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


 
                         THE PRESIDENT'S BUDGET
                          FOR FISCAL YEAR 2007

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 8, 2006

                               __________

                           Serial No. 109-12

                               __________

           Printed for the use of the Committee on the Budget


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



                                 ______

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
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, February 8, 2006.................     1
Statement of:
    Joshua B. Bolten, Director, Office of Management and Budget..     7
Prepared statement, additional information requested of Mr. 
  Bolten:
    Prepared statement...........................................    12
    Mr. Spratt's question regarding the deficit..................    18
    Mr. Cooper's question regarding health savings accounts......    36
    OMB's reply to Mr. Hensarling's question regarding the 
      Federal role in hurricane relief...........................    48
    OMB's reply to Ms. Schwartz' question regarding energy policy    55
    Mr. Simpson's question regarding the TRIO Program............    60


                         THE PRESIDENT'S BUDGET
                          FOR FISCAL YEAR 2006

                              ----------                              


                      WEDNESDAY, FEBRUARY 8, 2006

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 11 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Crenshaw, Putnam, 
Wicker, Garrett, Barrett, Simpson, Mack, Ryan of Wisconsin, 
Diaz-Balart, Hensarling, Ros-Lehtinen, Lungren, Sessions, 
McHenry, Conaway, Spratt, Moore, Neal, DeLauro, Edwards, Baird, 
Cooper, Davis, Jefferson, Allen, Case, Cuellar, and Schwartz.
    Chairman Nussle. Good morning. The full Committee on the 
Budget come to order. This is a full committee hearing on the 
President's budget for fiscal year 2007. I want to thank 
members for their attendance today. As members know we will not 
have votes until after 6:30 p.m. on the floor and so we 
appreciate you coming back for this hearing.
    The hearing will end at 2:30 p.m. today because of the bill 
signing ceremony for the Deficit Reduction Act at the White 
House.
    And so the director needs to be able to get back to that so 
we will end it at 2:30 p.m. and try and expedite as many 
questions during that time as possible.
    On Monday, we received the President's budget request for 
fiscal year 2007 which marks the traditional start of the 
congressional budget planning for the coming year, but as all 
members know, this started in earnest last year with the onset 
of the challenges from Katrina, et cetera.
    We have with us today the director of the administration's 
Office of Management and Budget (OMB), Josh Bolten, to walk us 
through the President's proposal. As always, the President's 
request is based on OMB's budget and economic forecast. So one 
of the goals of this hearing is to get a solid understanding of 
what that foundation is, that bases the President's budget.
    Before we hear from the director, I would like to take just 
a few minutes to review what the Congress' budget experts, the 
Congressional Budget Office (CBO), had to see about the budget 
and outlook for the economy in their report released just a few 
weeks back, since this is the basis for the work that we do 
here in Congress in developing our budget.
    So let me start with the economy and revenues. Over the 
past few years, we have lowered the tax burden on Americans, 
because it is our fundamental belief that the people back home 
make much better decisions about their daily lives. The 
decisions they make around the kitchen table are to be honored, 
understood, and respected as they invest in their own 
businesses, on their farms, with their families, and 
communities, and it is just as an important issue than even 
what the Federal Government can do for them.
    As a result of giving Americans more control over their 
money, we have seen more investment, we have seen more jobs, 
and we have seen greater opportunities for this country. The 
economy as a whole has grown at a strong average of 3.8 percent 
since the tax relief was passed in 2003.
    Over 4.7 million new jobs have been created in the past 
2\1/2\ years. The unemployment rate has now fallen to 4.7 
percent, the lowest in years, and we have had 17 straight 
quarters of growth in this economy. As our economy grows, more 
jobs are created and personal incomes increase, which gives 
people and families more ability to make those decisions around 
their kitchen tables. As a direct result of that growth, 
revenue that comes into Washington is on the rise. Again, a 
phenomenon that many describe, but it appears that few 
understand--revenues actualy increase to the Federal Government 
when you reduce taxes, the way we have in the past number of 
years. In fact, we saw revenues coming into the Federal 
Government up 15 percent more than last year alone. A 15-
percent increase is almost an unprecedented level of revenue 
increase. We lowered the tax burden, told people to keep, 
spend, invest, and use their own money as they saw fit, and 
Federal revenues actually went up.
    Let me show you a chart of revenue projections. As you see, 
coming into 2003, before we made that unprecedented decision 
and put this plan that we have in place, revenues were falling. 
It was one of the first times in American history that we have 
seen that kind of 3-year drop in revenues. And since then, 
revenues have been on track to grow at an average rate of 5.3 
percent in the next 5 years from what we have already done in 
the last 3 years. According to CBO, assuming that we don't 
increase taxes or allow taxes to be automatically increased, 
this trend is set to continue and that is good news.
    Of course, that is only half the picture, the challenge 
that we have, I believe, is on the spending side. Over the past 
few years, we have seen a major, necessary, and deliberate 
shift in our Nation's spending priorities. We were already 
faced with ongoing demands in critical domestic areas, such as 
education, transportation, health care--there are many. And now 
we are facing continuing threats of international terrorism, 
the nearing retirement of baby boomers, the growing pressures 
of inadequate domestic energy supply, and the continuing sky 
rocketing of medical expenses.
    All of these need and place greater demands on an already 
stretched Federal budget, and it doesn't get any easier from 
here.
    Getting control of the budget requires that we understand 
and manage this ongoing shift of balance of our priorities. 
Last year, we set forth a plan to keep a strong growing economy 
and to create jobs while controlling spending both across the 
board as well as our continued progress in reducing mandatory 
expenses and reducing the deficit. We followed that plan and 
even in the face of an ongoing war, debilitating national and 
natural disasters we made some real progress, and we kept our 
economy pumping along at a robust pace.
    As I have noted, we have seen the creation of millions of 
new jobs, unemployment rates at historical lows, and increases 
in revenues coming into the Federal coffers. We have held our 
nonsecurity discretionary spending to a freeze, tighter than 
the previous year's 1.3-percent growth. Which is small by most 
people's measures, but certainly a marked improvement from the 
previous 5-year average of growth in the discretionary spending 
accounts of over 6 percent.
    And just last week, we completed work on the Deficit 
Reduction Act of 2005, which we anticipate the President will 
sign into law later today. This legislation begins the process 
of reforming the very important Federal Government programs 
which are, I believe, the least sustainable programs. And for 
the first time since the Balanced Budget Act, we have in the 
process saved taxpayers as a result of this bill, $40 billion 
over the next 5 years.
    As a result of all of this, we have also accomplished 
dramatic deficit reduction in just these past few years. Let me 
show you a chart that demonstrates that. But as OMB tells us 
today, and we will report, after $200 billion of consecutive 
deficit reduction, we now have a short-term increase of $105 
billion in our deficit picture. This increase is due to the $85 
billion in emergency spending that we all provided, to help 
folks in the gulf coast region following the natural disaster 
of Hurricane Katrina, and the additional $70 billion that the 
President proposes to fully fund our soldiers in Iraq and 
Afghanistan and provide additional hurricane relief for the 
future.
    As we know, had our economy not been so resilient, the bump 
in the deficit would have been much worse. Thankfully, we are 
growing at this period of time, and that must continue. These 
setbacks serve as a pretty solid reminder that controlling the 
budget isn't a one-stroke fix. It is a long-term, step by step 
commitment that takes resolve, particularly when extraordinary 
circumstances make it difficult.
    Let me turn to the fiscal year 2007 budget.
    So today it gives us not only an opportunity but a 
challenge in crafting this year's budget. I believe our 
priorities need to be very clear. No. 1, we must support our 
economy's continued strong growth in job creation. No. 2, we 
need to ensure that our freedom and security is preserved here 
at home as well as abroad. No. 3, we must continue our efforts 
to reform and strengthen our most critical programs and do this 
all while we are reducing the cost of government and reducing 
deficits.
    Our challenge is also clear. Second guessing is not a plan, 
and political posturing is not a plan. Just complaining and 
wringing your hands is not a plan. We must determine the best 
course and craft a plan, the right plan, so that we can proceed 
from here, and that process begins today.
    On my side of the aisle, we will spend this weekend in 
conference, to talk about this year's budget, to talk about our 
priorities, and I will be making two strong recommendations to 
my conference.
    No. 1, that we go through reconciliation again this year. I 
realize that that will cause some angst for Members. Already we 
are hearing hand wringing in the newspapers that you can't 
control budgets during an election year, that you can't reduce 
spending, that you can't reform government.
    I dismiss that. I reject that. I believe that part of the 
challenge that we are faced with is the result of us not going 
through a routine reconciliation process, a routine reform 
process where we have the opportunity to pull weeds out of the 
garden so that we can ensure that the garden is vibrant and 
continues to provide the kind of fruit that we believe is 
important, but pulls those weeds that are strangling our growth 
or making it difficult for us to maintain the kind of 
commitment that we have maintained within the budget. 
Reconciliation, even at a nominal amount, is an important 
process to go through constantly to reform our most important 
projects.
    And No. 2, I am going to make a strong recommendation to 
our conference that we have no new earmarks. I have made this 
suggestion a number of years in a row, and it has been 
rejected. It may be rejected again this year, but let me tell 
you, if we are not going to go through reform, if we are not 
going to go through reconciliation, then I don't believe we 
should have the opportunity to go our taxpayers and tell them 
all the good things we brought them in the form of earmarks. We 
need to do both. We need to reform our important programs, even 
if it is at a small routine amounts, to get us on the kind of 
path toward reform, and we need to do so without adding to the 
already difficult whole that has been dug as a result of the 
challenges involving our national security as well as our 
natural disasters.
    This week the President presented his plan on his budget 
request to Congress. Today we have the pleasure of hearing from 
the Office of Management and Budget Director Josh Bolten, who 
has been before our committee and who has given us many 
opportunities to question him and the outline that he has 
presented. We look forward to your testimony and welcome to the 
committee.
    Mr. Spratt, I turn to you for any comments you wish to 
make.
    Mr. Spratt. Thank you, Mr. Chairman, and Director Bolten, 
welcome again. Mr. Bolten, you and your boss, Mr. Bush, have 
the dubious distinction of presiding over a deficit of $423 
billion this year, the largest in nominal terms, in our 
Nation's history. You would say it is only a nominal term not 
as a percentage GDP, and I will grant you that. But I have to 
say that a $423 billion deficit is not acceptable and not 
sustainable.
    Nevertheless, your budgets have run deficits in this range 
for about 4 years and by our calculation, this budget shows no 
sign of deficits abating or disappearing.
    As you can see, as we look out over 5 years, your 
projections, using your numbers, show that the budget will 
sustain deficits totaling $1.596 trillion. And those 
projections leave out two very likely and very expensive items. 
First, the cost of operations in Iraq and Afghanistan after 
this year, other than the $50 billion that you will provide in 
2007, let's hope that is enough for 2007. But we are spending 
$120 billion this year.
    If you look at what is being provided in this budget as 
well as what was provided in the 2006 defense authorization 
bill and appropriations bill.
    And secondly, you made no provision after this year for any 
correction to the alternative minimum tax (AMT) so that it will 
apply only to the existing taxpayers whom it applies, some 5 
million taxpayers and not 22 million taxpayers, which is what 
will happen unless we patch or fix it. This fix of the AMT is 
inevitable as a matter of politics if not policy, and revenues 
lost to such a fixed amount is $844 billion over 10 years. But 
as I search your budget, I find no provision for that revenue 
impact anywhere in your budget. And yet I think it is an 
inevitable adjustment to the AMT.
    Even without these adjustments, your budgets run deficits 
of $1.596 trillion over the next 5 years. And when you back out 
the surplus in Social Security, as I think you should, because 
there is a date in that time frame shown on this chart, 2008, 
which is a real milestone in the budget history of this country 
because that is when the baby boomers began to retire. And 
pretty soon, the monies we are setting aside for now in the 
Social Security trust fund will be drawn down. That is why it 
is called a trust fund. These funds are entrusted, obligated 
and encumbered for a purpose. And when you back out the Social 
Security trust fund, because it shouldn't be used as an offset 
morally or legally, the deficits over the next 5 years amount 
to $2.841 trillion.
    But we say we see no signs of abatement, disappearance, or 
approval, we base it on our calculations of the puts and takes, 
pluses and minuses in the budgets you presented to us. When we 
offset your spending cuts against your tax cuts, we find that 
your budget makes the deficit worse, not better, worse by $413 
billion over the next 5 years. This is not a deficit reduction 
budget, but a deficit worsening budget. That is without making 
the changes in the AMT. Now if you can't see this, we will be 
glad to share this chart with you just to show we didn't pull 
this out of the air.
    When you make the changes that we think are inevitable in 
the AMT and other changes that we think our baseline needs to 
have adjusted in order to realistically reflect the likely 
future. When these changes are made, we plot the deficit over 
the next 10 years along the path shown on the lower sloping 
curve in the lower right-hand corner of this chart, hovering in 
the range of $300 to $400 billion for next 7 or 8 years and 
then going further downward to the point where in the year 
2015, 10 years from now, it is $550 billion. We will be glad to 
share these numbers with you. We appreciate your comments on 
them. Maybe we can refine them. Maybe we have done something 
wrong. I would hope so. But that is what we see is the path 
your budget is taking if it is laid out according to what we 
find in this budget before us.
    We know that you might take exception to these numbers, but 
we know that when the administration has come up previously, 
you have painted a pretty picture for each of the outyears, but 
here is the actual results on the back of an envelope, an easy 
way to sum up last 5 years of budgets presented to us by the 
Bush administration.
    In order to accommodate those budgets passed by the Bush 
administration, proposed by the Bush administration, passed by 
the Congress, the debt ceiling of the United States has been 
raised 3 times and the debt ceiling increases that are pending 
right now and according to the Secretary of Treasury is 
absolutely urgent. When you add those debt ceiling increases 
over the last 4 years, 2002, 2003, 2004, the total debt 
increases come to $3 trillion.
    Now, when we take your projections of this existing budget, 
and run them out with the adjustments that we think are 
politically realistic, like the AMT, or like some provision for 
continuing operations in the theaters if not actually in the 
countries of Afghanistan and Iraq, when we make these 
adjustments, the next 10 years looks equally as bad. This total 
comes to over $3 trillion in debt, which will be a repetition 
of this period of time so that the legacy of your 
administration, which is surely not one you cherish or want, 
will be an addition to the debt of the United States of $6 
trillion.
    I would like to see us--I would like to feel that there is 
some sort of alternate course we can take. The chairman 
referred to a plan. We really haven't had a collegial effort to 
come to terms and grips with the budget deficit since 1997, 
since we sat down, Democrats, Republicans, the White House, and 
the Congress to try to negotiate a budget that would put us in 
balance within a couple of years. It succeeded to the point 
where we had a surplus of $236 billion in the year 2000. We 
were standing on the shoulders of budgets that had come before 
us, finishing the job.
    The job before us right now is extremely difficult but if 
you look back at the past; it took Gramm-Rudman-Hollings in 
1985, the Bush budget summit in 1990, the Clinton budget in 
1993 and the balanced budget agreement in 1997 to finally 
subdue the deficit, bring it to heel and eradicate it to the 
point where we had a surplus in the year 2000. I don't see us 
moving down that path today. But I do so see a situation that 
is even more dire than it was in 1997 because of the imminent 
retirement of the baby boomers and the problems we know we are 
going to experience with Medicare, Medicaid, and Social 
Security. What we should be doing now is saving more, not 
running more debt, so that we can reduce our debt service.
    And that reduction with the burden on our economy we can 
accommodate some of the growth we know will occur in Social 
Security and Medicare. We are not taking that path, and I think 
our children one day will ask what in the world were our 
parents thinking about when they tacked up so much debt and 
left it as our inheritance.
    Thank you for your testimony today. We look forward to that 
and we would appreciate it if you would address some of these 
questions in the course of your testimony or in the questions 
afterwards. Once again, thank you for coming.
    Chairman Nussle. Thank you, Mr. Spratt. Director Bolten, 
welcome back to the Budget Committee and we are pleased to 
receive your testimony. Your written testimony will be made 
part of the record and you may proceed as you wish.

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

    Mr. Bolten. Thank you, Mr. Chairman and Mr. Spratt. I 
appreciate the welcome.
    Mr. Chairman, Mr. Spratt, other distinguished members of 
the committee, the President's 2007 budget which I transmitted 
to the Congress on the President's behalf on Monday, meets the 
priorities of the Nation and builds on the progress of the last 
5 years. Before getting to the 2007 budget, I would like to 
take a moment to review the substantial accomplishments in 
spending restraint we were able to achieve together over the 
past year.
    Chairman Nussle made reference to some of them, but they 
are displayed on this chart that is just on your screen now.


    The President set four objectives in the 2006 budget.
    First, the President proposed to hold growth and overall 
discretionary spending below the rate of inflation. Second, he 
proposed an actual cut in the nonsecurity portion of 
discretionary spending, the first such proposal since the 
Reagan administration. Third, he proposed major reductions or 
eliminations in 154 government programs that were not getting 
results, were not fulfilling essential priorities. And fourth, 
he proposed reforms in mandatory programs to produce $54 
billion in savings over 5 years.
    The Congress substantially delivered on all four of these 
objectives, as the second column of this summary chart shows.
    I would like to thank you, Mr. Chairman, and members of 
this committee for your leadership and dedication in helping to 
achieve these goals. As you referenced, Mr. Chairman, this was 
not easy to accomplish. It took a lot of hard work from you and 
a number of members in this room. The administration, and I 
think, the American people, owe you a debt of gratitude.
    When President Bush gave me guidance on what the 2007 
budget should look like, he directed me to build on this 
progress by focusing on national priorities and tightening our 
belt elsewhere. He told me to give our troops and those who 
defend our security what they need to fight and win the global 
war on terror. And he emphasized that the 2007 budget must 
support our pro-growth economic agenda.
    In particular, he said we should maintain our economic 
strength by extending the tax relief that has fueled our 
economic expansion and by aggressively restraining spending.
    On Monday I presented on the President's behalf, a budget 
that does just that.
    In the past 5 years, our economy suffered an historic 
series of shocks, starting with the recession and terror 
attacks of 2001 and continuing through the hurricanes last 
summer. Those events had profound impacts on job creation and 
on the fiscal outlook.
    Despite these challenges, thanks to the productivity and 
hard work of the American people, our economy is expanding at a 
healthy pace. As the chart on the screen now shows, in 2005, 
the economy grew by a substantial 3\1/2\ percent, the third 
consecutive year of healthy growth.


    And as you can see on the chart, we project ongoing 
economic strength for the foreseeable future.
    Economic expansion, Mr. Chairman, as you mentioned in your 
opening remarks, has produced more than 4.7 million new jobs 
since May of 2003, reduced unemployment to 4.7 percent, and 
raised home ownership to all time highs. This economic growth 
would not have been possible without the tax relief that you 
passed and the President signed.
    The tax cuts, which were fully implemented in May, 2003, 
have been critical to helping the economy recover from the 
recession and terrorist attacks of 2001 and then helping the 
economy to continue expanding despite the hurricanes and high 
energy prices of 2005.
    With the tax cuts fully implemented in 2003, the economy 
responded strongly, and tax receipts rebounded. As you can see 
on the chart now on the screen, receipts grew substantially in 
2004, the blue bar there, what that reflects is growth of 5\1/
2\ percent. In 2005, receipts jumped by a remarkable $274 
billion, or 14\1/2\ percent, the largest increase in 24 years.



