[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
STATUTORY PAYGO
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 25, 2009
__________
Serial No. 111-13
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
http://www.gpoaccess.gov/congress/house/budget/index.html
U.S. GOVERNMENT PRINTING OFFICE
50-917 WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON THE BUDGET
JOHN M. SPRATT, Jr., South Carolina, Chairman
ALLYSON Y. SCHWARTZ, Pennsylvania PAUL RYAN, Wisconsin,
MARCY KAPTUR, Ohio Ranking Minority Member
XAVIER BECERRA, California JEB HENSARLING, Texas
LLOYD DOGGETT, Texas SCOTT GARRETT, New Jersey
EARL BLUMENAUER, Oregon MARIO DIAZ-BALART, Florida
MARION BERRY, Arkansas MICHAEL K. SIMPSON, Idaho
ALLEN BOYD, Florida PATRICK T. McHENRY, North Carolina
JAMES P. McGOVERN, Massachusetts CONNIE MACK, Florida
NIKI TSONGAS, Massachusetts JOHN CAMPBELL, California
BOB ETHERIDGE, North Carolina JIM JORDAN, Ohio
BETTY McCOLLUM, Minnesota CYNTHIA M. LUMMIS, Wyoming
CHARLIE MELANCON, Louisiana STEVE AUSTRIA, Ohio
JOHN A. YARMUTH, Kentucky ROBERT B. ADERHOLT, Alabama
ROBERT E. ANDREWS, New Jersey DEVIN NUNES, California
ROSA L. DeLAURO, Connecticut, GREGG HARPER, Mississippi
CHET EDWARDS, Texas ROBERT E. LATTA, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia
JAMES R. LANGEVIN, Rhode Island
RICK LARSEN, Washington
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
GERALD E. CONNOLLY, Virginia
KURT SCHRADER, Oregon
Professional Staff
Thomas S. Kahn, Staff Director and Chief Counsel
Austin Smythe, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, June 25, 2009.................... 1
Statement of:
Hon. John M. Spratt, Jr., Chairman, House Committee on the
Budget..................................................... 1
Prepared statement of.................................... 2
Hon. Paul Ryan, ranking minority member, House Committee on
the Budget................................................. 3
Peter R. Orszag, Director, Office of Management and Budget... 4
Prepared statement of.................................... 6
Bill proposal: ``Statutory Pay-As-You-Go Act of 2009''... 37
Alice M. Rivlin, the Brookings Institution and Georgetown
University, prepared statement of.......................... 48
Douglas Holtz-Eakin, former Director, Congressional Budget
Office..................................................... 51
Prepared statement of.................................... 52
Robert Greenstein, executive director, Center on Budget and
Policy Priorities.......................................... 55
Prepared statement of.................................... 57
STATUTORY PAYGO
----------
THURSDAY, JUNE 25, 2009
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:01 a.m. in room
210, Cannon House Office Building, Hon. John Spratt [chairman
of the committee] presiding.
Present: Representatives Spratt, Schwartz, Becerra,
Doggett, Berry, Boyd, McCollum, Melancon, DeLauro, Edwards,
Scott, Langevin, Larsen, Bishop, Schrader, Ryan, Hensarling,
Garrett, Diaz-Balart, Lummis, and Latta.
Chairman Spratt. I think more of the committee will be
joining us later in the morning. But in the interest of time, I
think we should also get this hearing started.
The purpose of this hearing is to review statutory Pay-As-
You-Go, PAYGO, and examine the President's proposal to renew
it. Initially, we had planned this hearing for last Thursday;
and I would like to thank both of our witnesses and our ranking
member, Mr. Ryan, for their cooperation in helping us
reschedule it for today.
