicated in its 
appropriations it is willing to accept.
    The reason I put this chart up is that spending restraint 
in appropriations is only a part of the story for making us 
look good out over the next 5 or 10 years, which is the budget 
window I have been reporting on.
    The budget window beyond that is not favorable at all, and 
it is reflected by the enormous growth in that blue area. 
Because that blue area grew so much, the green area grows 
correspondingly as well. It is the enormous unfunded liability 
in our entitlement programs that really threatens our fiscal 
situation and makes it very difficult for us to plan to try to 
pay down any of the interest. On the contrary, it means that 
interest itself could contribute to overwhelming the ability of 
our resources to pay for our debts.
    What that says is, in addition to continuing progrowth 
policies and exercising restraint with our appropriated 
spending, we need to pursue fundamental reform in our 
entitlement programs. I believe this President has stepped 
forward in a major way with his Social Security plans. We also 
need to look at the Medicare and Medicaid systems as well.
    Chairman Nussle. I thank the gentlelady. I recognize myself 
now for my question time, just to say a couple of things. One 
is, I think this is a great way to end. The gentlelady and our 
witness today have kind of brought us to the threshold of the 
next big project that our committee is going to undertake 
together, with obviously the other committees of Congress, and 
that is called reconciliation.
    It is a huge project, and it was in large measure the blue 
area that was being discussed in your testimony, and it is the 
hardest area to control.
    The most difficult votes and some of the biggest challenges 
are coming. I have checked my schedule, and I didn't see any 
celebration on my schedule today. I am not celebrating, but I 
am optimistic. When I see that real GDP has increased for 14 
consecutive months, that gives me some optimism about America. 
With the strongest growth in 5 years, that gives me optimism. 
When I hear we have created 3.7 million jobs in the last 25 
months, that gives me optimism, that doesn't make me frown.
    There has been a lot of frowning around here today. And I 
understand there are challenges out there and no one has 
scheduled a celebration. However, we should be optimistic about 
the fact that we have an unemployment rate that has fallen from 
6.3 percent 2 years ago to 5 percent now, meaning that 95 
percent of Americans who are out there and want a job--and I 
remember back to my college days what the definition of full 
employment was, that is pretty darn close to full employment 
from the old textbook models of what full employment is all 
about, where the other 5 percent are in school or looking for 
work or in transition.
    Total employment at record highs; 141 million people are 
working. In fact, my son is one of them, he just got his first 
job as a teenager. Growth in the business equipment investment 
is the best in 6 years, and home ownership rates are at record 
highs. The gentleman who spoke earlier about people who are 
particularly at middle income and lower income, and owning a 
home is a gigantic part of being self-sufficient and being 
secure. And then, as I said in my opening, you don't have to 
believe us here today. You can look to what the private 
forecasters are saying, and they expect this kind of growth to 
continue. That makes me optimistic.
    I understand we have work to do. I was the first one to say 
it, I will be the last one to say it, I have no doubt. But I 
also know that we will be joined in this effort by a number of 
other committees as we try and do the spade work this year with 
the reconciliation process to get that under control. It is 
about reform, not just reduction in spending, but reforming it 
to deliver a better quality product to the people we are trying 
to serve.
    This committee is leading that effort, and I am proud of 
the leadership and I am proud of the leadership the President 
has made.
    You have been very generous with your time here today, as 
well as in your delivery and how calm you have been; and I--do 
you have a celebration on your schedule today? Maybe you 
deserve one, but we do appreciate your coming up and spending 
time with us, and we look forward to that opportunity again in 
the near future.
    Mr. Bolten. Mr. Chairman, I thank you and Mr. Spratt and 
all the members for their courtesy.
    Chairman Nussle. If there is nothing else to come before 
the committee, without objection, we will stand adjourned.
    [Whereupon, at 1:05 p.m., the committee was adjourned.]

                                  
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