    These recent gains in receipts confirm that a strong 
economy is the most important factor in reducing the deficit.



    This chart here shows our progress in bringing down the 
deficit. Since the President set a goal of cutting the deficit 
in half from its projected peak in 2004 of 4\1/2\ percent of 
GDP, the deficit has come down markedly. The final 2004 deficit 
was 3.6 percent of GDP and fueled by the surge in receipts last 
year, the 2005 deficit fell further to 2.6 percent of GDP.
    Although revenues are projected to continue rising into 
2006, the deficit for the current fiscal year is now projected 
to come in at 3.2 percent of GDP or in nominal terms $423 
billion.
    This is more than previously expected and is, in 
significant part, due to unanticipated spending associated with 
relief and recovery efforts from Hurricanes Katrina and Rita. 
While this increase in the deficit is unwelcome, at 3.2 percent 
of GDP, the projected deficit would be well within the 
historical range and smaller than the deficit in 11 of the last 
25 years. More importantly, we project that if the policies in 
the President's budget are adopted, the deficit will return to 
its downward trajectory.
    We forecast a decline in the 2007 deficit to 2.6 percent of 
GDP. By 2009, the deficit is projected to be cut by more than 
half of its projected peak to just 1.4 percent of GDP, well 
below the historical average, which is represented by the 
dotted line there. That dotted line is also roughly the cut in 
half line from the point at which the President set the goal of 
cutting the deficit in half 2 years ago.
    In order to keep the deficit on this declining path, we 
must continue to do 2 things: First, keep the economy growing; 
second, restrain spending.
    First, the 2007 budget supports continued economic growth 
by proposing to make permanent the tax relief signed into law 
by the President in 2001 and 2003.
    Some have argued that we should have let the tax relief 
expire. A tax increase is the wrong prescription, not only for 
the Nation's economic health, but for the Treasury's fiscal 
health as well.
    We are not an undertaxed society. By rejecting tax 
increases on families and small businesses, this budget will 
help keep the economy on a continuing course of job creation 
and strengthen the foundations for long-term growth.
    The second critical component of deficit reduction is a 
vigorous policy of spending restraint. Similar to last year, 
the budget again holds overall discretionary spending growth 
below the rate of inflation. That is reflected in the third 
column on the chart now on your screens. It, again, proposes a 
cut in nonsecurity discretionary spending. It calls for major 
reductions and/or major eliminations of 141 Federal programs 
and it continues our efforts to slow the growth of spending in 
mandatory programs by proposing $65 billion in savings over the 
next 5 years.



    These efforts to restrain the growth in mandatory spending 
are vital, not just for our near-term deficit reduction 
efforts, but especially for the long term. This chart on your 
screen now displays



government spending and revenues as a percent of our gross 
domestic product. The black line going across the middle is our 
revenues which, in the outyears, we project to hold at the 
historic average of 18.2 percent. The bars represent the 
different components of Federal spending. The green at the 
bottom is mandatory spending made up largely of entitlement 
programs, and the blue bar is the Government's interest 
expense. Finally, the orange bar is discretionary spending.
    Toward the end of the next decade, deficits stemming 
largely from entitlement programs such Social Security and 
Medicare will begin to rise indefinitely.
    No plausible amount of spending cuts in discretionary 
accounts or tax increases could possibly solve this problem.
    The President has shown a willingness to take on these 
future unfunded obligations and to propose long-term reforms. 
This year's budget proposes $36 billion in savings for Medicare 
and includes proposals that pave the way for additional reforms 
in the future. As with Social Security and Medicaid, we do not 
need to cut Medicare. But we do need to slow its growth. And 
this budget begins to do just that.
    In addition, the 2007 budget contains proposals to 
significantly improve the budgetary process, the budget 
proposes discretionary spending caps as well as restraints on 
new mandatory spending. The administration is pleased, Mr. 
Chairman, that the congressional leadership is focused on the 
need for reform of earmarks in the budget process. As you 
mentioned in your opening remarks, one way we can address the 
excessive use of earmarks together is by Congress giving the 
President the line-item veto.
    The 2007 budget also continues our efforts to improve 
performance and make sure the taxpayers get the most for their 
money. Using the President's management agenda, OMB measures 
success not by good intentions or dollars spent, but by results 
achieved. As part of these efforts, OMB has introduced a new 
Web site called ExpectMore.gov. ExpectMore.gov allows taxpayers 
to review the OMB assessments of neither nearly 800 Federal 
programs. You can search the programs by rating, topic, or a 
simple keyword. I urge you and your staffs to use this new 
resource.
    This management agenda, coupled with the spending restraint 
reflected in the President's 2007 budget, will help ensure that 
taxpayers' dollars will be spent wisely, or not at all. Mr. 
Chairman, I look forward to your questions.
    [The prepared statement of Joshua Bolten follows:]

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

    Chairman Nussle, Ranking Member Spratt, and distinguished members 
of the Committee, the President's 2007 Budget, which I transmitted to 
the Congress on the President's behalf on Monday, meets the priorities 
of the Nation and builds on the progress of the last 5 years.
    Before getting to the 2007 Budget, I would like to take a moment to 
review the substantial accomplishments in spending restraint we were 
able to achieve together over the past year.
    Last year's 2006 Budget set four major objectives:
    First, the President proposed to hold growth in overall 
discretionary spending below the rate of inflation.
    Second, he proposed an actual cut in the non-security portion of 
discretionary spending--the first such proposal since the Reagan 
Administration.
    Third, he proposed major reductions or eliminations in 154 
Government programs that were not getting results or not fulfilling 
essential priorities.
    And fourth, he proposed reforms in mandatory programs to produce 
$54 billion in savings over 5 years.
    The Congress substantially delivered on all four of these 
objectives. I would like to thank Chairman Nussle and the members of 
this committee for your leadership and dedication in helping achieve 
these goals.
    When President Bush gave me guidance on what the 2007 Budget should 
look like, he directed me to build on last year's progress by focusing 
on national priorities and tightening our belt elsewhere. He told me to 
give our troops and those who defend our security what they need to 
fight and win the Global War on Terror. And he emphasized that the 2007 
Budget must support our pro-growth economic agenda.
    In particular, he said we should maintain our economic strength by 
extending the tax relief that has fueled our economic expansion and by 
aggressively restraining spending. Monday, I presented on the 
President's behalf a budget that does just that.
    In the past 5 years, our economy suffered an historic series of 
shocks, starting with the recession and the terror attacks of 2001 and 
continuing through the hurricanes last summer. Those events had 
profound impacts on job creation and on the fiscal outlook.
    Despite these challenges, thanks to the productivity and hard work 
of the American people, our economy is expanding at a healthy pace. In 
2005, the economy grew by an estimated 3.5 percent--the third 
consecutive year of healthy growth. Economic expansion has produced 
more than 4.7 million new jobs since May 2003, reduced unemployment to 
4.7 percent, and raised homeownership to all-time highs.
    This economic growth would not have been possible without the tax 
relief that you passed and the President signed. The tax cuts--which 
were fully implemented in May 2003--have been critical to helping the 
economy recover from the recession and terrorist attacks of 2001--and 
then helping the economy to continue expanding despite the hurricanes 
and high energy prices in 2005.
    With the tax cuts fully implemented in 2003, the economy responded 
strongly and tax receipts rebounded. Receipts grew substantially in 
2004--by 5.5 percent. In 2005, receipts jumped by a remarkable $274 
billion, or 14.5 percent, the largest increase in 24 years. These 
recent gains in receipts confirm that a strong economy is the most 
important factor in reducing the deficit.
    Since the President set a goal of cutting the deficit in half from 
its projected peak in 2004 of 4.5 percent of GDP, the deficit has come 
down markedly. The final 2004 deficit was 3.6 percent of GDP, and 
fueled by the surge in receipts, the 2005 deficit fell further to 2.6 
percent of GDP.
    Although revenues are projected to continue to rise in 2006, the 
deficit for the current fiscal year is now projected to come in at 3.2 
percent of GDP, or in nominal terms, $423 billion, which is more than 
previously expected and is in significant part due to the unanticipated 
spending associated with relief and recovery efforts from Hurricanes 
Katrina and Rita. While this increase in the deficit is unwelcome, at 
3.2 percent of GDP the projected deficit would be well within the 
historical range and smaller than the deficit in 11 of the last 25 
years.
    More importantly, we project that if the policies in the 
President's Budget are adopted, the deficit will return to its downward 
trajectory. We forecast a decline in the 2007 deficit to 2.6 percent of 
GDP, or $354 billion. By 2009, the deficit is projected to be cut by 
more than half from its projected peak to just 1.4 percent of GDP, well 
below the 40-year historical average.
    In order to keep the deficit on this declining path, we must 
continue to do two things: First, keep the economy growing; and second, 
restrain spending.
    First, the 2007 Budget will support continued economic growth by 
proposing to make permanent the tax relief signed into law by the 
President in 2001 and 2003. Some have argued that we should let the tax 
relief expire. A tax increase is the wrong prescription, not only for 
the nation's economic health, but for the Government's fiscal health as 
well.
    We are not an under-taxed society. By rejecting tax increases on 
families and small businesses, this budget will help keep the economy 
on a continuing course of job creation and strengthen the foundations 
for long-term growth.
    The second critical component of deficit reduction is a vigorous 
policy of spending restraint. Similar to last year, the Budget again 
holds overall discretionary spending growth below the rate of 
inflation. It again proposes a cut in non-security discretionary 
spending. It calls for major reductions in or total eliminations of 141 
Federal programs, saving nearly $15 billion. And it continues our 
efforts to slow the growth in spending on mandatory programs, by 
proposing $65 billion in savings over 5 years.
    These efforts to restrain the growth in mandatory spending are 
vital--not just for our near-term deficit reduction efforts--but 
especially for the long-term. Toward the end of the next decade, 
deficits stemming largely from entitlement programs such as Social 
Security and Medicare will begin to rise indefinitely. No plausible 
amount of spending cuts in discretionary accounts or tax increases 
could possibly solve this problem.
    The President has shown a willingness to take on these future 
unfunded obligations and to propose long-term reforms. This year's 
Budget proposes $36 billion in savings from Medicare, and includes 
proposals that pave the way for additional reforms in the future. As 
with Social Security and Medicaid, we do not need to cut Medicare, but 
we do need to slow its growth--and this budget begins to do just that.
    In addition, the 2007 Budget contains proposals to significantly 
improve the budgetary process. The Budget proposes discretionary 
spending caps as well as restraints on new mandatory spending. The 
Administration is pleased that the Congressional leadership is focused 
on the need for reform of earmarks in the budget process. One way we 
can address the excessive use of earmarks together is by Congress 
giving the President the line-item veto.
    The 2007 Budget also continues our efforts to improve performance 
and make sure the taxpayers get the most for their money. Using the 
President's Management Agenda, OMB measures success not by good 
intentions or by dollars spent, but rather by results achieved.
    As part of these efforts, OMB has introduced a new Web site called 
Expectmore.gov. ExpectMore.gov allows taxpayers to review the OMB 
assessments of nearly 800 Federal programs. You can search the programs 
by rating, topic, or by a simple keyword search. I urge you and your 
staffs to use this new resource.
    The management agenda--coupled with the restraint reflected in the 
President's 2007 budget--will help ensure that taxpayer dollars 
continue to be spent wisely, or not at all.

    Chairman Nussle. Thank you, Director Bolten. I appreciate 
your testimony, particularly, when it comes to the economy.
    That to me has been probably the best news that we have 
had, is this 17-quarter growth in our economy creating 4.7 
million jobs in America, which is significant. I can tell you 
that, and I am sure this is true from my colleagues, how many 
of us go home and hear about the concern that our constituents 
have about jobs leaving our country. And we have set ourselves 
not only--maybe we get too focused on the budget here in this 
room for obvious reasons, and that is appropriate, but reducing 
the tax burden was not so that we could reduce the budget 
deficit, but it was for us to make a stronger America. That is 
what this was about.
    Now it is manifested in many different ways. But the most 
important way it is manifested is the security of families and 
individuals and people who are holding those jobs and creating 
those jobs and benefiting from those jobs. The fact that it 
brings in more revenue, the fact that we are able to show, 
yellow lines and red lines and black lines and all that is 
important. But this was an economic policy for our country, not 
a budget policy, and it is working.
    The interesting thing about this--and I have a feeling, 
based on what I have heard already in the reports, of 
reactions, some of the reactions to the President's budget came 
before the President's budget was released. We already had 
people saying it was a bad budget, they didn't like this, and 
they didn't like that. I am a little offended that I didn't get 
this early release of the budget that appears everyone else 
did. I thought I was one of the insiders here that might get an 
early copy. But evidently I didn't get one of those early 
copies, but a lot of other people did. Because all sorts of 
press releases went out simultaneously, even a little bit 
before the President's budget came out, complaining about it 
and second guessing it. And I just have to say, I mean, I think 
what we have seen over the last couple of years in particular 
is we may now know the reason why there is not an alternative 
to what the President has put forward. And it is because at 
least from what I hear, I don't hear anybody suggesting there 
is going to be less for education.
    Maybe I am mistaken, but I think on the floor, we have 
heard that there should be more for education. I heard on the 
floor this last year there should be more for veterans. I heard 
on the floor this last year that there should be more for 
health care, and I don't believe that anyone is going to be 
proposing less for Iraq or Katrina. That will be interesting to 
see if someone is going to be proposing less for Katrina. I 
will wait and find out if my colleagues on the other side will 
be proposing that.
    So there is not less for the programs that they claim are 
priorities. There will not be less for important priorities 
such as Katrina and Iraq. So it boils down to one thing, higher 
taxes. Now, the reason that is not put forward as a plan is 
because they know that this is not sustainable, for the very 
reason that it would hurt the economy, which is chugging along 
at now 15 percent growth to revenue. Which is demonstrative to 
what that has done for families and family budgets. You cannot 
increase taxes at this time and expect our economy to continue.
    There are many independent economists that have suggested 
that it would do nothing but cause a recession, and cause a 
challenge to our ability to be attractive as a country for 
investment and job creation. And so we know that is not going 
to be the answer.
    So while there will be a lot of second guessing and 
posturing, particularly because this is an election year--it 
seems like its always an election year--I will bet you again we 
are not going to hear an alternative plan. I will just bet you 
that we won't hear an alternative plan because when it comes 
right down it to, proposing or providing less for these 
important priorities is not going to be sustainable.
    They are going to claim that we are not putting enough in. 
And a tax increase is not something that, my guess, is the 
Democratic Caucus would be able to get even a majority for.
    So my guess is that there will not be an alternative plan. 
So we need to work off the President's plan, and I believe you 
have put out an outline that is something that we need to work 
from. We need to recognize that there are some assumptions 
here. We have made the commitment as a Congress, cheerfully 
voting, almost unanimously, to support the victims of the 
natural disasters, and of course that is what we would do, that 
is what we always do.
    We are also going to support our men and women in the field 
during this battle on international terrorism. Those are facts 
that we are going to deal with.
    I really believe that this is the year that we need to make 
a commitment on no new earmarks and on reconciliation, 
continuing that process. I understand, I have already read in 
the newspapers and some of the journals that we have members 
who are suggesting that you can't reform Government, you can't 
reduce spending, even a little bit, in what is an election 
year.
    That would be to me a what I think is failure. I think that 
would be failure, in my mind.
    I would hope that we don't as a Congress, or even as a 
party to my own members, do that. I believe even if it is what 
someone might call a small amount, there is nothing small about 
billions of dollars, but small compared to even where the 
President has suggested, as we did this last year. It is a 
routine that we have to get into if we are going to be serious 
about relieving this unsustainable growth curve.
    Let me ask you, last year you proposed 154 programs to be 
reduced. Congress came through with an elimination of 89 of 
those programs, and now you are proposing 141 programs this 
year.
    Would you talk about those a little bit? Why are you making 
these proposals? Are these similar to the--I guess it would be 
close to 60 or so that were left off the table last year, are 
they included in this? How do you know get on the list, so to 
speak? Are these from the ExpectMore.gov? Is that where we 
would find some of the criteria that was used to determine 
whether or not these programs were effective? Would you talk 
about those a little bit?
    Mr. Bolten. Sure. Thank you, Mr. Chairman. And thank you 
for your remarks. On the major reductions and terminations that 
are included in this budget, many of them are carryovers from 
last year. The Congress this year I think remarkably 
effectively stepped up and acted on 89 out of the 154 programs 
that the administration proposed. That is a .578 batting 
average, which in this league isn't just good it is terrific, 
particularly given the batting average of some previous years.
    What that left on the table was 65 proposals that had not 
been acted on. You will see, in the 141 that we are proposing 
this year, you will see most of those 65 come back on the 
table. You will also see a number of new ones. And the way that 
proposals made that list was a variety of ways, but one 
important way is the one that you mentioned, which is we are 
increasingly within our budget process taking account of 
performance evaluations of programs.
    We have now gone methodically through over the last several 
years and done objective assessments, we call them PART ratings 
of the various components of Government spending program by 
program, rating them effective, moderately effective, adequate, 
ineffective, or results not demonstrated, and also a variety of 
sub-evaluations within that.
    And we now use those evaluations more and more in the 
process of determining where to put the taxpayer's dollar.
    Now, a rating doesn't necessarily determine where the 
dollars go. It may be that an ineffective program ought to be 
terminated, and many are. It may also be that a program is 
ineffective because we haven't put enough resources into it. So 
in some rare cases, you will find a program that is not 
performing well actually receiving more resources because we 
believe that can help make the programs effective.
    In all cases, if you go to the ExpectMore.gov Web site you 
will see transparently displayed our candid assessment of the 
program and if we think a program isn't working well, what we 
are planning to do to improve it. We don't claim to have a 
monopoly on wisdom, in what is effective spending and how to 
improve it, which is why we put it on the Web site for the 
Congress and for the public to comment on and to participate in 
a very important national debate. Are we spending the taxpayers 
dollars wisely?
    Mr. Cooper. Mr. Chairman, is the list available that he was 
just describing?
    Mr. Bolten. I believe it is. We are publishing a document 
which will include a whole description of each one of the 141, 
plus the rationale for it. If it is not available immediately, 
it will be available shortly and we will make sure it gets to 
your office.
    Chairman Nussle. Thank you. I was particularly pleased this 
year that the President included budgeting for future funding 
in Iraq and Afghanistan. I certainly have never thought it was 
possible to predict the course of these conflicts, 2, 3, or 4 
years down the line, but there is an understanding, based on 
the track record that we have had, what the next obligation 
would be. And I appreciate the fact that part was included.
    I know we have discussed this in the past. And there is no 
secret that, at least between us, that we need to include a 
reasonable amount. Even if we don't hit it on the nose for that 
matter, but a reasonable estimate is needed. And I think this 
is a good step to put this into the budget.
    Would you talk about the reasonableness of this amount, 
because, obviously, $50 billion was not enough, as we have 
budgeted in the past for this last year as an example, and 
together with supplementals, it has not been enough in order to 
meet that challenge.
    Why is $50 billion the amount that the President is putting 
in there? Is that a place holder? Or is there some comfort you 
can give us that that is the amount that will be there at the 
end of the day for the President's request?
    Mr. Bolten. Mr. Chairman, I think it has to be regarded 
principally as a place holder just as it was last year. We had 
not, in the past, done an allowance of the sort you have just 
described in our budgeting. You did it in the budget resolution 
last year, including $50 billion in the budget resolution for 
the ongoing costs of the war in Iraq and Afghanistan. We have 
decided that your approach was the preferable one, so we have 
modified our approach. We are including a similar $50 billion 
allowance for 07 in our budget in order to display that number 
in the budget.
    I could not say right now whether that number is the right 
number for what we will spend. I don't think anybody else could 
say candidly either what the spending is likely to be a full 
year from now. It will depend entirely on the facts on the 
ground. But the Congress, having adopted this $50 billion 
allowance in the past year, we accepted the wisdom of that 
approach. And we have included that $50 billion in as an 
allowance in our 07 presentation.
    And it is reflected in all of the deficit numbers and so on 
that the chairman--that Mr. Spratt made reference to at the 
outset.
    Chairman Nussle. Thank you. Let me turn to Mr. Spratt.
    Mr. Spratt. Thank you. Let me show you again, this is--I 
direct you to the chart that we have, chart No. 3, which is our 
summary of the puts and takes as we reconstruct your budget. As 
we see it, for the first 5 years, the renewal of the tax cuts 
in 2008 and again in 2010, will cost in revenues about $285 
billion. Does that comport with your understanding?
    Mr. Bolten. I am not sure I am following the chart as--the 
$285 billion is intended to reflect what?
    Mr. Spratt. The renewal and extension of existing tax cuts 
that were passed in 2001 and 2003.
    Mr. Bolten. So the cost so far?
    Mr. Spratt. This would be the cost of renewing them in 
2008, dividends and capital gains, and 2010 when they expire.
    Mr. Bolten. I don't have--we usually don't rack up the 
numbers that way, but I don't have a basis to disagree.
    Mr. Spratt. OK. The defense supplemental is what we find 
supplemental to what would be current services for defense, $89 
billion, Social Security reform, which you have chosen to put 
in your budget, I think that is doubtful, but, nevertheless, we 
are trying to be consistent with your numbers, we are 
reconstructing your budget, defense appropriations, the 
increases in defense appropriations you have got for ordinary 
operations of Government over and above current services, the 
hurricane supplemental for Katrina. We will all vote for that, 
but it is in the budget as a plus.
    Nondefense appropriation cuts, we tally at $115 billion 
over 5 years plus mandatory program cuts we tally at $66 
billion, a total of $182 billion.
    And when we do those puts and takes and adjust for debt 
service, we get a total effect on the deficit of $413 billion 
worse than current services simply continuing the Government as 
is, but adjusting each year for inflation.
    Do you see anything there that you would take exception to 
or disagree with?
    Mr. Bolten. I don't think I would rack it up that way at 
all, in other words, you are starting from the artificial 
current services baseline and trying to add some puts and 
takes.
    Mr. Spratt. No, I am doing the baseline per the Budget 
Enforcement Act of 1991 when taxes expire, a renewal of the tax 
cut means that you have to add that as an additional reduction 
revenue.
    Mr. Bolten. Well, Mr. Spratt, let me accept for argument's 
sake the numbers that you have presented because I sense there 
is a question coming.
    Mr. Spratt. Would you take these home with you and give us 
a response? We would appreciate it.
    Mr. Bolten. Sure.
    [The information requested follows:]