At the outset of the 1990s, Congress passed the Budget
Enforcement Act to ensure that the Budget Summit Agreement was
carried out. Among its provisions was a rule that we
colloquially called Pay-As-You-Go, PAYGO for short. Our critics
disdained our resort to budget process. They accused us of
dodging the hard choices we had to make if we were going to
wipe out the deficit. But by the end of the 1990s, the budget
was in surplus for the first time in 30 years; and it was clear
that process rules like PAYGO played a big part in our success.
Republicans were in the majority in 2002 when the BEA
expired. They chose not to reinstate PAYGO, knowing it would
impede passage of their tax cut agenda. Without the process
rules, the budget plunged from a surplus of $236 billion in the
year 2000 to a deficit of $413 billion in the year 2004.
When Democrats took back the House, the reinstatement of
PAYGO was on the top of our agenda. We made PAYGO the rule of
the House the first day we convened the 110th Congress.
Two weeks ago, the President proposed a bill to make PAYGO
statutory; and last week that bill was introduced, with over
150 cosponsors, as a starting point toward making statutory
PAYGO part of our budget process.
The Obama administration and the current Congress have
inherited a colossal deficit, swollen this year to accommodate
needed recovery measures. As these measures help pull us out of
the slump, we need to refocus our attention on the longer-term
fiscal fate of this country and this government.
Earlier this month, Chairman Bernanke told our committee
that the long-run fiscal path is simply not sustainable; and
witness after witness comes to us bearing the same message.
Statutory PAYGO works because it reins in new entitlement
spending and new tax cuts. Both tend to be long lasting. They
are easy to pass and hard to repeal. By insisting on offsets
and deficit neutrality, PAYGO buffers the bottom line. Its
terms are complex, but at its core is a common-sense rule that
everyone can understand: When you are in a hole, stop digging.
We share the administration's commitment to fiscal
discipline and believe that statutory PAYGO will put greater
rigor into the budgetary process.
To help us understand the proposed legislation, our first
witness will be no stranger to this committee. He is a former
CBO Director, now the OMB Director, Peter Orszag.
Then, on our second panel, we have lined up additional
experts who are old friends of the Budget Committee as well:
Robert Greenstein from the Center on Budget and Policy
Priorities; Doug Holtz-Eakin, who is also a previous Director
of CBO.
We originally planned for Alice Rivlin to testify. She was
not able to be here due to the schedule change. If there is no
objection, we will make her statement part of the record.
Before turning to Director Orszag for his testimony, let me
turn to Mr. Ryan for any opening statement that he may wish to
make. Mr. Ryan.
[The statement of Mr. Spratt follows:]
Prepared Statement of John M. Spratt, Jr., Chairman, House Committee on
the Budget
The purpose of today's hearing is to review statutory Pay-As-You-Go
(PAYGO) and examine the President's proposal to renew it. We initially
had planned this hearing for last Thursday and I would like to thank
both our witnesses and our Ranking Member, Mr. Ryan, for their
cooperation in helping us reschedule it for today.
At the outset of the 1990s, Congress passed the Budget Enforcement
Act to ensure that the Budget Summit Agreement was carried out. Among
its provisions was a rule called `pay-as-you-go' or PAYGO for short.
Critics disdained our resort to budget process. They accused us of
dodging the hard choices we had to make if we were going to wipe out
the deficit. But by the end of the 1990s, the budget was in surplus for
the first time in 30 years; and it was clear that process rules like
PAYGO played a big part in our success.
Republicans were in the majority in 2002 when the Budget
Enforcement Act expired, and they chose not to reinstate PAYGO, knowing
that it would impede passage of their tax cutting agenda. Without the
process rules, the budget plunged from a surplus of $236 billion in the
year 2000 to a deficit of $413 billion in the year 2004.
When Democrats took back the House, the reinstatement of PAYGO was
at the top of our agenda. We made PAYGO a rule of the House the first
day we convened the 110th Congress.
Two weeks ago, the President proposed a bill to make PAYGO
statutory, and last week that bill was introduced--with over 150 co-
sponsors--as a starting point toward making statutory PAYGO part of our
budget process.