              Mr. Spratt's Question Regarding the Deficit

    Non-defense appropriations cuts, tallied at $115 billion over 5 
years plus mandatory program cuts tallied at $66 billion, is a total of 
$182 billion. When those puts and takes adjust for debt service, we get 
a total effect on the deficit of $413 billion worse than current 
services simply continuing the government as is, but adjusting each 
year for inflation. Do you see anything there that you would take 
exception to or disagree with? Would you take home chart No. 3 and give 
us a response?

    OMB Answer: The President's Budget would cut the deficit by more 
than half from its projected peak in FY 2004 of 4.5 percent of GDP down 
to an estimated level of 1.9 percent of GDP by FY 2009 if the 
President's policies for spending restraint and economic growth are 
implemented. CBO recently provided its own estimates of the President's 
Budget and forecasts an even larger reduction in the deficit, down to 
1.3 percent of GDP by FY 2009.
    The figures in the chart display a deficit increase relative to a 
``current services'' baseline. This current services baseline also 
assumes growth in spending and a large tax increases by assuming tax 
relief is not extended. Relative to this baseline, the President's 
proposals to slow the growth in spending are shown as cuts in spending 
and his proposals to extend tax relief are shown as an increase in the 
deficit.
    The Administration has proposed that the current services baseline 
be modified to remove the bias against tax relief and to assume the 
extension tax relief. With this modified baseline, the extension of tax 
relief has no impact on the deficit.
    Finally, current scoring methodologies do not take into account the 
positive economic impact of tax relief. Since the full implementation 
of the President tax relief program in 2003, we have seen strong 
sustained economic growth. This economic growth has brought an increase 
in revenue to the Treasury. In FY 2005, Federal tax collections grew by 
$274 billion or 14.5 percent.