The Obama Administration and the current Congress have inherited a
colossal deficit, swollen this year to accommodate needed recovery
measures. As these measures pull us out of the slump, we must focus
attention on our longer-term fiscal fate. Earlier this month, Chairman
Bernanke told our Budget Committee that the long-run fiscal path is
simply not sustainable.
Statutory PAYGO works because it reins in new entitlement spending
and new tax cuts. Both tend to be long lasting--easy to pass, hard to
repeal. By insisting on offsets and deficit neutrality, PAYGO buffers
the bottom-line. Its terms are complex, but at its core, it is a
common-sense rule that everyone can understand: when you are in a hole,
stop digging.
We share the Administration's commitment to fiscal discipline, and
believe that statutory PAYGO will put greater rigor into the budget
process. To help us better understand the proposed legislation, our
first witness will be no stranger to this Committee, former CBO
Director and now OMB Director Peter Orszag. Then, on a second panel, we
have lined up additional distinguished experts who are also old friends
of the Budget Committee:
Robert Greenstein is the founder and Executive Director of
the Center on Budget and Policy Priorities and provides expertise on a
wide range of budget policies.
Douglas Holtz-Eakin, served as the sixth director of CBO
and also worked with George H. W. Bush and George W. Bush on economic
policy.
We had originally planned for Alice Rivlin to testify, as
well, but with the schedule change for the hearing, she cannot be with
us in person today, but, without objection, her written testimony will
be included as part of the record. As you know, she is senior fellow at
the Brookings Institution and formerly served as director of OMB during
the Clinton Administration and also as director of CBO from 1975
through 1983, at the onset of our current budget process.
Before turning to Director Orszag for his testimony, however, let
me turn to Mr. Ryan for any opening statement he may wish to make.
Mr. Ryan. Thank you, Chairman. And Budget Director Orszag,
welcome back. Nice to have you here.
First, I want to note that I appreciate any real effort by
the administration and Congress to get a grip on our Nation's
mounting fiscal crisis. But when I look at the broader
budgetary context that has developed in the first 6 months of
this administration, I am afraid that this PAYGO debate is
little more than a distraction. The President's budget will
produce record deficits as far as the eye can see. Deficits
never fall below $600 billion and hit $1.2 trillion by the end
of the budget window; and, under this budget, the national debt
will nearly triple over the next decade.
Second, after signing a bloated 2009 omnibus spending bill,
a stimulus bill that will cost more than $1 trillion with
interest costs and proposing an 11 percent increase in
nondefense discretionary spending for this year alone, the
administration is now demanding that Congress rush through a
huge new entitlement program under the slogan of health care
reform. Just this week, Treasury had to issue a record $104
billion in new debt to support all of this spending.
Not surprisingly, polls have started to show the public's
concern about this deluge in spending and debt that Washington
is racking up. So we get a Cabinet meeting to highlight $100
million in savings, followed by, a few weeks later, by a day-
long media blitz to trumpet this PAYGO bill.
Clearly, both of these efforts were intended to give the
impression that the administration is finally putting its foot
down on out-of-control spending. But if you read the papers
after either of these announcements, you will know that I am
not the only one with skepticism. Even the Washington Post said
that the President doesn't deserve much credit for his PAYGO
proposal because of, quote, his failure to adjust his spending
plans to budgetary reality, end quote.
But, notwithstanding all of that, there are some aspects of
this bill that are real improvements to the House majority's
existing rule. Most notably, the administration's proposal
would modify PAYGO so that simply preventing one unintended tax
hike, such as the expansion of the AMT or expiration of the
2001 and 2003 tax laws, don't result in yet another unintended
tax hike.
The administration's proposal would also direct CBO and OMB
to ignore the all-too-often-employed timing shift gimmick, the
practice of shifting spending or revenue from one year to the
next in order to claim it as a savings.