    Mr. Spratt. OK, secondly, in 2009, the President has made a 
promise, repeated a couple years that he would cut the deficit 
in half, in 2009, which is the last year of his administration 
is the target year for that to be achieved.
    The problem we have with your claim that you are reaching 
that goal, is that you have no provision which we can find 
after 2007, for the AMT. We are fixing it throughout those 
years, so that it does not affect 22 million or 30 million 
taxpayers as opposed to the 45 million taxpayers who are 
confronted with it today.
    The Congressional Budget Office tells us that the missing 
number is $844 billion. The lack of a fix for the AMT based on 
this premise, it would be fixed in place, frozen in place in 
terms of its effect to taxpayers, when you go back and make 
that adjustment in revenues, it is $844 billion in that stretch 
of time.
    In addition, I commend you for putting a place holder in 
2007. But CBO also has done a model for predicting the future 
cost of our operations in Iraq, Afghanistan and domestic 
operations. The total of those costs, ongoing operations that 
are not provided for in your budget come to $298 billion, if 
you use CBO's model and CBO assumes if you begin a drawdown of 
forces today, there will be a linear reduction same slope every 
year, 4 for 4 or 5 years until 2010, when we bottom out at 
50,000 troops in theater, not necessarily in country. They 
estimate, if we follow that path, which seems to me to be a 
moderate assumption, the additional cost is $298 billion. We 
don't find anything for operations in Iraq and Afghanistan 
after 2007 and we don't find any fix for the AMT.
    When we go back and make those fixes, you are way off 
having the deficit in 2009. Don't you think those fixes have to 
be made to make the realistic claim that in 2009, the deficit 
will be cut in half?
    Mr. Bolten. First, on the war costs, we have been explicit 
in the budget that there are likely to be costs for the war in 
Afghanistan and Iraq that are not reflected in the budget. We 
have not tried to make estimates of those. My own view is that 
trying to make an estimate of that is irresponsible at this 
point. We have included the place holder that the chairman 
referenced at the outset, which I think is a good idea for 
2007. Trying to make an estimate beyond that I think is 
unwarranted, but we have been explicit there, whatever 
additional costs are required for the war on terror in Iraq and 
Afghanistan need to be added into our projections on the 
spending.
    And the President has also been very clear publicly in his 
instructions to me, whatever we need to spend to support or 
fighting men and women in harm's way, we will spend.
    Second, on the AMT, we do include in our projections and in 
our deficit estimates a patch of the AMT for the 2006 tax year 
for which people will be paying, filling out their returns in 
2007. So there is a deficit effect from that patch in 2006 and 
2007. At this point, the Congress has not adopted even that 
patch. We have included it in our recommendation--in our 
estimates as an assumption for purposes of transparency because 
we are fairly confident, as I imagine you are, that the 
Congress will adopt that patch this year.
    Mr. Spratt. But as a matter of policy and politics, don't 
you agree that it will have to be patched basically at 2006 
levels and 2007, 2008, 2009, and on into the future until 
something is finally done about the way it works?
    Mr. Bolten. I will let you be the best judge of politics. 
As a matter of policy I believe that and the administration 
believes the AMT is a misguided system requiring people to file 
in two different ways that needs to be corrected, but that it 
can be corrected in the context of overall revenue neutral tax 
reform.
    Now I am a little bit surprised that there is such strength 
of view from those who have championed tax increases who 
automatically assume that a tax cut will be adopted in the form 
of the continual patching of the AMT, but that is something we 
believe can be accomplished in the context of revenue neutral 
overall tax reform, and I think it should be.
    Mr. Spratt. Revenue neutral tax reform is way back on the 
shelf. We don't have any expectation, anything like that is 
about to be done. If you take those two numbers, $844 billion 
for the AMT fix and $298 billion for the ongoing operations 
after 2007, the total is over a trillion dollars. And it 
changes your bottom line considerably and undoes the claim you 
have made.
    Let me just ask you a couple--the chairman said nobody is 
calling for a cut in education. For the first time in 17 years 
last year, the President requested a budget for education that 
was less than the prior year. This year, you are requesting, if 
I read your budget correctly, $2.1 billion less than the 
enacted level for 2006.
    So there is a real cut in education for this year. 
Furthermore, you are killing or requesting the elimination of 
42 different programs.
    The President made a bold initiative, announced a bold 
initiative in the State of the Union. We are going to really 
put tremendous effort and energy into math and science 
education in this country.
    The next day or so, the number was announced that $5.9 
billion was being allocated to this purpose in the budget. When 
we got to budget to see how the $5.9 billion was spent, what we 
found was that $4.6 billion is allocated to a continuation of 
the R&D tax credit, which is not an initiative because it has 
been around 25 years. We support it and we will support its 
renewal, but it is not an initiative. There is nothing new 
about it, it should be done. That leaves $1.3 billion, which is 
spread over six or seven different agencies, beginning with the 
Department of Education, but including the Department of Energy 
and the Institute of Standards, for a number of different 
purposes. And when you finally get down to what the allocation 
is to math and science teaching, it is about $300 million a 
year.
    Do you think that--and I could take you through a lot of 
the President's golden issues the other night like energy is 
the $1.3 billion the source of the energy initiative the 
President announced the other night? How much money is going to 
be applied in this budget for the energy program that the 
President proposed the other night in his State of the Union?
    Mr. Bolten. Those are separate numbers, Mr. Spratt.
    I don't have off the top of my head. One of my colleagues 
may have the amount that is put into the energy initiative, but 
that is added to the roughly $1.3 billion that this year is 
part of a 10-year initiative that will be made available if the 
President's budget is adopted for promoting math and science 
research, basic research in this country and promoting math and 
science education, for which the allocation in this year's 
budget is $380 million.
    On the general education point, Mr. Spratt, what I would 
point out about the President's education funding, his record 
over the course of his administration is that in totality, 
between 2001 and 2006, there has been a 30-percent increase in 
education funding. More importantly----
    Mr. Spratt. No Child Left Behind is the signature program 
of this administration. By our calculation it will be funded 
under your budget if it is adopted and implemented at $15.4 
billion less than the authorized level, way short of what was 
promised when the bill was passed.
    Mr. Bolten. Mr. Spratt, if I had a dollar for every dollar 
that was authorized but not appropriated, I would probably be 
able to do a lot to close the deficit gap.
    The President's commitment to No Child Left Behind, 
however, I don't think can reasonably be questioned. No Child 
Left Behind focuses on title 1, those areas where, those 
children who are most at risk of being left behind. There has 
been more than a 40-percent increase in funding in the No Child 
Left Behind areas over the course of the President's tenure, 
and even in this tight budget, there is a 4.6-percent increase 
over 2006 in No Child Left Behind programs, including a $200 
million increase in title 1.
    So what the President is doing, with what is turning out to 
be a very successful education program demanding accountability 
from schools, is leveraging the relatively small proportion 
that the Federal Government contributes to education in this 
country, to insist on accountability and results, so far it 
looks like the program is working and the President's financial 
commitment remains behind that program.
    Mr. Spratt. One last question. You have got substantial 
cuts in Medicare, $105 billion over 10 years.
    But none of the cuts recommended by MedPAC, your official 
consultant, experts in Medicare, has been adopted or promoted 
or brought forth by the administration, according to our 
examination of your budget. They have made recommendations 
about the Medicare incentives you are paying to PPOs and HMO's, 
recommendation about risk adjustment for overpayment, for 
patients who have a health profile that doesn't warrant the 
amount per capita per person you are paying, half a dozen 
different recommendations that total about $49 billion all 
together. They are nowhere to be found in your budget. Why is 
that?
    The senate adopted some of those $22 billion of those in 
their reconciliation bill, and then backed off in conference. 
Senator Grassley said the other day, if there is going to be 
anything like $105 billion in Medicare cuts, some of these cuts 
have to begin with recommendations made by MedPAC.
    Why did you not pick up on those recommendations?
    Mr. Bolten. Mr. Spratt, first, on the contrary, of the $36 
billion in Medicare savings that the President proposes in his 
budget, and let me pause for a moment and emphasize the word 
savings because the President's proposals are a moderate 
reduction in the growth rate of Medicare out over the next 
several years. If all of the President's proposals in this 
budget on Medicare were adopted, the annual growth rate in 
Medicare would decline from about 7.8 percent per year to about 
7.5 percent per year.
    So I want to emphasize that what the President is proposing 
is a very moderate reduction in the rate of unsustainable 
growth in the Medicare program and ought to be regarded as a 
down payment on future reform. But within that category in that 
$36 billion that the President has proposed, the majority of 
the savings that we are proposing, in fact, exactly parallel 
recommendations made by the independent MedPac Commission, 
particularly on the moderate reductions in what is called the 
market basket that is used to calculate the provider's 
reimbursement. So we have, in fact, adopted a very large 
measure of the MedPac's proposals. We haven't adopted all of 
them.
    Mr. Spratt. Do you make any provision for physicians' pay 
for 2007?
    Mr. Bolten. I believe the recent reconciliation bill did 
make a provision where----
    Mr. Spratt. For 06; but how about 07?
    Mr. Bolten. We do not propose a change in law at this point 
for physicians for 07.
    Mr. Spratt. Thank you very much.
    Chairman Nussle. Mr. Garrett.
    Mr. Garrett. Thank you. Thank you, and I appreciate seeing 
you here again today. Just a couple days ago, just as the 
budget was coming out, I had the opportunity in my district to 
have a regular meeting with veterans and leaders in my district 
and around the State to address veterans issues, and it was 
just fortuitous that the budget was coming out at that time but 
we did not obviously have the opportunity to punch the numbers. 
But you might imagine that the normal response at one of these 
meetings was, well, the rumor is that veterans benefits are 
going to be cut and the story is that we are going to be 
reducing the overall funding for veterans; and of course being 
the Representative, they are saying what am I going to do about 
it.
    Now, my understanding of having a little opportunity to 
take a look at the numbers are the overall figure is $80.6 
billion total for the VA, $38.5 billion in discretionary, and 
$42.1 in mandatory entitlement funding. The area that was most 
of concern to them was in the area of medical care. If I am 
reading the numbers right, is that we are seeing a little over 
an 11-percent increase in overall spending on medical care for 
veterans.
    Could you touch upon that, confirm for me if I am reading 
the numbers correctly there on the medical side and also the 
overall numbers for veterans care out of this budget?
    Mr. Bolten. Mr. Garrett, you are reading the numbers 
correctly. In medical care the overall proposed increase in 
spending in this 07 budget, 06 to 07, is $3.5 billion or an 
11.3-percent increase.
    Mr. Garrett. Overall for the entire veterans?
    Mr. Bolten. Overall, the number is 9-point-something, I am 
searching for it. Either 9.4 or 9.8 percent increase overall; 
9.8 percent increase in veterans spending overall.
    Mr. Garrett. The last question on this topic: How does this 
address the overall issue of obviously we have a lot more 
veterans coming into the system, more folks coming back from 
overseas right now and the projections for the cost going down 
the road with increasing numbers?
    Mr. Bolten. We are seeing increased costs in the veterans 
system. It has gotten much more popular in recent years. Partly 
the Veterans Administration budget is a victim of the Veterans 
Administration's success in running an increasingly effective 
and high-quality medical care system, so we are seeing a lot 
more veterans who in past years have gotten their health care 
elsewhere coming into the system. We want to sustain that 
commitment to providing the best possible quality health care 
to our veterans, but we also want to do it on a sustainable 
financial basis.
    Mr. Garrett. The second area, changing over to homeland 
security, it is in homeland security and defense where we will 
see increasing in spending, whereas nonsecurity areas, a slight 
decrease. The concern I have and expressed this in hearings in 
the past, is the so-called mission creep we see in the area of 
Homeland Security. It is the job of OMB to try to classify that 
and define that, but I understand there are certain cases that 
are at the extreme, where the Navy is doing certain functions 
considered not Homeland Security, where the Coast Guard is 
doing some. Then in the practical, to my neck of the woods, 
what first responders are doing, whether that is Homeland 
Security, or do any of these things simply fall in the category 
of natural elements of local, municipal, county/State 
government responsibilities?
    On the Federal level there is a whole area with regard to 
computer issues, as far as computer security. And I can see the 
idea here, this being a Homeland Security issue, but I also see 
the other side of the equation, that this would have fallen 
prior to 9/11 into the category of issues dealing with crime 
and local law enforcement either on the State or Federal level.
    What can you say to reassure me we are not simply seeing a 
reclassification from the discretionary nondefense, nonhomeland 
security areas being shifted over into the homeland security 
area, and that is why we continue to see significant increase, 
I think over 25 percent increase over the period of time 9/11 
forward in Homeland Security funding? Now it is down to a 
little under 5 percent. Can we sustain these numbers and is OMB 
doing anything to actually rein in and properly classify within 
that category?
    Mr. Bolten. Mr. Garrett, we work hard to try to properly 
classify the Homeland Security accounts. It is a difficult and 
technical undertaking. You have done a lot to spur us on to 
higher quality in that area and have called a couple of issues 
to our attention. But overall I think we have done a very good 
job of identifying within the various agencies, including 
within the Department of Homeland Security, what are legitimate 
Homeland Security expenses and which are not. And you have just 
raised a couple of examples. We will take a close look at them. 
But right now I think we are doing a pretty good job of 
separating what is and is not Homeland Security.
    Where we run into some difficulty and where we have a 
substantial political problem is precisely in that area of the 
first responders that you mentioned. Every first responder in 
this country is, I believe, a treasured asset and contributes 
substantially to the overall security and well-being of the 
country. That does not mean that the Federal Government should 
take responsibility for funding every first responder in the 
country. We need to focus our limited Federal resources on 
those areas where we believe there is legitimately the highest 
terrorist threat environment, and we have tried to do that in 
our budget.
    Now, that has disappointed a lot of people in areas that 
aren't necessarily at the top of the list in terms of terrorist 
threat, who would like to be getting a share of this first 
responder money. There is a fair amount of money still that 
goes out by formula, but we have dialed back on that and we are 
trying to focus our resources on making sure that what the 
Federal Government supports is genuinely in the Homeland 
Security category. We get a lot of disagreement and 
disappointment on that. It is one of the more contentious areas 
we have in our budget.
    I believe we are doing the right thing and I appreciate the 
efforts you have made to push us in that direction.
    Mr. Crenshaw [presiding]. Mr. Moore is recognized.
    Mr. Moore. Thank you, Mr. Chairman. Thank you, Mr. Bolten, 
for being here. We have an $8.1 trillion national debt, we have 
a projected deficit this year of $423 billion. This job, in my 
mind, is about setting priorities for our country and deciding 
where we are going to spend our tax money that taxpayers in 
this country pay into our Treasury. We talk here in D.C., the 
President and Congress, a lot about values. To me, a budget 
document is a values document because it again sets our 
priorities and says where we place our values, what we value 
the most. If we value tax cuts the very most, that is what we 
set as a priority. If we value taking care of poor children and 
their health care needs, if we value taking care of our 
veterans when it comes to copays or increasing those copays, 
then we are going to do some of those things as well.
    I think it is important that the American people and all of 
us be truthful with ourselves and everybody else that this is 
about values. I have 6\3/4\ grandchildren right now and I am 
telling you, Mr. Bolten, I am very concerned about passing a 
debt, an $8.1 trillion debt on to my grandkids. To me, passing 
massive debt to our children and grandchildren is not a family 
value that we should be proud of. And I think when Mr. Nussle, 
the chairman, earlier said well, if you don't like what we are 
doing, come up with an alternative, come up with a proposal, 
well, I don't think it has to be all or nothing. I voted for 
the President's first round of tax cuts because at that time we 
had a $5.6 trillion projected surplus. I voted against the next 
round because things had changed dramatically. We no longer had 
a $5.6 trillion surplus, we were in heavy deficit and debt.
    And here is my recommendation to Mr. Chairman. He is not 
here to hear this, but I will send a note. I have a bill, H.R. 
1574, which addresses the estate tax issue. The President and 
you and others are calling for permanent repeal of the estate 
tax. Again, I don't think it has to be all or nothing. My bill 
would increase the exception to $3\1/2\ million, and $7 million 
for husband and wife together, which will protect almost 99 
percent of the estates in this country. Yet my billing, 
according to CBO, would cost less than $200 billion in total 
repeal over the first 10 years, and I understand the permanent 
repeal is going to explode after 10 years.
    I guess what I want to ask you is this: Isn't it a fact the 
deficit for 03 was $378 billion?
    Can I see chart 26, please? Is that correct, Mr. Bolten?
    Mr. Bolten. That looks right.
    Mr. Moore. Is it correct that for 04 the deficit was $412 
billion?
    Mr. Bolten. Yes.
    Mr. Moore. For 05 the deficit was $318 billion?
    Mr. Bolten. Correct.
    Mr. Moore. For 06 the projected deficit is $423 billion.
    Mr. Bolten. Also correct.
    Mr. Moore. For those 4 years that would be a total deficit 
added to our debt of $1.53 trillion dollars, correct?
    Mr. Bolten. Yes.
    Mr. Moore. Could I see chart 2, please?
    This chart, Director Bolten, addresses the national debt 
limit increases in the past and present and pending. Isn't it a 
fact that our national debt limit was increased in June 02 by 
$450 billion? Isn't it correct in May of 03 the deficit limit--
the debt limit was increased by an additional $984 billion? 
Sir?
    Mr. Bolten. I believe so, yeah. I would be happy to 
stipulate to the accuracy of the entire chart.
    Mr. Moore. I would like to hear you talk about this. Isn't 
it correct in November of 04 the debt was increased for our 
country by $800 billion?
    Mr. Bolten. I believe so, Mr. Moore.
    Mr. Moore. There is a pending increase for a $781 billion 
debt increase; is that correct?
    Mr. Bolten. I believe that is what Secretary Snow indicated 
in a letter.
    Mr. Moore. I believe that is correct. Thank you. That would 
total in excess of $3 trillion more debt in the last 4 years; 
isn't that correct?
    Mr. Bolten. That is correct.
    Mr. Moore. According to the chart up here, $3 trillion and 
$15 change, whatever, right?
    Mr. Bolten. Correct.
    Mr. Moore. We are going in the wrong direction. I guess we 
could sugar-coat this any way we want to. Isn't it true if 
there is an increase in veterans spending, we are asking 
veterans to pay more under this budget for copays; isn't that 
correct?
    Mr. Bolten. We are indeed, Mr. Moore.
    Mr. Moore. Thank you. Isn't it also correct that college 
student loans are proposed to be cut or at least frozen? The 
increases in expenses aren't going to be covered; isn't that 
correct?
    Mr. Bolten. I believe college student loan volume is 
actually projected to go up.
    Mr. Moore. I am talking about the money of aid to each 
college student who applies.
    Mr. Bolten. The administration has proposed in the past 
increases in Pell grants, if that is what you are referring to.
    Mr. Moore. No. Thank you. My time is up.
    Mr. Crenshaw. Mr. Barrett.
    Mr. Barrett. Thank you, Mr. Chairman. Mr. Bolten, welcome. 
A couple of questions. Let us not talk any specifics, let's 
talk about some budget reform, trying to get a handle on what 
is going on; $38.8 billion in the Budget Deficit Reduction Act, 
it is a drop in the bucket. But the President is trying to head 
in that direction also. Can we bring the budget to some sound 
fiscal responsibility without touching mandatories?
    Mr. Bolten. Mr. Barrett, in the short run, the answer is 
perhaps yes. If we are very tight with discretionary spending 
and we don't have another Katrina year, out over the next 5 or 
10 years we can see a budget picture that would look all right 
without digging into mandatories. The problem is that, as Mr. 
Spratt and Mr. Moore have emphasized in their presentations, we 
have an enormous debt burden looming in the future, which is 
the product largely of unfunded obligations in our entitlement 
programs.
    As I said in my opening statement, there is no amount of 
restraint in discretionary spending, nor is there any plausible 
amount of increases in tax cuts. Even if you thought that was a 
good idea for the economy, there is no plausible amount of tax 
cuts that can possibly close the gap.
    So the answer to your question is in the short run maybe we 
could get away without addressing entitlements. In the longer 
run, it is absolutely impossible to do that. And the problem of 
addressing entitlements gets harder every year that we wait.
    Mr. Barrett. Let's take it another step further. Let me run 
some numbers. Discretionary funding levels from 85 to 2004, 
that is 20 years. Had we tied that growth to the Consumer Price 
Index (CPI) we would have saved $165 billion. OK. If we had 
taken discretionary and automatic spending in that 20-year 
period and tied it to CPI, we would have saved $724 billion. 
There are a lot of people, a lot of them on this committee, 
that are talking about budget reform. Does it make sense to tie 
the level of spending--and we are all reasonable people, we 
understand that we are going to have to grow government 
somewhat because of needed services, of population growth and 
stuff like that--but doesn't it make sense to tie the level of 
growth to some type of factor; i.e., CPI, to try to get a grip 
on how fast this government is growing?
    Mr. Bolten. I certainly agree, Mr. Barrett, that we ought 
to try to impose some kind of restraint on particularly the 
mandatory spending, because at least in the appropriations 
process, year on year, you all can do a budget resolution, the 
Appropriations Committees can do their work, and if the 
spending bills are headed toward exceeding what the President 
believes is good policy for discretionary spending, he can veto 
those bills. So that element of spending is reasonably 
controllable under the current process. What is very hard to 
control is exactly what you are focusing on; the mandatory 
spending.
    So I agree completely there ought to be some mechanisms of 
control to prevent unsustainable and indefinite growth in the 
mandatory programs.
    Mr. Barrett. One last question real quick. We talk about 
emergency spending. I have put in several budget bills to 
tighten up the language on emergency spending. Too many times 
you guys send us supplementals that some of the things in there 
I don't think are quite emergencies. Tell me what is your 
definition, what is the administration's definition of 
emergency spending, and do you think we need to set up some 
type of rainy day fund? It is going to happen, we know it. We 
are going to have a natural disaster, a conflict sooner or 
later. Do we need to set up some type of rainy day fund in our 
overall budget reform that addresses emergency spending?
    Mr. Bolten. Mr. Barrett, we do include in different 
portions of our budget an estimate of what sort of rainy day 
fund is going to be needed in a typical year. For example, we 
include in the FEMA budget an average amount for a regular year 
of disasters. That means a few hurricanes and floods of normal 
proportion. I think that is the right thing to do. What that 
kind of budgeting doesn't take into account is a disaster like 
Hurricane Katrina. And I believe those are properly handled 
through the emergency process, because if you try to put that 
kind of spending into your regular base, what will happen as 
the appropriations bill gets done is that if it doesn't happen 
to be a bad year from the standpoint of disasters, that money 
will get taken and spent on something else. So when we have 
really big emergencies, I believe we ought to handle them 
through the emergency supplemental process. That is the way the 
administration has done it. We do need to be careful when we 
ask for emergency spending, it truly is an emergency. And we 
appreciate your efforts to try to make sure that emergencies 
remain actual emergencies.
    Mr. Barrett. Thank you, Mr. Chairman.
    Mr. Crenshaw. Mr. Neal.
    Mr. Neal. Thank you, Mr. Chairman. Mr. Bolten, you earlier 
talked about the expenditures and costs for Iraq. And I think 
you used the word ``responsible.'' the administration's 
position would be responsible as to requests for expenditures.
    Mr. Bolten. I believe I did.
    Mr. Neal. How would you characterize your predecessor's 
position that the war in Iraq would cost $60 billion?
    Mr. Bolten. I am not familiar with that.
    Mr. Neal. The Governor of Indiana. He said it would cost 
$60 billion.
    Mr. Bolten. I know and admire my predecessor.
    Mr. Neal. You said the administration is taking a 
responsible position with budget projections as it relates to 
the war in Iraq. He said $60 billion.
    Mr. Bolten. I am curious of the context.
    Mr. Neal. It was after the general said we would need 2- to 
300,000 troops and Lawrence Lindsey offered an assessment of 
$300 billion. We are now off about $300 billion now from where 
Mr. Daniels was at the time to where you are at the moment.
    Mr. Bolten. Well, the one thing I would say----
    Mr. Neal. I am sure you will say something. I am quite 
positive of that.
    Mr. Bolten. If you will permit me, Mr. Neal. The one thing 
I would say is to underscore what conversation I had with the 
Chairman and Mr. Spratt at the outset is that war costs are 
inherently unpredictable, which is why I believe we need to 
handle them as emergencies as they are needed.
    Mr. Neal. I want to thank you for setting up the next 
question. How might you characterize the position of the former 
director of the Center for Medicaid and Medicaid Services (CMS) 
suggesting that the prescription drug bill was going to cost 
$400 billion and we are at $740 billion and counting? How would 
you characterize that position?
    Mr. Bolten. I think CMS's estimate have turned out to be 
relatively accurate.
    Mr. Neal. They are at $648 billion. Mr. Leavitt said the 
other day he was pleased it was down to $648 billion. Do you 
consider it when you are off by $250 billion to be a reasonable 
forecast?
    Mr. Bolten. I believe the numbers you are referring to when 
the previous director placed his statement was for a 10-year 
period that was from probably 04 to 13 or 05 to 14. The numbers 
that Secretary Leavitt was referring to are, I believe, a year 
or two later, which are inherently more expensive. Now, 
estimating the cost of a totally new Medicare program is a 
difficult undertaking. Everybody----
    Mr. Neal. Wasn't difficult--Mr. Bolten, it was not 
difficult at 4 o'clock in the morning here when we voted on it. 
The projections were there. We watched the majority leader move 
up and down the aisle and get the votes at 4 o'clock in the 
morning. He was certain it would cost $400 billion dollars.
    Mr. Bolten. I believe their projections are bearing out to 
be pretty close.
    Mr. Neal. He is cheering for that number. Says it wasn't as 
much as we thought it would be.
    Mr. Bolten. I believe a different time frame than the CBO.
    Mr. Neal. Do you understand why there might be some 
reasonable skepticism that some members of the minority party 
might raise about some of these issues?
    Mr. Bolten. The budget projection that you are referring to 
came from CBO, but I can appreciate skepticism because it is 
both a science and an art. One thing we know----
    Mr. Neal. You have clearly come down on the side of the 
art. I want to assure you that. Let me ask you a quick follow-
up here. You stated we are not undertaxed as a society. The 
budget calls for $1.5 trillion in tax cuts over the next 10 
years and you clearly don't account for fixing the AMT or 
interest costs associated with the additional debt. These tax 
cuts are not offset by similar reductions in spending under 
your budget, so how do you propose to pay for the tax cuts? And 
if you haven't paid for the tax cuts, doesn't that mean the tax 
cut is really a loan that will be paid back by Mr. Moore's 
grandchildren?
    Mr. Bolten. I don't think so, Mr. Neal. First of all, the 
tax cuts, the permanent extension of the President's tax cuts, 
are all incorporated in our budget projections. That is going 
out through the period in which they are in effect and even 
beyond. So all of the numbers that you see for our projections 
going out through 2011 include the full effect of making the 
President's tax cuts permanent.
    We believe that those tax cuts are essential to economic 
growth and we believe that economic growth is essential to 
sustaining our good fiscal position and toward making it 
possible for everybody in society to do well and have a good 
chance.
    Mr. Neal. Understanding that the costs of the Iraqi war and 
the Afghanistan war are difficult to gauge, would you say in 
retrospect that it is OK to say that Mr. Daniels' assumptions 
were on the low side?
    Mr. Bolten. I don't know what assumptions Mr. Daniels was 
making.
    Mr. Neal. He said $60 billion.
    Mr. Bolten. I don't know what context he was saying it in, 
Mr. Neal. And I am sure----
    Mr. Neal. I want to thank him for the clarity he has 
brought to this topic today, Mr. Chairman. Thank you.
    Mr. Crenshaw. Thank you. Mr. Simpson is recognized.
    Mr. Simpson. Thank you, Mr. Chairman. The light goes on. 
Novel concept.
    I agree with what Mr. Moore said earlier in that a budget 
really is about values. The question is how do we accomplish 
and get the money for those things that we want to spend it on.
    You said during your testimony that the most important 
aspect of reducing the budget deficit was a growing economy. 
You saw that last year. I mean, the machinations we went 
through trying to reduce $39 billion of spending. It is not 
easy to reduce spending. Yet as I look at the numbers, we got 
$100 billion essentially in additional revenue by doing 
nothing; by a growing, expanding economy. Seems to me we are 
never going to get the budget deficit under control unless we 
have a growing and expanding economy. So whatever we do to get 
that economy growing seems to make sense.
    The difference seems to come in whether you think reducing 
taxes on the American people and leaving more money in their 
pocket to spend and that to turn over in the economy actually 
increases the revenue to the Federal Government or decreases 
it. Seems to me on the other side of the aisle they think 
anytime you give a--reduce taxes, that all that does is take 
away from the revenue that the Federal Government has.
    And it seems to me that there are two things that are 
absolutely true: that at a zero-percent tax rate you get zero 
revenue; at 100-percent tax rate you get zero revenue. 
Somewhere in between there is a tax rate which maximizes the 
revenue and does the least damage to the economy. Where is 
that; do you know?
    Mr. Bolten. Congressman, I wish I did know where that was, 
and I have asked economists that question and every one of them 
has refused to answer that question. I think the right way to 
look at it is the best thing for the economy and for the 
Treasury is to keep taxes at the lowest possible rate that can 
sustain essential spending. And what we need to do is push down 
on both and make sure that the spending we do is only the 
essential spending the Government needs to do, and leave the 
rest back in the economy where people can spend it on their 
own, that will promote economic growth, because that growth, if 
you are concerned about people at the bottom end of the income 
scale, that is the most important thing for them, is being able 
to get a job in a growing economy and being able to take 
advantage of the many opportunities that a growing economy will 
offer.
    Mr. Simpson. Seems the me also the President is trying to, 
instead of reducing the supply of government, reduce the demand 
of government by creating an opportunity society where you have 
individuals with health savings accounts, increasing their 
ability to keep some of their own money and put them in 
retirement accounts, where there is less demand on government 
for the services because they make those decisions themselves. 
Would you say that is accurate?
    Mr. Bolten. Yes, I believe it is.
    Mr. Simpson. One more question I want to ask you 
specifically. In the Army Corps of Engineers' budget you said 
that the request is for $4.7 billion in discretionary budget 
authority, a decrease of about half a billion dollars. The 
administration prioritizes six construction projects and 
transfers money from nonpriority construction projects to the 
operation and maintenance program.
    The money you transfer from the nonpriority construction 
projects, as you know, many of these projects are multiyear 
programs. What we found out last year is that in some of them, 
by transferring that money, we were actually going back on a 
contract we had made with someone and the penalty for buyout 
would have cost us more than what we were saving by 
transferring it. Are we sure that the money we are transferring 
from the nonpriority construction projects won't cost us in 
penalties?
    Mr. Bolten. I can't speak to the specifics without having 
them in front of me, but we do indeed try to avoid that kind of 
situation as we put together the priorities in spending for the 
Corps of Engineers. So you are absolutely right. In some cases 
by slowing down spending or by pausing spending, we actually 
generate substantially more liability to the government than 
otherwise would have occurred, which is why in the Corps' 
budget we have tried to put a priority on not having a whole 
lot of new starts show up but, rather, take care of the 
projects that are already underway and take care of the 
projects that have the highest cost-benefit in particular.
    We have tried to bring as much cost-benefit analysis as 
possible to the Army Corps projects, and I think our budget 
reflects that. Our negotiations with the Appropriations 
Committees I hope will reflect that going forward.
    Mr. Simpson. That is what we are trying to do also is not 
have so many starts but finish the projects we have got on the 
board. Appreciate it.
    Mr. Crenshaw. Mr. Edwards.
    Mr. Edwards. Mr. Bolten, I think we all on a bipartisan 
basis want an opportunity society. I think, though, many 
Americans would say that cutting college student loans for 
middle- and low-income high-achieving students, borrowing 
billions of dollars from the Communist Chinese to pay for our 
deficit, and to allow us to buy more and more goods from the 
Communist Chinese is really a prescription for an opportunity 
society.
    Mr. Chairman, this budget fails the test of fiscal 
responsibilities and fairness. It burdens our present economy 
and our children's future with enormous deficits, including the 
largest single deficit in American history this year, $423 
billion. What that means is every night when I put my two sons 
that are 8 and 10 years old to bed, they and their generation 
are burdened with an additional $1 billion debt compared to 
just one night before. To put that kind of a burden on our 
children and grandchildren, in the view of most Americans, is 
morally wrong.
    This deficit doesn't just break the record of deficits 
prior to this administration, it shatters it. In fact, the 
$423-billion deficit this year is $131 billion higher than any 
deficit in any previous administration in our Nation's history. 
It is amazing to me that Chairman Nussle would call that record 
deficit, quote, dramatic deficit reduction. That is not fuzzy 
math, that is mythical math.
    For Republicans in Washington to claim that a $423-billion 
deficit is good news, a sign of, quote, dramatic deficit 
reduction, should frighten American families and businesses who 
know better. I never thought I would hear Republicans, who used 
to claim the mantle of fiscal responsibility, try to minimize 
the disastrous long-term consequences of a $423-billion deficit 
in 1 year and an $8.1-trillion national debt.
    Even worse, they are digging the hole deeper on a partisan 
basis since budgets for the last 5 years have been put together 
completely on a partisan basis by the Republican leadership and 
Congress and the White House. In fact, this bill is going to 
cut taxes by $103 billion more than it cuts spending.
    So after all the tough deficit-hawk speeches are through, 
the fact is the Republicans in Washington aren't willing to 
even pay for the future tax cuts that they are proposing by 
spending cuts, much less try to reduce the national debt or 
deficit.
    Not only is this budget fiscally irresponsible, it is 
painfully unfair to decent, hardworking families. Just a few 
days ago Republicans in Congress voted to harm children of 
deadbeat dads by cutting child collection programs and to make 
college less affordable to middle- and low-income families by 
cutting college student loan programs by $11.9 billion dollars. 
What did Chairman Nussle call this? Quote: ``pulling the weeds 
out of the garden.'' I really don't think helping families with 
deadbeat dads collect money from that deadbeat dad to help 
those children have a better education and the clothes to wear 
to school and food to eat so they are not hungry at school, I 
really don't think those children are weeds in the garden, I 
think they are our Nation's future.
    Republicans voted to cut health care for the children of 
low-income working families by cutting the Children's Health 
Insurance Program (CHIP). Explain that to the 28-year-old widow 
in central Texas, in my part of the country, who lost her 
husband in a house fire a couple of years ago and went to work 
as a bank clerk to try to provide CHIP health insurance for her 
3-year-old daughter.
    Now in this budget farmers, seniors, and hardworking 
families already struggling not with the optimism we heard from 
Mr. Nussle and others--I don't know which constituents they are 
listening to--these are people struggling with high prices for 
gasoline, home heating, health care, and prescription drugs. 
Now they will be hit even harder by budget cuts in this program 
to farm programs, education, health care, and student loan 
programs.
    Worse yet, perhaps worst of all, this budget would ask 
retired military personnel, retired military officers, to pay 
$1,000 more a year out of pocket for their military retiree 
health insurance in order to pay for a $220,000 tax cut for 
people making $1 million a year in dividend income. Retired 
military personnel paying $1,000 each a year pay the tax cut 
for just one American, someone who might have never served our 
Nation in uniform.
    I don't think this budget is fiscally responsible, I don't 
think it is fair, and I don't think it reflects the values of 
the American people. Thank you, Mr. Chairman.
    Mr. Crenshaw. Mr. Bolten, did you get that question?
    Mr. Edwards. Mr. Bolten has plenty of time to express his 
view. I will be very clear there was no question in that 
statement.
    Mr. Crenshaw. I don't know if Mr. Bolten figured that out 
or not.
    Mr. Bolten. I got it, Mr. Chairman.
    Mr. Crenshaw. Let me ask you a question, Mr. Bolten. When 
we talk about deficits, we talk about tax cuts, can you talk a 
little bit about the fact that when we reduce taxes and we let 
the average citizen keep more of what he earns and then that 
individual gets to decide what to do with the money, not the 
Government but the individual, he can spend it, save it, and 
invest it in his business, somehow that seems to generate more 
revenue.
    For instance, I think when the capital gains taxes were 
reduced, the capital gains tax receipts almost doubled in 3 
years. I think a lot of people don't understand how you can 
actually reduce taxes, which reduces the money that people 
would pay, lets them keep it, and somehow when they get to keep 
it and they get to spend it or invest it, then more money comes 
into the general revenue.
    What would have happened when you look at those deficit 
numbers, what would happen if we had not put in place some of 
the tax relief that we put in in 2001 and 2003? What do you 
think the state of the economy would be today?
    Mr. Bolten. Mr. Chairman, I believe we would be in much 
worse shape today, both economically and fiscally, had those 
tax cuts not been put in place. I am not arguing that every 
dollar of tax cut produces more than a dollar of revenue. Some 
people believe that; I am not making that case here now. What I 
am saying is that when the Government keeps tax rates low, that 
generates economic activity, and the overwhelming factor in our 
fiscal health is how good is the economy, because that dictates 
whether revenues are coming in. When we are getting good 
capital gains revenues, which was the reason why we had a spike 
in revenues and in the Federal Treasury position toward the end 
of the 90s, it is also the reason why we had a collapse in 
revenues in 2000 going into 2001 and into 2002. That collapse 
in revenues was not the product of the President's tax cuts 
which were either not in effect or barely beginning to take 
effect; that collapse in revenues was directly the product of a 
weak economy and especially collapsing capital gains revenues, 
which were inflated during the bubble period at the end of the 
90s and the deflation was just as hard on the downturn.
    The economic growth in this country is the absolute 
critical factor in our fiscal health, which is why this 
President's budget is focusing on ensuring ongoing economic 
growth.
    Mr. Crenshaw. We hear a lot about the deficit, and this 
year it is projected to be $423 billion, which is obviously a 
lot of money. I think last year it was projected to be over 
$400 billion, and it came in around I think $319 billion; and 
the year before that it was projected to be over $400 billion. 
I guess in one sense you are not painting rosy scenarios 
because it seems like for the last 2 years the deficit has 
actually been lower than was projected, so there is a good 
opportunity for it to be lower again this year, but I don't 
know.
    I would like you to talk about deficits in terms of you had 
a chart that shows the deficit both in real dollars then as a 
percentage of GDP. And I know about the time I was born, I 
think the deficit was about $54 billion, and I went back and 
looked and that actually was 30 percent of the GDP. And that is 
probably an extreme example but the good news is we have come a 
long way there. You showed a chart that showed over 40 years 
the deficit has averaged about 2.3 percent of GDP. I looked, 
and if you took the last 20 years, it actually ends up 3\1/2\ 
percent of GDP. So it seems to me we are in kind of the 
historical realm.
    Can you talk about how we should look at the deficit? We 
have got a 2\1/2\, $2.7 trillion economy. So $423 billion is 
obviously a lot of money, but as a percentage of that it is 
right around 3 percent, which is kind of where it has been 
historically.
    How do you look at it? What is the best way for people to 
look at it? Obviously it is large and we need to control 
spending, but put it in perspective, if you would, in terms of 
how you view the real dollars versus the percentage of GDP.
    Mr. Bolten. Mr. Chairman, the deficit that we have 
projected for this year is indeed a large one at $423 billion. 
Nobody believes that is good news. But the right way to look at 
a deficit is indeed as a percentage of GDP because that 
reflects what the resources are in this country to pay off the 
debt that can accumulate from those deficits.
    What we find is that if you look historically over the last 
40 years, the average deficit is about 2.3 percent of GDP. If 
you go to the last 20 years, it is actually higher than that, 
probably up in the 3 percent range. At 3.2 percent of GDP, the 
projected deficit we have for 2006 would be the 11th largest in 
the last 25 years. So not a good-news story by any means, but 
not historically out of range and not something that either has 
caused, or I expect will cause, surprise in the financial 
markets, which is a very important element here.
    Going back, though, you mentioned our projections. You were 
right that we had projected for 2004 a substantially larger 
deficit than ultimately came in. We projected a deficit about 
$500 billion originally, and it came in at about $412 billion. 
For 2005 we had projected a deficit of $421 billion; it came in 
at $318 billion dollars, thanks in large part to a surge in 
revenues from a strong economy.
    This year we are projecting an up-tick in the deficit, and 
it is more than a substantial move-up in the deficit, which is 
not surprising when you are in the middle of a war and have 
suffered the most economically disastrous natural disaster in 
this country's history.
    What I believe our numbers also show, though, is a very 
clear and credible path to bring that deficit down over time 
and do much better than meet the President's goal of cutting 
the deficit in half, which as a percentage of GDP would be 
below 3.2 percent.
    I believe we are in a sustainable range where we are right 
now with respect to our short-term deficits. What is 
unsustainable is what I have been talking about with Mr. Spratt 
and others is the long-term situation. The unfunded obligations 
in our entitlement programs are what make our long-term 
situation unsustainable and we must address those.
    Mr. Crenshaw. Thank you. Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman and thank the witness. 
I would like the indulgence of my colleagues to see if we 
couldn't get Chairman Nussle to have Secretary Leavitt and 
perhaps Director McClellan come before the committee, because I 
think health care issues will be key as we deliberate about the 
budget. So I would urge to have those folks as witnesses. It is 
my understanding today they are not scheduled as witnesses.
    Second, the list of terminated programs is apparently 
available to no one on the committee, so I would urge you to 
make it available.
    Mr. Bolten. We will, Mr. Cooper. We will have it in a nice 
printed book that I believe is being printed up.
    Mr. Cooper. Even scratch paper would be nice. Timeliness is 
more important than formatting.
    On the health care issues, I wanted to ask some questions. 
I would agree with you, you are talking about slowing the rate 
of growth of Medicare. I would like to know what alternatives 
for slowing the rate of growth that you considered and 
discarded in the effort to choose the methods that you chose in 
the budget.
    Mr. Bolten. Mr. Cooper, I think that question may be better 
directed to Secretary Leavitt when and if you are able to have 
him appear before the committee.
    Mr. Cooper. So he made the cut in this process or he made 
the selection of the ways to slow Medicare growth?
    Mr. Bolten. Absolutely. All of our recommendations on 
Medicare were done in close coordination with Secretary Leavitt 
and his entire team, who are the experts on Medicare spending. 
There are a lot of ways to dig in on Medicare costs. We chose 
the ones that we thought were the most promising, at least in 
the short run, and had been, in the case of the market basket 
savings, had been recommended by MedPac.
    But there are a lot of other ways to go at this problem and 
my expectation is and my hope is that we will continue at this 
problem not just this year but for some years to come.
    Mr. Cooper. Did any of the alternatives that you considered 
include trimming back the Medicare drug benefit that seems to 
be so expensive and doubtful of popularity with seniors?
    Mr. Bolten. I don't think there was any consideration given 
to eliminating the drug benefit, which I believe will turn out 
to be an absolutely critical part of the Medicare program and 
with pharmaceuticals being a tremendously important and 
increasingly important part of providing appropriate health 
care to people.
    What we had before the drug benefit was adopted was a 
system that would pay for a $10,000 heart operation but not pay 
for the $10 dollar pill that would have prevented it. That 
seems to me a situation that everybody should agree could not 
be sustained.
    Mr. Cooper. If that bill were funded, of course it creates 
an estimated $10 trillion liability for our Nation, which is 
almost completely unfunded. I think our colleagues on the other 
side of the aisle know this is true.
    Let me ask about health savings accounts. In the budget 
their estimated cost, I believe, is about $90 billion. Can you 
give me some backup information to help me understand how these 
would work? For instance, the Employee Benefit Research 
Institute (EBRI) says if you save the maximum every year, you 
would have to do that for 30 or 40 years without drawing out 
any money from that account; in other words, not being sick for 
30 or 40 years before you would have enough money saved up to 
meet your expected health care needs. That is a long time for 
people to save the maximum every year for 30 or 40 years before 
essentially health care savings accounts would work. What are 
your estimates of the viability or the workability of these 
accounts?
    Mr. Bolten. I am not an expert on health savings accounts, 
but I think the description you have just given 
mischaracterizes the way they work. What a health savings 
account does is makes it possible for a person to set aside a 
modest amount to cover the expenses that are not covered when 
you purchase a less expensive----
    Mr. Cooper. I understand that. The EBRI estimates seniors 
will need on the average of $200,000 to meet their expected 
health care needs. And it is impossible, according to EBRI, to 
accumulate that much money in health savings accounts.
    Mr. Bolten. That is $200,000 in uninsured needs?
    Mr. Cooper. Out-of-pocket expenses. In fact, their estimate 
is $230,000. They estimate that the average person who, for 
example, saved for 10 years and never withdrew a penny and paid 
in the maximum every year, they would have an account of 
$40,000, which is so far short of the expected need. This is a 
very legitimate nonpartisan group.
    Mr. Bolten. I have to say that just sounds completely out 
of range to me.
    Mr. Cooper. What backup information do you have to show 
that health savings accounts would be adequate for the need?
    Mr. Bolten. I would be glad to provide that for the record. 
But what I can tell you from my own experience with a health 
savings account, or even some other folks who have them, is 
that what the health savings account does is make it possible 
to purchase a much less expensive insurance policy, pay the 
first dollar out of pocket, and the health savings account 
helps you cover those first dollars out of pocket, which 
typically are in the low thousands of dollars to $3,000, which 
most people have to pay some out-of-pocket anyway, even under a 
more expensive health insurance plan.
    Mr. Cooper. I understand that. If you could supply the 
committee that information to show the workability and the 
efficiency of those accounts, because if we are going to spend 
$90 billion on something, we need to know what the chances are 
that it would work.
    Mr. Bolten. Be glad to. I know the experts in whose 
judgment I trust a great deal are very optimistic about the 
success of these health savings accounts, which have already 
shown some success so far, and in particular in making 
individual health care consumers better consumers. Because in 
exchange for the lower costs they are paying, those first 
dollars themselves in many cases except for preventive care, 
they are paying the first dollars themselves and they become 
better consumers and should improve both the price and quality 
information and substance that is in the health care market 
today.
    [The information requested follows:]

        Mr. Cooper's Question Regarding Health Savings Accounts

    In the president's budget, the projected cost for health savings 
accounts will be $90 billion. The Employee Benefits Research Institute 
estimates seniors will need on the average $200,000 to meet their 
expected health care needs. And it is impossible, according to EBRI, to 
accumulate that much money in health savings accounts. EBRI estimates 
that the average person will be far short of the expected need. What 
backup information do you have to show that health savings accounts 
would be adequate for the need?

    OMB Answer: EBRI's estimate of $200,000 represents the amount an 
individual would need to pay for premiums and out-of-pocket expenses in 
retirement. Though HSAs can be used to fund these health expenses, the 
Administration views HSAs as a tool to help people save for current and 
near-term health expenses. They may be viewed as a supplement to, but 
should not be viewed as an alternative to traditional Medicare, the 
primary source of health care financing for seniors.
    From that perspective, there are several ways in which HSAs provide 
adequate resources for individuals.
     HSAs must be accompanied by major medical health insurance 
when established, which protects consumers from unforeseen, necessary 
medical expenses.
     Under current law, individuals generally can contribute 
funds to their HSA equal to their deductible.
     The President's FY 2007 Budget includes a proposal to 
increase the maximum contribution levels to the out-of-pocket limit of 
one's high-deductible health plan. This proposal ensures that 
individuals can contribute enough to their HSAs to meet their potential 
out-of-pocket health care expenses.

    Mr. Cooper. I see that my time has expired. Thank you.
    Mr. Crenshaw. Thank you. Mr. Wicker is recognized.
    Mr. Wicker. Thank you very much. Actually Mr. Simpson is 
such a big linebacker that I have trouble looking at the 
witness through him. So I have moved over.
    Mr. Bolten. Sort of a defensive back.
    Mr. Wicker. We are eating into my precious time.
    Mr. Bolten, I have asked the technician to put up a chart 
that you used earlier, ``Progress on Spending Restraint.'' My 
colleagues on the other side of the aisle know that I have the 
greatest fondness and affection for them as friends, but it is 
clear that we have major policy differences across the aisle 
with regard to the budget. I have listened intently to the 
questioners on the Democratic side this morning and this 
afternoon, Mr. Bolten, and I have listened in vain for a plan 
to back up the eloquent rhetoric of my colleagues in decrying 
the growing Federal deficits and denouncing the lack of fiscal 
irresponsibility and their asking us to be more fiscally 
responsible. I have heard questioner after questioner say 
``let's spend more on this, let's spend more on this, let's 
grow government at an even faster rate on that.'' And I did 
hear one proposal for increased taxation on the American 
people, if I heard the questioners right.
    But when it comes to the things that have actually worked 
and we have had accomplished there on the chart, I look at 
discretionary spending below inflation which the President is 
asking for and which we delivered. We got no help from our 
friends on the Democratic side of the aisle in 2005 on that 
issue. Nonsecurity cut, whether it was in the budget resolution 
or our appropriation bills, the elimination of 89 programs. 
Basically the Republicans had pretty much to do that all alone. 
And then it was just last week that we were able, finally, to 
get the reconciliation bill passed; $39 billion in cutting the 
rate of growth over a 5-year period. I believe we had to do 
that without one single, solitary ``yes'' vote on the other 
side of the aisle.
    When you look at those choices, Mr. Bolten, in terms of 
deficit reduction what else is there? I guess there would be a 
cut in homeland security. That would be one alternative in 
terms of spending restraint. Am I right there?
    Mr. Bolten. Yes, sir.
    Mr. Wicker. Then I suppose we could cut the Department of 
Defense at a time when we have servicemen and -women around the 
world in places like Afghanistan and Iraq and fighting 
international war on terrorism, we could cut that. That would 
be another alternative, would it not?
    Mr. Bolten. Yes, sir.
    Mr. Wicker. What else is there if we don't cut mandatory 
growth or domestic programs; what else is there?
    Mr. Bolten. That leaves the possibility of tax increase.
    Mr. Wicker. Surely does. Let me ask you then to flip over, 
and I have asked the technician to give us ``Strong Job Growth 
Has Resumed.'' If we could see that chart, which I clued the 
technician in--there we go. That nice strong growth line from 
2003 to 2006, had we not had the tax policy in place, do you 
think that line--is it your opinion that that line of strong 
job growth would be that strong?
    Mr. Bolten. My opinion, Mr. Wicker, is it would not be 
nearly that strong. More importantly, that is the opinion of a 
number of respected economists.
    Mr. Wicker. Exactly. As the Chairman mentioned earlier 
before he had to leave the room, we are not really in this for 
numbers, we are in this to make the lives of Americans better. 
And in that respect I would certainly hate to see us go back to 
the high-tax policies of before and risk having another 
downturn.
    Let me just ask you, then, one other chart about our 
entitlement growth, ``Current Trends Are Not Sustainable.'' We 
see there if we don't take action, that actually the autopilot 
spending, the mandatory growth itself will exceed revenues if 
we do not take strong action in those outyears by 2070; is that 
correct?
    Mr. Bolten. Actually, by roughly 30 years from now, it 
would require all Federal revenue just to pay for the mandatory 
programs and the interest on it.
    Mr. Wicker. As I understand it, if we do nothing over the 
next 5 years, mandatory spending will grow $570 billion, it 
won't amount to $570 billion, but it will grow $570 billion 
over the next 5 years. The President is proposing that we slow 
that rate of growth by $65 billion. In other words, under the 
President's proposal, mandatory spending would still increase 
by half a trillion dollars over the next 5 years.
    Good luck, Mr. Bolten, getting a bipartisan consensus for 
even doing half of that slowing of the rate of growth over the 
next 5 years. I welcome the suggestions of our friends on the 
other side of the aisle. I endorse the plea by the chairman of 
the committee that our friends and colleagues come up with a 
specific comprehensive proposal for deficit reduction and a 
return to fiscal responsibility, and I think that would be a 
good starting point to let the electorate make a decision in 
November of this year.
    I thank the chairman.
    Mr. Crenshaw [presiding]. Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman, I will follow on with 
Mr. Wicker's suggestion. I do have suggestions for reducing 
mandatory spending, but they are suggestions that the 
administration has rejected.
    First of all, you said we need restraint on mandatory 
spending, and that is exactly right. The first step in the 
health care area should be to stop the excessive spending on 
HMOs and PPOs. You have got a MedPAC proposal that says we are 
spending--we are contributing--there is $50 billion there in 
spending we don't need to provide them because they are being 
overpaid.
    The secondary area of course is prescription drugs, and 
this is really simple. You rightfully praise the Veterans 
Administration for the dramatic improvements in quality and 
service.
    If I could have chart 7 please, you know, the study done by 
the Democratic staff of the Government Reform Committee. What 
they did is they took the 10 most commonly used drugs by 
seniors and they looked at the 10 leading plans across the 
country. And this is in the aftermath of Secretary Leavitt 
saying that the decline in the projected cost of the part D 
plan was due because competition in the drug benefit was 
driving down costs.
    Well, frankly, that is ridiculous. You look at the costs, 
when you look at those 10 most commonly used drugs, the 
Medicare plans are charging seniors in America 80 percent more 
than the price available to the VA, they are 60 percent higher 
than prices available in Canada, they are even higher than the 
prices on two mail order firms. So there is a place where we 
could dramatically reduce price.
    Let me turn to another area in health care. The HSAs that 
you mentioned. There are lots of studies out. The figure I have 
seen is $156 billion over 10 years. That is what the 
President's proposal would cost, and they weaken, they clearly 
weaken the existing health insurance system because they are 
moving people away from an employer based system to individual 
insurance policies, and that could lead, probably would lead to 
an increase in the ranks of the uninsured.
    They have little potential to improve the quality of the 
health care system because they do nothing about the major cost 
driver.
    You gave an example of first costs. They might make you a 
little bit more cautious about going to the doctor in the first 
instances, but 70 percent of the cost of health care in this 
country comes from 10 percent of the population. The population 
with chronic illnesses or major operations. And HSAs are really 
designed to provide health care for people who already have it 
and who have the resources to put money into another tax 
shelter, and Milt Friedman's column in the ``New York Times'' 
the other day pointed out only 2 million people in the country 
have got them and 1 million of those people haven't even put 
any money into them. So for people with money they may work, 
but they don't do too much.
    Finally, I want to say--and this is only my second year in 
the committee. But the gap across here is wide. It is a gap in 
values. It is a gap of sort of who we care about. But it is 
also a gap in some areas that we don't need to have.
    Mr. Crenshaw was talking about, how it's remarkable, you 
cut taxes and revenues to the government increase, as if the 
causation were clear. Another member of this committee in a 
prior meeting said once the tax cuts have worked. The tax cuts 
have created 4.7 million jobs.
    When the Clinton administration in 1993 raised taxes and 
cut spending, no advocate of that proposal I think has ever 
said the tax increases in 1993 created 22\1/2\ million jobs 
because we have a vibrant, dynamic economy. I don't disagree 
that some tax cuts can be helpful, but the notion that they 
increase revenues over what they would otherwise be is a 
stretch, and CBO doesn't buy it. You admitted you wouldn't 
argue for that position. So my question comes to this.
    You said at one point that the effects of the Bush tax 
cuts, extending the tax cuts, had been factored into the 
budget. It is true, is it not, that when you factored in the 
continuation of the tax cuts that meant you dropped revenue 
from what it would otherwise be if the tax cuts were not 
continued.
    Mr. Bolten. If measured on a static basis or probably even 
on a dynamic basis, yes, although the measurement we do and are 
obligated now by our rules to do and CBO does is to measure it 
on a static basis without measuring the dynamic effect. I hope 
at one point very soon economists will come to an agreement as 
to how to measure that dynamic effect. But you are correct, the 
revenues would be lower than they otherwise would have been 
without those tax cuts.
    Mr. Allen. But remember Douglas Holtz-Eakin ran dynamic 
scoring over a bunch of models over at CBO and came away 
concluding that it didn't make much difference, the tax cuts 
have some stimulative effect but nowhere near enough to 
compensate for the loss of revenue from the tax cuts 
themselves. That was his finding and that came out.
    Mr. Bolten. Economists are in disagreement about the size 
of what the dynamic effect is, and I am hopeful that they will 
come to some agreement soon. But you are right. I am not 
arguing that a dollar of tax cut produces a dollar of tax 
revenue. I am arguing that a dollar of tax cut can do an 
enormous amount of good for the economy, create jobs, put us on 
a much better long-term sustainable path than we would be on 
with that tax increase in place.
    Mr. Allen. Fair. So we agree at least that the tax cuts do 
not by themselves cause a revenue increase that is larger than 
the tax cuts themselves.
    I thank you.
    Mr. Crenshaw. I think they increase revenue, not 
necessarily dollar for dollar. Even this year CBO says if you 
don't continue them it will have a detrimental impact, so I 
think we all agree on that.
    Mr. Ryan of Wisconsin is recognized.
    Mr. Ryan. I thank you, Mr. Chairman. A couple of things I 
want to set straight and then ask a question of Mr. Bolten. No. 
1, we keep hearing tax cuts. The tax cuts in 2008, the tax cuts 
in 2010, and yes, the gentleman from Maine did say there is a 
gulf between us. What happens in 2008 and what happens in 2010 
are not tax cuts. Tax increases, we don't do anything.
    So there is a difference of opinion. We are simply saying 
keep taxes where they are and don't increase taxes 
dramatically. And what the other side here is saying is that if 
we do not increase those taxes, that is all of a sudden a tax 
cut. We are talking about holding taxes where they are, and not 
hitting our--the American taxpayer with massive tax increases. 
Calling that a tax cut is just beyond reason in my mind.
    Another important point is the Health Savings Accounts 
(HSA). There is important facts to get straight on health 
savings accounts. As a coauthor of that law, I managed that 
bill on the floor in 2003 when we passed that as part of the 
Medicare law. I remember the debate vividly. It was said at the 
time that this was only going to go to healthy and wealthy 
people, that just the rich and healthy people would get HSAs. 
Well, what are the data we have now today? HSAs went from 1 
million people having them a year ago to 3 million people. Who 
are those 3 million people? As many as 45 percent of the people 
who have HSAs are people who are over 40 years old. About 30 
percent of the people who have HSAs are people who earn less 
than $50,000. More than half of the people who have HSAs have 
some kind of preexisting condition. They are no more healthier 
than anybody else getting traditional insurance.
    But even more exciting than those facts is this: 37 percent 
of the people who have HSAs today, 37 percent of those 3 
million people are people who did not have health insurance 
before. They were previously uninsured. So what health savings 
accounts has done is priced insurance within reach for people 
who could otherwise not have afforded it.
    The latest survey of HSAs--and over 100 providers are out 
there providing these--is that two-thirds of the people who 
have HSAs have a monthly premium for their catastrophic health 
insurance of about $100--$100 for your health care premium, 
just imagine that.
    I talked to a couple of Racine farmers in Racine County, 
Wisconsin the other day who are able to slash their health care 
premiums by two-thirds. So HSAs are working, and they are 
helping people get insurance. They are helping people who 
couldn't get insurance otherwise, and they are helping people 
who have risky health profiles, who are older and who make less 
money than the average worker in America.
    The question I want to get to Mr. Bolten--and I wasn't just 
going to give a speech. I actually do have a couple questions. 
No. 1, on budget process. Mr. Hensarling and I have been 
pushing this rock up the hill for many years. I am very pleased 
to see these in here, the line-item veto specifically. I was 
one of the people who more or less agreed with the argument 
about a nondelegation doctrine of the Constitution that it 
would be unconstitutional for the legislative branch to 
delegate lawmaking authority to the executive branch. That is 
why we came up with the enhanced rescission method whereby the 
President pulls out spending from a bill he signs, sends it 
back to Congress under an expedited procedure where then we 
have an up or down vote, retaining the legislative authority 
but giving the President that sort of scalpel so that he could 
go after wasteful spending.
    Give me your version of the line-item veto. I see some text 
here but not specifically, and what is the constitutional 
argument you make behind your line-item veto and exactly how do 
you phrase it, and then if I have time I have a Medicare 
question.
    Mr. Bolten. I will try to preserve your time, Mr. Ryan, 
just by saying that, first, we really appreciate the efforts 
that you Mr. Hensarling and others have made on budget process 
reform and we wish you well in your Sisyphean task, which I 
think you may actually be close to getting the rock and keeping 
it up at the top of the hill.
    On the line-item veto our lawyers have constructed a 
mechanism that is based on deferral of spending rather than the 
actual termination of spending that they believe would pass 
constitutional muster. I will be glad to provide with you some 
of the----
    Mr. Ryan. Does it involve sending a bill back to the House 
and back to Congress?
    Mr. Bolten. I do not believe it does, but I will confirm 
that for you and we will give you a full legal analysis. On 
enhanced rescission, however, which we would prefer to have the 
line-item veto, enhanced rescission I think could go hand in 
hand. They need not be mutually exclusive. And I think both of 
those tools would be terrific tools to give the President. For 
those who are worried about earmarks and those who are worried 
about spending generally, I think those would be important 
tools for the President to have.
    [The information referred to follows:]

    The Office of Management and Budget did not respond to this 
query.

    Mr. Ryan. Quickly on Medicare, your proposals which do 
track with MedPACS--I serve on the committee on Medicare on 
Ways and Means--you do track mostly the MedPAC recommendations. 
Is it not true though that these proposals would actually lower 
Medicare beneficiary copays, lower some of their premiums than 
they otherwise would be?
    Mr. Bolten. Absolutely they would. But whenever we lower 
the payments that are going to, that the Government makes to 
providers, we are at the same time lowering beneficiaries' 
premiums because beneficiaries under most parts of the system 
pick up a quarter of the cost. So if we can keep provider costs 
low, we are also keeping beneficiary expenses low.
    Mr. Ryan. Thank you.
    Mr. Crenshaw. Mr. Case.
    Mr. Case. Mr. Bolten, I listened carefully to the 
President's State of the Union message, as we all did, not just 
for the details but for some sign of a commitment to bridging a 
partisan divide that in my view has poisoned this country. And 
frankly I heard some encouraging words along those lines. Did 
you in the preparation of this budget consult with any Members 
of the minority party in Congress?
    Mr. Simpson. Or the majority.
    Mr. Case. I am getting there.
    Mr. Bolten. Yes, I have had conversations with Members on 
both sides on issues of interest to them and their 
constituents.
    Mr. Case. So is that yes, you did come up here and consult?
    Mr. Bolten. Yes.
    Mr. Case. How many?
    Mr. Bolten. I couldn't say how many on either side were 
consulted. I take actually a fair number of calls, just regular 
phone calls coming in from Members of both parties to make 
cases on, usually on items that are of particular interest to 
their districts.
    Mr. Case. Was there any kind of systematic outreach to the 
minority or the majority for that matter on big picture policy 
items? You have made big picture policy calls in this budget, 
and that is what a budget is about. Was there any systematic 
attempt to seek from the minority party some input on the 
policies relative, for example, to continuation of tax policies 
or spending cuts or the elimination of specific programs?
    Mr. Bolten. Nothing systematic from my standpoint on either 
side. I have been pretty well aware of what the views of most 
Members are. I have spent a great deal of time not just with 
the chairman but with Mr. Spratt talking about policy over the 
last couple of years that I have been in this job. This budget 
is the President's proposal, and it reflects his values. He 
hopes very much to be able to work in a bipartisan way with the 
Congress on it. But my main priority in putting this budget 
together has been to reflect his principles.
    Mr. Case. I noted in the budget that there were several 
notations relative to the Budget Enforcement Act of 1990. Does 
the administration favor reenactment of the Budget Enforcement 
Act? And I want to speak specifically to PAYGO. Has the 
administration changed its position, which I understand at 
least to be in opposition to PAYGO across the board?
    Mr. Bolten. Yes, we do favor reenactment of the Budget 
Enforcement Act. We do not believe that PAYGO needs to apply to 
taxes as well as mandatory spending.
    Mr. Case. So you are not willing to put everything on the 
table quite yet? I mean taxes is a given and we can do PAYGO on 
the spending side only.
    Mr. Bolten. It is not up to me to take anything off or put 
anything on the table. I am giving you the President's 
position. But there are two sides or three sides or however 
many sides there are to that table.
    Mr. Case. But in any event, the President's position this 
morning as expressed by you today is not to reenact PAYGO as it 
existed under the Budget Enforcement Act, is that right?
    Mr. Bolten. Yes.
    Mr. Case. Can I have chart 3, please? That is pretty hard 
to see, but essentially what it is is your projection of total 
debt in your budget 2005 through 2011. I am correct, again, 
just to get this straight, that we are talking essentially 
about an increase under your budget, the President's budget, as 
submitted here today, total debt going from about $8.5 trillion 
to $11.5 trillion in the next 5 years. Is that correct?
    Mr. Bolten. That is correct.
    Mr. Case. Let me deal with after 5 years, Mr. Bolten, 
because we have had great disagreement in this committee and I 
suspect we will continue to on your decision, the President's 
decision, to have a 5-year horizon when prior Presidents, I 
think in both parties, had a much farther horizon out into the 
future, beyond 5 years. We had a big debate on that last year. 
I continue to disagree with you on that. But if I can have 
chart 6, please.
    Mr. Bolten. Mr. Case, while you are getting the chart if I 
can say on that question, I think there is legitimate room for 
debate. But I think Presidents of both parties have more 
traditionally displayed the budget in a 5-year chunk than in a 
10-year chunk. There have been periods where it has been done 
in 10 years. I think there is a reasonable case to be made on 
either sides of that.
    Mr. Case. I think Presidents of both parties have been 
wrong on that case.
    Mr. Bolten. All right.
    Mr. Case. This is your projection, one of the few places in 
the budget where you actually do go out past the 5-year window, 
and this shows your projection as on the effect of the 
proposals relative to tax policy beyond 2011. And essentially 
what you are showing is a $1.67 trillion loss in revenue, 
period 2007 and 2016, of which $280 billion is in the first 5 
years. So by my math what we are talking about is a decrease in 
revenues on the tax side of $1.4 trillion after that 5 years is 
over. It drops off the cliff. And as we all know, that is 
because of the assumption that the tax cuts that are scheduled 
to expire in 2011 do in fact continue beyond. Is that right?
    Mr. Bolten. That is right. And we do reflect in all of our 
numbers the continuation of the President's tax cuts. What 
those numbers largely reflect are the amount of tax increases 
that would be imposed on the American people if the President's 
tax cuts were allowed to expire.
    Mr. Case. Is it fair to say that in the window beyond 5 
years, given the spending patterns which do in fact show 
growth, you are just talking about curtailing growth, and the 
fact that you are in fact projecting significant reductions in 
revenue in the area of $1.4 trillion after the 5-year window, 
that we would anticipate a significant increase in the Federal 
debt after the next 5 years.
    Mr. Bolten. No, I don't think that it would be fair to say 
that.
    What the next, if we were to display the next 5 years, and 
I repeat there is reasonable arguments on both sides of that, I 
think the next 5 years would actually show continuing 
relatively low deficit years. There would be an ongoing----
    Mr. Case. I didn't talk about the deficit. I talked about 
the debt, total debt, including the borrowing from Social 
Security.
    Mr. Bolten. What it would also show, however, over the next 
5 years is an accumulation of debt that is related to the 
unfunded obligations in our entitlement programs. So the next 5 
to 10-year period, as I said earlier, I think from a fiscal 
standpoint on the face looks pretty good. The real crisis that 
is looming, and it is looming 10, 15, 20 years down the pike, 
is a crisis of the unfunded obligations in our entitlement 
programs. That is where the real crisis is, and that is why in 
the spirit of your opening remarks that the President asked in 
his State of the Union for both parties to come together to 
address this politically very difficult entitlement reform 
problem.
    Mr. Case. And I agree with that, just to finish that 
concept.
    Mr. Bolten. Thank you, sir.
    Mr. Crenshaw. Mr. Mack is recognized.
    Mr. Mack. Thank you, Mr. Chairman. Mr. Bolten, good to see 
you, sir.
    Mr. Bolten. Thank you, sir.
    Mr. Mack. We worked nights and weekends putting together a 
pithy statement for me to read but I decided instead just to 
boil it down to something my children would understand, and 
that is we take too much, we spend too much, and we regulate 
too much.
    I came to Washington, I think like most people did when 
they were campaigning, and talked about fiscal discipline, and 
I know we have made some small gains last year and want to see 
us continue to do that. I think we have to, here in this 
committee, Mr. Chairman, and others, really look at the budget 
process and really take a look at the way we do business here 
and what this process is all about. And there is leaders here 
that have been on this a lot longer than I have been on this 
committee. But I wanted to lend my voice to that. I also wanted 
to congratulate or thank you for including some of the language 
you did on Voice of America, especially as it relates to 
Venezuela. I think that is very important for security reasons 
and also it is our hemisphere and we need to take care of our 
backyard.
    My question is pretty simple. If we were to basically put 
in a spending freeze, kept it at the same level that we had 
this past year, how long would it take before we would wipe out 
the deficit?
    Mr. Bolten. Mr. Mack, are you thinking of a freeze on 
discretionary spending or overall spending.
    Mr. Mack. Overall spending.
    Mr. Bolten. I would imagine that a freeze on overall 
spending would bring our fiscal situation into balance in a 
very few years. I may ask my colleagues to do some quick 
calculations, but by 2009 one of my colleagues estimates we 
would be in complete balance on our fiscal picture if we were 
to freeze both discretionary and the mandatory sides of the 
spending ledger.
    Mr. Mack. But politically that would be hard to do.
    Mr. Bolten. It would be very hard to do. We have taken some 
steps in that direction. You have all taken some very important 
steps in that direction with the 2006 budget. The President is 
asking for similar kinds of restraint in the 2007 budget. And I 
think step by step, we will put ourselves on a sound path in 
the short to medium run. The longer term problem is 
unsustainable growth in entitlement problems that I was talking 
about with Mr. Case.
    Mr. Mack. Again thank you and my--hopefully at some point 
down the line I can look my kids in the eyes and say you know 
today we cut spending. Thank you.
    Mr. Bolten. I hope you will, sir.
    Mr. Crenshaw. Mr. Cuellar.
    Mr. Cuellar. Thank you, Mr. Chairman. Mr. Bolten, again 
thank you for being here with us and again thank you for 
working on this ExpectMore.gov Web page. I think that will be a 
good start. What I want to do is again go back to budget 
reform, but I am talking about performance based budgeting and 
having a system that instead of going to a Web page for 
Members, if we could have it where it would be a little bit 
more accessible to the Members.
    I was just looking at the budget a few minutes ago, and my 
question would be, would you be willing to sit down with myself 
and any member of the committee, to pick any agency, doesn't 
matter which agency you all want to pick, and I sit on the 
Agriculture Committee. If you want to go to do that it would be 
fine. They do have a couple performance measures. But would you 
all be willing to sit down with us on a pretty quick basis just 
to come up with a format as to what the budget would look like 
if we actually put it with, this is the mission of the agency, 
these are the goals, here are the objectives, here is the 
money, here is the performance measures, and put it in a format 
that I believe will be more accessible and easier for the 
Members to look at so that way we can have questions as to here 
is the agency, here is how we are spending the money, this is 
how I think we ought to be refocusing some of these dollars?
    Because I do have some concerns like the Members about the 
cuts in education and health care and agriculture and all that. 
But today I just want to focus on that specific to see if you 
would assign yourself or assign somebody that would be willing 
to sit down with myself and any of the Members to just come up 
with one format and I would prefer to do Agriculture if that 
would be OK with you, but any other agency would be fine.
    Mr. Bolten. Be glad to do that, Mr. Cuellar. It is an 
interesting idea. I will recommend to you my Deputy Director 
for Management, Clay Johnson, whom I believe you know, or at 
least may have met at some point, who was the animating force 
behind the score sheets that we put out, behind the PART 
program now and behind ExpectMore.gov and I think would be a 
very good person to talk to about how we construct our budget, 
how we display it.
    I don't know about starting with Agriculture. We might want 
to check with Secretary Johanns to see if he wants to be the 
guinea pig or not. I would be glad to sit down with you on that 
exercise and any other Member that is interested in doing so.
    Mr. Cuellar. If you want to talk to the Secretary, No. 1. 
No. 2, if we can do this on a quick basis, if he agrees, if 
not, we can pick another agency, but I think for the Members, I 
think, if we can just have a starting point, I think this will 
go a long way. Because again I support you on your 
ExpectMore.gov. That is good for citizens to go and check, that 
is fine.
    But I am more interested in the budget oversight that the 
Congress needs to provide, and I think if we put it in a 
particular format, and I will be happy to interact with you as 
to some of the ideas.
    Mr. Bolten. Deputy Director Johnson has spent a lot of time 
with agencies and with a relatively small number of Members who 
were interested in this, I think. I am pleased to see that you 
are interested, I think more should be, in constructing the 
format for our evaluations. If you haven't had a chance to surf 
on ExpectMore.gov, I think you will be pleasantly surprised at 
the quantity and quality of information that is there. It is a 
very candid assessment, and I think you may find a lot of what 
you are looking for there because we display more information 
than you would normally put up for the average layperson to 
read. It actually does give real information for the technical 
expert.
    Mr. Cuellar. Right, and I believe the Chairman Nussle and 
ranking members, we had a hearing here last year and Clay 
Johnson, Mr. Johnson, was here. And I understand that 
information is there. But what I am looking at is to try to 
package it where we can extract really the performance measures 
and the objectives that I think will be useful for the Members 
so we can have this in a more easy format. Mr. Johnson will be 
perfect. I know him very well from Texas. And all I am asking 
is that we can kind of put this in a quick time frame.
    Mr. Bolten. I am sure he would be pleased to do that.
    Mr. Cuellar. Thank you, Mr. Bolten.
    Mr. Crenshaw. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Mr. Bolten, let me 
start out by complimenting the administration for this budget 
relative to the historical standards of this city. Proposing a 
budget that only increases Federal spending by a little over 2 
percent is certainly noteworthy, and I congratulate you for 
that.
    Obviously your budget has received a lot of criticism from 
our friends on the other side of the aisle principally for its 
failure to call for a large tax increase and for your measures 
to begin reforming entitlement spending.
    With few exceptions, and there have been some exceptions 
particularly from the gentleman across my way here, I haven't 
seen a whole lot or heard a whole lot on constructive 
suggestions on what their plan is. Recently, I saw a GAO study 
from December that says that if we keep discretionary at its 
historic standards, if we fail to reform our entitlement 
spending, within one generation, specifically the year 2040, we 
are on a collision course to do one of two things, either one, 
increase taxes on the next generation 2\1/2\ times or, two, we 
would have to reduce Federal spending by roughly two-thirds, or 
essentially the Federal Government would consist of Medicare, 
Medicaid, Social Security and very little else.
    So No. 1, I am curious if your own conclusions, does that 
study paint a fairly accurate picture?
    Mr. Bolten. It does, Mr. Hensarling, and I think it was 
graphically demonstrated in the chart we had up earlier where 
you see the black revenue line.
    Mr. Hensarling. Forgive me, I was a little late and so I 
missed your presentation.
    Mr. Bolten. That is all right.
    This chart, what it shows is that when you get out in that 
range of 2040, if you assume Federal revenues remain at roughly 
constant 18.2 percent of GDP, which is a historic average, by 
the time we got to that date you would need to spend all 
Federal revenue on mandatory programs plus the associated 
interests, you would have no money left over for any of the 
discretionary spending, including defense, education, housing, 
veterans, and all of the other things, the services that people 
expect from government.
    Mr. Hensarling. These are subjective terms, but some on the 
other side of the aisle have described your budget as being 
unfair, irresponsible, and lacking compassion.
    In your judgment, is it fair, is it responsible, is it 
compassionate to more than double taxes on the next generation, 
or to cut every Federal program practically with the exception 
of the big three entitlements?
    Mr. Bolten. No. It would be a very bad legacy to leave to 
the next generation, rich or poor, because they would all end 
up being poor.
    Mr. Hensarling. There has been some talk here obviously for 
different aspects of budget enforcement, budget process reform. 
It is a subject near and dear to my heart and frankly there has 
been some good ideas on the other side of the aisle as well and 
I understand that the President, I guess in every budget that 
he submitted he has called on some form of extending the Budget 
Enforcement Act and he does yet again in this budget. But there 
is a tendency in this town when all is said and done that there 
is more said than done.
    I certainly saw the administration become very enthusiastic 
about passing the prescription drug benefit bill. I have yet to 
see that level of enthusiasm replicated for retooling what I 
view as a Washington spending machine into one that would be a 
savings machine for American families. So I guess my question 
is, tell me something encouraging that somebody else besides 
OMB is going to get excited about actually enforcing these 
budgets and changing the budget process.
    Mr. Bolten. Well, Mr. Hensarling, I think you should have 
drawn encouragement from the words of the President himself in 
the State of the Union when he explicitly referred to the 
importance of spending restraint here in Washington, the 
importance of budget process reform, specifically obtaining a 
line-item veto or as I was discussing with Mr. Ryan, coupling 
that with some enhanced rescission process and, most 
importantly, taking on the problem we just talked about, which 
is entitlement reform and trying to do that on a bipartisan 
basis.
    Mr. Hensarling. This might be a rhetorical question or 
maybe I can get the answer later, but I believe that already 
the administration proposed and Congress has enacted close to 
$100 billion in hurricane relief. Now you are asking for 
another $18 billion in supplementals. Some of us want to know 
what is the proper Federal role in hurricane relief? Where is 
the accountability? And what reforms will be enacted so that 
the factory worker in my district in Mesquite, Texas doesn't 
have to do this again in 5 years.
    But I see my time is out. But I look forward to maybe 
getting a written answer to that question. Thank you very much.
    [The information referred to follows:]

OMB's Reply to Mr. Hensarling's Question Regarding the Federal Role in 
                            Hurricane Relief

    The Federal Government's role in hurricane relief is largely 
spelled out in the Stafford Act and provided through the Federal 
Emergency Management Agency (FEMA). This Act recognized that Federal 
coordination and resources are vital to protecting lives and property 
when state and local resources are overwhelmed. Much of FEMA's 
assistance is provided through the Disaster Relief Fund, which provides 
direct assistance to victims, and supplements state and local response 
resources. Recognizing that disaster response is a shared 
responsibility, several FEMA programs have state and local matching 
requirements.
    FEMA also administers a flood insurance program that is financed by 
premiums. The extensive damages caused by Hurricane Katrina have caused 
flood insurance losses to exceed resources available to this program. 
To ensure these insured losses are covered, the Administration has 
sought additional resources for this program and has proposed reforms 
to ensure this program is solvent in the future.
    In addition to these two programs, the Federal Government 
traditionally responds to hurricanes with disaster assistance through 
the Small Business Administration (SBA) and to rebuild Federal highways 
through the Department of Transportation.
    Hurricane Katrina was the most damaging natural disaster in the 
nation's history. To assist the region in its recovery, the President 
also has proposed and signed into law tax relief. He has also proposed 
Community Development Block Program (CDBG) grants to assist the 
regional recovery efforts led by State officials. To protect New 
Orleans from future hurricanes, the Corps of Engineers is rebuilding 
levees and making other improvements.
    While FEMA assistance must be provided rapidly, FEMA has a number 
of control mechanisms to ensure that agencies and state and local 
governments are accountable for FEMA funds. For Hurricane Katrina, the 
Administration has taken a number of steps. First, to address problems 
arising from the immediate response to Hurricane Katrina, the 
President's Homeland Security Council conducted a lessons learned 
exercise and issued a report on February 23, 2006 that included 125 
recommendations. Second, to oversee the rebuilding and recovery effort, 
the President appointed Don Powell as the Federal Coordinator. Third, 
most Federal assistance has been and will be provided through FEMA 
within the Department of Homeland Security (DHS). DHS's Inspector 
General has established an Office of Katrina Oversight to conduct 
audits and reviews to closely monitor the expenditure of disaster 
funds.

    Chairman Nussle [presiding]. Mr. Davis.
    Mr. Davis. Mr. Chairman, I think by now, Mr. Bolten, you 
have some sense of the general flavor to the argument we have 
over the tax cuts. The chairman and my colleagues on the other 
side of the committee room today point out the job creation is 
up, the GDP is up, and they cite that as an example of the 
success of the Bush policies. And you have heard our refrain, 
that job creation was substantially higher in the 90s, that GDP 
was substantially higher in the 90s and the marginal rates were 
higher and taxes were a greater percentage of GDP. I think you 
get that underlying dispute.
    So let me try to possibly inject a little bit more evidence 
into the argument.
    Wage growth in the economy, looking at--Mr. Hensarling 
mentioned the people who work in Mesquite, Texas. Wage growth 
for people in the manufacturing sector and the service sector, 
what the overwhelming majority of people do in this country, is 
wage growth at a higher level or appreciably higher level 
today, Mr. Bolten, in fact in 2004 and 2005 than it was in the 
2 years before the Bush tax cuts were enacted?
    Mr. Bolten. The wage growth I believe has been relatively 
flat over that period.
    Mr. Davis. Been about the same. Let me turn to another 
indicium. Several of my colleagues on this side of the aisle 
talk about the value of people having more money to put in 
their pocket, more money to spend. Discretionary income on the 
part of the of the taxpayer is perhaps best defined by the 
percentage of his or her income going to paying taxes.
    Looking at wage earners earning less than $150,000 a year, 
majority of wage earners, is the percentage of their income 
going to the combined State and Federal taxes appreciably less 
in 2004 and 2005 than it was in the 2 years prior to the 
enactment of the Bush tax cuts?
    Mr. Bolten. Yes, I believe it was.
    Mr. Davis. The numbers I have show it is about the same.
    Mr. Bolten. Let me offer chart number 32 if I could to 
illustrate the point. I cannot speak to the State burden. This 
is just the Federal and that is----


    Mr. Davis. Well, that is the significant part of my 
question, unfortunately, because the taxpayers' pocketbooks 
don't distinguish between State and Federal. They are both 
taken out of your taxes. So again for the sake of time, and I 
don't know I will accept that as an answer, but do you know if 
the combined Federal-State burden is less today than in the 
2004-2005, than it was before the Bush tax cuts?
    Mr. Bolten. I can't speak to the combined burden but what I 
can tell you is that the burden on all taxpayers who are below 
50 percent is lower today than it was before the tax cuts. They 
are paying a lower percentage of the overall tax burden, and 
all of the higher income earning brackets, the top 1, 5, and 10 
percent are paying a larger share of our income tax than they 
would have been without the tax cuts.
    Mr. Davis. Let me turn to another measure that most people 
think is important, the rate of savings, again the theory being 
that if people have more money, if they could save more, is the 
savings rate in our economy appreciably higher today than it 
was before the Bush tax cuts?
    Mr. Bolten. I don't have that year-on-year data. The 
savings rates are a matter of concern, which is why----
    Mr. Davis. Are they higher than they were before the Bush 
tax cuts?
    Mr. Bolten. I don't know. But what I can tell you is that 
in this budget there are a number of proposals to promote 
enhanced savings in this economy, which is what we need.
    Mr. Davis. But just for the sake of time, you would agree 
with me that we can't document that the overall savings rates 
are higher than before the tax cuts? And we turn to two other 
indicia, the number of business failures in the economy in 2004 
and 2005. Another theory we often here is the tax cuts make it 
easier for people to act on their entrepreneurial instinct. Are 
the number of business failures appreciably better in 2004 and 
2005 than it was in the 2 years before the Bush tax cuts?
    Mr. Bolten. I do not know the data, Mr. Davis.
    Mr. Davis. Let's look at the level of new business 
creation. We talk about new job creation. As far as new 
business creation goes, is there an appreciably higher number 
of new businesses created in this economy in 2004 and 2005 than 
in the 2 years before the Bush tax cuts?
    Mr. Bolten. I would expect that there are more businesses--
--
    Mr. Davis. Do we know?
    Mr. Bolten. There are certainly a lot more jobs. The 
important part is that jobs are up dramatically.
    Mr. Davis. I understand that. I don't mean to cut you off 
but I am making a specific point that presumably the evidence 
ought to be somewhat relevant to this argument.
    Let me wrap up. I think you get the point I am making, Mr. 
Bolten. Clearly, the case can be made that there are some good 
economic things that have happened in the last several years. 
There is an old story about a priest in Philadelphia who went 
to see boxing matches and he would often see one of the boxers 
walk in the ring and he performed the cross before he would go 
in to fight. And 1 day somebody said, well, Father, does that 
do any good? And he said yes, if he knows how to fight.
    Make no mistake. There have been some good things that have 
happened in the economy, but if I can invoke the Ander Crenshaw 
15-second wrap up rule, Mr. Chairman, there have been good 
things in the economy, there have been some less successful 
things in the economy. The challenge for the committee is there 
is an indisputable consequence from the tax cuts in terms of 
revenue, in terms of drawing money from other discretionary 
spending, in terms of limiting our capacity to cope with 
mandatory spending crises. Those are indisputable consequences, 
and there ought to be a powerful reason on the other side, in 
my opinion, for continuing in these policies.
    And frankly if you look at these important indicia from 
business creation and savings rate to wage growth, the reality 
is that things are not dramatically better. And on this point I 
was interested in seeing Mr. Nussle and Mr. Wicker make the 
somewhat interesting comment that the purpose of our fiscal 
policy is to make lives better for the American people, and it 
is a decidedly unconservative premise on their part, but even 
granting that premise, I wonder if the real empirical evidence 
suggests that that is the case. Thank you, Mr. Chairman.
    Mr. Bolten. Mr. Chairman, may I have one 15-second comment 
to close.
    Chairman Nussle. I will give you the same amount of time to 
respond, which was hardly 15 seconds.
    Mr. Bolten. I will use only 15, just to say that I don't 
agree with Mr. Davis' view of the economy. I think we have a 
very solid, strong economy under way at this point. But if I 
did agree with his view of the economy, I would feel even more 
strongly that this would be exactly the wrong time to raise 
taxes on the American people.
    Chairman Nussle. Mr. Lungren.
    Mr. Lungren. Thank you, Mr. Chairman. In response to Mr. 
Davis' question, there ought to be a principle as to why we 
keep tax cuts. It is the principle that it ain't your money. 
Taxes are involuntary takings of money from individuals who 
have earned it in some way, shape or fashion. Maybe I have been 
away from this place too long, but when I come here and hear 
the debate now that we can't afford not to raise taxes because 
that costs the government something, what concept is that? That 
an American citizen, sitting in their own home, making whatever 
they make, giving it to someone else and in return getting 
money for the labor that he has put in or she has put in and 
suddenly they are costing the government something because they 
haven't given them everything they have got.
    Mr. Davis. You are guilty of a pre-911 mindset, Mr. 
Lungren.
    Mr. Lungren. I didn't interrupt you on this. I am just 
trying to get what the principles are down here.
    Mr. Bolten, I admire you greatly and everything you have 
said, but they have beaten you down such that you made a 
statement a minute ago that is extraordinary. When you were 
talking about mandatory spending, you mentioned the area of 
discretionary spending defense.
    Now my reading of the Constitution is the first thing that 
we are required to do on the Federal level is provide defense. 
And we have gotten so far in the Budget Committee that now we 
consider defense as discretionary and all these other things as 
mandatory. It suggests we really have gone out of control. We 
now are told that the fruit of your labor is not yours, it is 
the Government's, and if you don't give them everything you 
have cost the Government something. We have now been told that 
there is mandatory spending that is going to eat everything up 
and leave nothing for discretionary spending such as defense. I 
mean this is Alice in Wonderland. Up is down. Down is up. This 
is crazy.
    We can talk about budgets all we want. Folks are saying 
that if we don't keep the tax cuts in--we are saying that if 
you don't keep the tax cuts in or raising taxes, again I was 
here with Ronald Reagan. We put tax cuts in, and I never knew 
we had to defend them out 20 years and say if you don't get rid 
of those tax cuts you are being somehow dishonorable, you are 
costing the American public something. The idea is we give 
people tax cuts. That is the new rate. So if you are going to 
go and do something which raises them on them, it seems to me 
that to the average person that is an increase in taxes.
    There is two ways to make sure the government gets zero 
revenues. One is to have a tax rate that is zero, but the other 
one is to have a tax rate that is 100 percent. Because dynamic 
scoring would tell you that if you tax people at 100 percent 
they ain't going to work. And if they are not going to work, 
the government gets nothing. And the question is where do we 
find that balance?
    And the big debate between us, the big cleavage that I find 
here, is that you folks think that the American people can bear 
a larger and larger tax burden without doing anything to stifle 
their creativity, the amount of money they want to take home, 
the amount of work that they are going to do.
    And the point that Mr. Davis was making just a moment ago 
that we ought to talk about how much total taxes people are 
paying is an important one. But I would draw a slightly 
different conclusion to Mr. Davis. If we hadn't had those tax 
cuts in, no matter what the level that they are paying now for 
the State is, they would have paid far more unless you are 
suggesting that the States would automatically charge their 
folks less because we are charging them more. I mean the fact 
of the matter is people generally feel that they don't have an 
obligation to pay us more in taxes.
    And so I come back to this, what are we really going to do 
to try to keep spending down? Because that is what we should be 
talking about here in the budget side. This sounds like the 
Ways and Means Committee when I listen to my friends on the 
other side. They are always talking about raising taxes, but 
they don't call it that. They want to say, don't extend the 
current rates. OK, well, don't extend the current rate because 
of the budget situation and laws that we have. That is called a 
tax increase as far I am concerned. But you talked about 
deferrals as one of the processes you used. It sounds to me 
that that is enhanced impoundment. We had a little problem with 
that following the Budget Act.
    So I would ask you a couple questions. One is should we 
maybe be putting more emphasis on the suggestion we have here 
in this body of enhanced rescission because that seems to be 
the mechanism by which we allow the legislative branch to have 
a say as well?
    And lastly this, why don't we consider just freezing 
spending? By my calculations, based on the figures you have, by 
the year 2009 our receipts would catch up with our outlays. And 
that is what most normal families would do. Why can't we? I 
know the political requirements are tough. But why don't we use 
that as a target?
    My last question is have you suggested the President veto a 
single spending bill?
    Mr. Bolten. Let me take the last one first, Mr. Lungren. I 
have recommended on many occasions that the President veto 
bills, and those recommendations have typically been 
incorporated in the statements of administration position that 
the administration has sent up on bills. And in all cases, the 
Congress has made modifications so that it was not necessary 
for the President to exercise his veto.
    Last year was a very good example in which we threatened on 
many occasions the President's veto if the President's spending 
limits were exceeded. The Congress and appropriators, you among 
many Members, were contributors to ensuring that that the 
appropriations bills came in at or below the levels that the 
President requested. And I think last year is a good record 
because that is a year in which at least the nonsecurity 
elements of spending were frozen.
    I will go back to your earlier remark about, I didn't mean 
to cause you consternation by suggesting that I thought 
entitlement programs are in the normal English sense of the 
word mandatory and that defense is discretionary. On the 
contrary, when the President gave me instruction on putting 
this budget together he said the top priority is protecting the 
national security, and that is reflected in this budget.
    Finally, on the budget process issues you mentioned, yes, I 
think it is useful to examine the enhanced rescission processes 
that Mr. Ryan was talking about. I believe and our lawyers 
believe that we can do a line-item veto in a constitutional 
way, but regardless I don't see any inconsistency in going 
forward with both proposals at once. I think both arrows belong 
in the President's quiver in assaulting unnecessary spending.
    Chairman Nussle. Ms. Schwartz.
    Ms. Schwartz. Thank you, Mr. Chairman. I have been asked by 
my colleagues to yield and I will only be 30 seconds. I would 
like to yield back just 30 seconds of my time and I will let 
the chairman monitor this, to Mr. Davis, and then I will be 
happy to make my comment and ask my question.
    Mr. Davis. I thank the gentlelady for yielding just to 
briefly address your point, Mr. Lungren, for someone earning 
over a million dollars the average tax cut they receive this 
year is $103,000. You can pare that down to $90,000 and recoup 
all the Medicaid savings that happened in the reconciliation 
last week, pare it down to 95,000, recoup the savings in the 
child support enforcement program. I am always struck by this 
theory of agony for millionaires, have gone from $103 to $95, 
and I thank the gentlelady for yielding.
    Ms. Schwartz. Thank you. I want to bring up an issue that 
really we have only barely touched on and I appreciate all the 
conversation on our side of the aisle has really been about 
priorities. Budgets are about priorities. You have spent your 
time this morning being very clear about the fact of the 
priorities of restraining spending, particularly in education, 
health care, and on that being the priority of this 
administration to accept actually I think really astounding 
deficits that many of us on this side of the aisle are very 
concerned about the fiscal irresponsibility of those continuing 
deficits and the huge debt this country is in and the fact that 
we are spending more on our interest payments than we spend on 
veterans health care and homeland security and education 
combined.
    But set that aside because my side of the aisle has talked 
about that, talked about some of those issues.
    Yesterday I had a family in my office with their son, who 
is an American soldier just returned from a year in Iraq. And 
we spent a good bit of time, as you might imagine, talking 
about the war in Iraq, about his service to this country and 
about what he has been through. What is interesting to me is 
that at the end of this conversation many things he said and 
the parents said and his younger brother, all three sons have 
chosen ROTC because of their love of this country, their 
commitment to service, but always also to help pay for college. 
Two of them are serving in Iraq. One just came back, one is 
just entering college in May and in August he will be put in 
harm's way.
    But what is really particularly interesting to me is at the 
end of the conversation one of the parents said to me that did 
any of us, were any of us paying attention, and I will ask you 
this question, paying attention to the fact that while we are 
engaged in what may be important internationally in in fact 
countries like China where we are borrowing most of the money 
to operate to meet our obligations, are investing in their 
children's education in science and technology, in energy 
independence and in their infrastructure? And are we worried 
about what that means to our ability for her sons, my sons, 
Americans to be able to compete in the global marketplace in 20 
years if in fact, as this administration said, we are not going 
to make the kind of significant investments in energy 
independence, for one, or in education or health care or some 
of the other things we have talked about. So I wanted you in 
the time remaining to specifically, because we haven't talked 
about it much, talk about energy independence.
    I think we were looking for--the President's State of the 
Union speech was presented to us as being a huge step forward 
in terms of energy independence, and yet not only did those 
figures not point that out that we are not, that it is not 
going to happen when you look at the real numbers you are 
looking at, in fact the President's request being less than 
what was authorized previously for research and development and 
renewable energy and hydrogen and fuel efficiency, that in fact 
its own Secretary of Energy spoke up immediately the next day 
to say the President was just giving an example that we might 
be able to reduce our dependence on foreign oil by 75 percent 
on fossil fuels in particular, and just let me say this is a 
question of priorities. Because last year we actually offered 
and gave the oil industry $14 billion, and yet we are talking 
about a $2.1 billion investment in research and technology on 
new energy sources. So while the other side keeps saying this 
is about spending more money, I would say, and many of us are 
saying, it is a question of what we are spending our 
constituents' tax dollars on. Are we going to do it in a way 
that builds energy independence, builds a future for this 
country and for our young people, or is it going to be 
something that subsidizes the oil industry that, as you may 
know, ExxonMobil alone made $36 billion in profits--not 
revenues but profits last year? People are having a hard time 
heating their homes this winter, paying for gasoline at the 
pump. What in this budget really tells my constituents and all 
Americans that we are really looking toward the future as that 
mother asked me?
    Mr. Bolten. It is an important question, and I compliment 
your constituents first on their service but also on the mom's 
farsightedness about what the real challenges are in this 
economy, because I think the administration agrees with that.
    On education, the President's record I believe is strong 
particularly on the No Child Left Behind education spending. 
The President's record over the course of his Presidency is 
about a 30-percent increase overall in education spending. This 
year while overall spending is down, spending in the No Child 
Left Behind----
    Ms. Schwartz. Could you speak to the energy question, 
please, because you did speak to education before?
    Mr. Bolten. On the energy side, first of all, there were 
some important measures adopted in the Energy Act that this 
Congress adopted last year. But in addition, the President has 
put a number of important proposals into this budget and were 
mentioned in his State of the Union address. His Advanced 
Energy Initiative constituted a 22-percent increase in funding 
for a variety of renewable energy sources, including increases 
in hydrogen technology, fuel cell technology, biomass is the 
one that he mentioned in particular, solar wind, geothermal. 
There is also a substantial amount of money in the budget to 
promote clean and safe nuclear power, which needs to be part of 
our overall mix----
    Ms. Schwartz. Maybe because time is up and you could 
provide--there was really quite a big difference of 
presentation, if you will, from what the President said at the 
State of the Union and what the Secretary of Energy and what 
the dollars that you suggest in terms of what the previous 
commitment was, what the expectation was in terms of what we 
would spend this year and what the hard dollars are in this 
budget. So I think that is really important for us to know how 
much is rhetoric and how much is actually going to really help 
us be able to move forward in this country toward energy and 
independence.
    Mr. Bolten. I will be glad to provide that. I hope you will 
see--when the budget proposals are racked up you will see the 
substantial investment there in the kind of forward looking 
energy policy this country needs.
    [The information referred to follows:]

     OMB's Reply to Ms. Schwartz' Question Regarding Energy Policy

    Since 2001, the Administration has spent nearly $10 billion to 
develop cleaner, cheaper, and more reliable alternative energy sources. 
As a result, America is on the verge of breakthroughs in advanced 
energy technologies that could transform the way we produce and use 
energy. The 2007 President's Budget builds on this progress, through 
the Department of Energy's (DOE) Advanced Energy Initiative (AEI) which 
provides a 22 percent increase in funding for clean-energy technology 
research to change the way we fuel our vehicles and the way we power 
our homes and businesses. Specifically, the 2007 Budget request $2.1 
billion for the AEI including $771 million for Energy Efficiency and 
Renewable Energy programs, $444 million for Fossil Energy programs, 
$392 million for Nuclear Energy programs, and $539 million for Science 
programs.

    Mr. Baird. I thank Mr. Bolten for being so generous with 
your time and thank the chairman. I have got a few quick 
questions to ask. I think you mentioned at the start of your 
remarks, and Mr. Lungren echoed this, that if tax cuts 
currently on the board are not extended that is tantamount to a 
tax increase.
    I don't see in the President's budget a calculation of the 
continuation of sales tax deductibility for the seven States 
that have no income tax but do have sales tax. Those States are 
my home State of Washington, the President's home State of 
Texas, the Vice President's home State of Wyoming, the 
President's brother's State of Florida and also Tennessee, 
Nevada, and South Dakota.
    Now, is it the administration's intent to raise taxes on 
people from those States?
    Mr. Bolten. No, I don't believe so. The question of sales 
tax deductibility is one that was not part of the President's 
original tax program.
    Mr. Baird. True, but it was passed by the U.S. Congress 
into law and applies this year. And if it is not extended would 
that be not tantamount to a tax increase?
    Mr. Bolten. The question of sales tax deductibility I think 
is one that we believe ought to be addressed in the concept of 
overall fundamental tax reform, which we continue to support.
    Mr. Baird. But you chose to target other taxes for 
extension, did you not? And I know the President is a strong 
advocate of extending capital gains and dividend tax cuts and 
would imply that if we don't support those then we support a 
tax increase, but yet in your own budget you aren't supporting 
extension of the sale tax deductibility.
    Mr. Bolten. All that is reflected in the budget for 
permanent extension is proposals that the President made and 
were enacted 2001 and 2003.
    Mr. Baird. So the President is not supporting extension of 
tax cuts for the people in those States and that seems to me to 
be tantamount to supporting an increase in the taxes. I don't 
know how you avoid it given your logic.
    Mr. Bolten. As I said, we think that is an issue that can 
and should be addressed in fundamental tax reform.
    Mr. Baird. Well, the taxes on these folks will be increased 
if we don't extend this. I founded the Congressional Meth 
Caucus along with Chris Cannon and Ken Calvert. It is the 
number one drug of abuse in many counties in this country, and 
by my calculations, and maybe you can correct me if I am wrong, 
we are looking at a $376 million cut to the COPS program, $23.5 
million cut to Meth Hot Spots, $353 million cut to Safe and 
Drug Free Schools, complete elimination of Byrne grants, I have 
to tell you, Mr. Bolten, back home my local sheriffs and police 
officers are reeling at the prospects of these cuts. They are 
fighting a very difficult frontline battle. I don't know if you 
have been out there and met with these folks and seen these 
meth labs and seen the kids and families destroyed by them. Do 
you really think we can deal with this problem which is tearing 
up our families and our communities with these kind of cuts?
    Mr. Bolten. Well, the administration I believe, remains 
strongly committed to addressing the problem of 
methamphetamine, and the programs that you referred to are more 
general grants to first responders that we believe are more in 
the realm of local responders.
    Mr. Baird. I can tell you if you talk to those folks they 
will tell you they can't make it without these programs. One of 
the things I find interesting here is we come to visit with you 
having just met with our local folks. And in addition to 
hearing from our local police and sheriffs, I just met with 
school districts. And I can tell you the shortfalls in title I 
funding that don't meet the demand in title I are going to 
leave some of our schools--and I just had school board members 
and community college presidents and board members here that 
last 2 days. They are telling me they can't do it. They are 
telling me they are going to significantly face not just 
hardships. In our State you have a limit on how much your local 
levy can be. If we receive the kind of cuts and shortfalls that 
these folks are looking at, they will not be able to meet the 
needs of special ed kids and other folks that are covered in 
Title I. And I just would invite you, and I mean this quite 
sincerely, would invite you to meet with some of these folks 
because they could give you a pretty clear picture of demands 
placed on them by No Child Let Behind and other Federal 
mandates and shortfalls resulting from the budget.
    I don't expect you to answer it, but I can tell you we live 
in a different world sometimes. I go home nearly every weekend 
and these folks tell me, this is what is happening to us on the 
ground, and come back here and it is all rosy. And boy, the 
dichotomy we face is astonishing. So I extend an invitation to 
come to Longview, Washington or Kelso or Centralia, especially 
when it comes to vocational ed. The elimination of the Perkins 
program will devastate our vocational ed program. I just have 
to tell you that. You need to understand that kids who are 
trying to get an alternative to the college track will not be 
able to do so or will not be able to keep up.
    The final thing I just would mention, the King of Jordan is 
here meeting with President Bush, met with him this morning. He 
met with Members of Congress today. My understanding is that 
Jordan has in it a request for about $200 million in aid. By my 
estimate, that is about one-fifth of what we spend in Iraq in 1 
week. Now, this is one of the strongest best friends we have in 
the region. And I would urge this committee, Mr. Chairman, and 
this body, if we can't find $200 million to help the people of 
Jordan who have been steadfast friends to this country, who are 
a model of a moderate, responsible, and a progressive state in 
that region, I think our priorities are totally out of whack 
and I would encourage the President to support it, and I hope 
this committee will put it in the budget on both sides. Any 
comments on that?
    Mr. Bolten. Only to say that I know the administration, 
Secretary Rice, shares the concern about adequately supporting 
the government of Jordan. I can't say what is in the budget 
now--I can't say what may be coming forward in the future, but 
it is a matter of substantial concern.
    Mr. Baird. Well, we should be able to find one-fifth of 1 
week of Iraq's spending to help Jordan out or we have our 
priorities a little crazy in that region. I thank the 
gentleman.
    I thank the chairman.
    Chairman Nussle. Mr. Jefferson.
    Mr. Jefferson. Thank you, Mr. Chairman. Light is gone. Mr. 
Chairman. I barely got my light on. I lost 20 seconds.
    Chairman Nussle. We are holding it for you.
    Mr. Jefferson. Thank you, Mr. Chairman. I appreciate the 
chance and Mr. Bolten for waiting as long as you have.
    I am like a lawyer with one client. It is just all about 
the recovery in my State, and I am concerned about what is 
happening with our Corps of Engineers. In the last year from 
budget to budget, as we read, it is 43 percent overall 
reduction, critical studies budget and 30 percent less for 
flood control and protection. These are the kind of cuts that 
led to the catastrophe that has occurred in my part of the 
country and that led to the flooding which is largely, as you 
may or may not agree, most studies now show largely manmade as 
opposed to resulting from a natural disaster. The levees failed 
because the Corps didn't do the levees right or didn't maintain 
them right or design or construct them right.
    And we think there is some responsibility. I heard the 
question, how much responsibility ought the Government have? 
Well, if it were just a natural disaster maybe we could argue 
that point. But if it is actually what we know it now is, a 
manmade disaster at the hands of our Corps and others who 
didn't do their job, then we have, I think, a different 
standing here, and so as a consequence I am really concerned 
about the level of support that the Corps budget has for these 
critical issues. And I would like to figure what the thinking 
is of the administration not applying a great deal more 
resources in this area to flood protection.
    Mr. Bolten. Mr. Jefferson, I will leave to others in the 
lessons learned exercise and evaluation of what exactly went 
wrong there. The one thing I do know is that it is not a lack 
of funding that caused the problem down in the gulf. Corps of 
Engineers funding during the course of this administration has 
not declined from the previous administration. And when you see 
the numbers that come up in the budget proposals that we have 
put before you today, the cuts that appear in there are the 
administration stepping in and striking out earmarks for 
programs that do not meet our cost-benefit analysis.
    The real challenge I believe in the area of the Corps of 
Engineers, where almost every member of this body has some 
interest in a water project in their district, is ensuring that 
the money we do spend goes to the highest priorities like 
protecting those areas most at risk.
    Mr. Jefferson. I just say the earmarks that were there were 
because of underfunding by the Corps on these projects. And the 
Corps usually requests more projects than the administration 
approves almost all the time. The Corps is lined up with us 
with respect to what we are requesting more than the 
administration was. And it is just not this administration but 
it has been happening for years. And it is time, we think, to 
address it. So in this whole area----
    Mr. Bolten. Can I also say, Mr. Jefferson, that on top of 
the regular 2007 budget that you see presented before you now 
the administration has also made substantial supplemental 
requests for funding in the Corps of Engineers of around $3 
billion to begin to address the problems that are there now in 
the gulf.
    Mr. Jefferson. We appreciate that. I went to the 
Netherlands with a CODEL just recently where they are operating 
20 feet below sea level over there with an integrated system of 
flood control, of dikes and barriers and various canals and 
various lock systems and so on. And they generate $400 billion 
in the economy 20 feet below sea level. And we are only 4 feet 
below sea level and people telling us it is impossible. It is 
not impossible if we apply the right commitment to it.
    And let me say one other thing in overall issues of 
deficits that concerns me. We are at a time now where we have 
enjoyed a strong economy. Folks have said here, strong economic 
growth in last few years. And yet we have these huge deficits. 
A few years ago CBO said our problem was largely caused by the 
bursting of the bubble with the stock market, by other economic 
shocks in the system.
    They now conclude that about 8 percent of what is happening 
is because of the economy, or the deficits I am saying, and the 
rest of it is because of shortages we will be making here in 
Congress. So the economy, the issues about the tax cuts and the 
rest that we have heard here today also, whether we extend 
taxes and all that, seems irrelevant to this whole point 
because what the economy has come back from, wherever it was, 
and to the extent that taxes had anything to do with it they 
were intended as stimuli and if that was the case of doing 
their job, this is why they were temporary in the first place. 
They weren't intended to be permanent, they were intended to 
give a jolt. Let's assume they did their job. Now the economy 
is back together and we are suffering these huge deficits 
nonetheless, which is, so how do you explain this dichotomy of 
a strong economy and huge deficits at the same time?
    This is a, tough, tough problem we have to face up to here 
and we have to face up to it in ways other than talking 
blithely about the effect of tax cuts.
    Mr. Bolten. I would point first partly to some lag effect 
that as the economy recovers there is a little time before the 
strong revenues start coming back. The economy was starting to 
recover in 2003 with the implementation of the last major set 
of the President's tax cuts. It wasn't until 2004 that we saw 
the economy really strengthening and revenues coming back 
strongly, and then 2005, when we had the real spike, good spike 
in revenues that we experienced then.
    The one thing I would say is that we now have an economy 
that is operating effectively, that is producing jobs, that is 
reducing the unemployment rate, generating home ownership, 
where business investment is strong, and our strong belief is 
that a tax increase on that economy would send us in the wrong 
direction.
    Now, why are we still in a deficit situation today? There 
are a lot of reasons for that. But the two biggest ones are 
that we are in a war and we are trying to respond to the most 
catastrophic and expensive natural disaster in this country's 
history. So those two factors alone are a substantial 
contributor to the deficit situation we are in.
    We also need to just get our spending appetite under 
control here in Washington. In the short to medium run, as I 
have said before, I believe our situation looks good if we 
follow the course that is laid out in the President's budget.
    The real challenge is the one that I have addressed with 
many members here, including, beginning with the chairman, is 
that our long-term fiscal situation is where our real danger 
lies, and that is a danger that is produced by the unfunded 
obligations in our entitlement programs, which is what we must 
begin to address, I hope on a bipartisan basis.
    Mr. Jefferson. I hope we can, too. Last thing, I don't have 
any time left, if you--it is an argument that is circular, if 
you don't extend the tax cuts then of course you can afford 
these unexpected costs, the war, and the hurricanes. If you do 
extend them of course then these things become issues that you 
can say are the reason for the deficit. So it is argued, you 
know, both ways.
    So I frankly think that we can anticipate better what is 
going on with recovery in the gulf and what will be needed 
there than we can with the issues about war. That soon has to 
be assigned to some supplemental idea. But we do know the cost 
of recovery is going to be tremendous down there and we do know 
that the cost of preventing the flood system can be estimated 
with more certainty than the cost of war. And I hope it would 
apply different standards to this as we go about trying to fix 
these two sets of issues.
    Chairman Nussle. Director Bolten, thank you for spending 
the time with the House Budget Committee today. We know you 
have other obligations in front of other committees. We 
appreciate the time you spent with us today and we look forward 
to working with you as we develop the budget for fiscal year 
2007.
    Mr. Bolten. Thank you for your courtesy, Mr. Chairman.
    [Additional questions submitted for the record:]

           Mr. Simpson's Question Regarding the TRIO Program

    We know that nearly one-third of the low-income high school 
graduates who immediately enroll in college were touched by a Federal 
TRIO program. And, as President Bush recently mentioned in his State of 
the Union Address, we know that America needs to keep expanding its 
educated labor pool if we are to remain internationally competitive. We 
also know that Americans, across all demographics of income, location 
and party affiliation, overwhelmingly support programs like TRIO that 
help low-income and first-generation students go to college. Why then, 
in the face of both clear need and tremendous public support, would the 
Bush Administration choose to eliminate two effective and popular 
programs that help low-income students attend college?

    OMB Answer: The President's 2007 Budget would continue significant 
investments in support of low-income high school students through the 
President's proposed $1.5 billion High School Reform program. This 
initiative would provide States with flexible funding to support a wide 
range of effective interventions. In return for this flexibility, 
States would be held accountable for improving student achievement and 
graduation rates. Under the High School Reform initiative, States may 
support activities similar to those carried out under TRIO programs, as 
long as they deem these strategies to be the most effective means for 
improving student performance.
    There are also other new or expanded high school activities that 
are being proposed in the President's 2007 Budget, including $100 
million for Striving Readers and $380 million in new funding for 
programs that are part of America's Competitiveness Initiative.

    Chairman Nussle. Thank you. This hearing is adjourned.
    [Whereupon, at 2:05 p.m., the committee was adjourned.]

                                  
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