Regrettably, these positive aspects will likely be
overwhelmed by the basic but significant shortcomings of this
bill.
First, there are no caps on annual appropriations, which
make up 40 percent of the total spending. PAYGO in the past has
always been accompanied by discretionary spending caps, and
that has been the critical element of spending control. But the
administration didn't do that.
Second, emergency spending is also exempt.
Third, PAYGO can easily be circumvented through gimmicks
such as artificial reductions in spending that we saw recently
in the SCHIP bill that met PAYGO by assuming that funding will
be cut by 65 percent in 2014.
But, most important, PAYGO does nothing to address our
greatest challenge to our long-term budgetary and fiscal
health, the entitlement crisis that is already speeding towards
us.
So while I certainly appreciate any genuine effort to
fiscal discipline, I don't think it is wise to pretend that we
can substitute a PAYGO slogan for the real, immediate action
needed to get spending deficits and debt under control. I hope
we can move this legislation toward the budget reforms that
actually tackle the real fiscal problems we face; and I will
assure both the chairman and the director that, when they are
ready, I will be the first in line to help bring about that
result.
Thank you, Chairman.
Chairman Spratt. Thank you, Mr. Ryan.
Let me ask unanimous consent that all members be allowed to
submit an opening statement in the record at this point.
Without objection, so ordered.
And let me say once again, welcome to our witness. We
appreciate your coming and your endeavors to put this bill
together and we will make your written testimony part of the
record so that you can summarize it.
The floor is yours, Dr. Orszag. Thank you for coming.
STATEMENT OF PETER R. ORSZAG, DIRECTOR OF THE OFFICE OF
MANAGEMENT AND BUDGET
Mr. Orszag. Mr. Chairman, Mr. Ryan, members of the
committee, thank you for the opportunity to testify this
morning on the Statutory Pay As You Go Act of 2009.
Largely because of rising health care costs, the Nation is
on an unsustainable fiscal course. Given the large structural
deficits that the Nation faces, we should follow the
Hippocratic Oath that reminds doctors to first do no harm.
With respect to taxes and entitlement, the PAYGO Act is the
statutory embodiment of that time-tested principle. It tells
Congress and the administration that their minimum duty is not
to make the existing multiyear structural deficit any worse
than it already is.
The PAYGO act would hold us to a simple but important rule:
We should pay for new tax or entitlement legislation. Creating
a new tax cut or entitlement expansion would require offsetting
revenue increases or spending reductions.
In the 1990s, statutory PAYGO encouraged the tough choices
to help move the Nation from large deficits to surpluses; and I
believe it can play a similarly constructive role today. The
statutory PAYGO legislation would complement existing
congressional rules. Both houses of Congress have already taken
an important step by adopting rules incorporating the PAYGO
principle, but we can strengthen enforcement and redouble our
commitment by enacting the PAYGO Act into law, which would
allow us to adopt a belt-and-suspenders approach to fiscal
discipline with the statutory PAYGO Act working alongside the
existing rules.
How would it work? Under the PAYGO Act, OMB would maintain
a PAYGO ledger recording the average 10-year budget effects of
any legislation enacted through 2013 that affects government
receipts or mandatory outlays relative to the baseline. We
would sum the average cost of savings--costs or savings of all
PAYGO legislation having effects in a given year and would
record a net cost for that year if the cost exceeded the
savings, which would then violate the PAYGO Act's budget
constraint.
The PAYGO Act would enforce that budget constraint through
the threat of sequestration. If policymakers don't make the
hard choices necessary to pay for any new mandatory spending or
tax reductions, the law would trigger sequestration, automatic
cuts in nonexempt mandatory programs. Sequestration would
strongly encourage all of us never to violate that PAYGO
constraint because--and, therefore, in practice it would be a
threat and not a reality. And the reason is that the across-
the-board reductions for the programs that are covered would be
so painful that, in the 1990s, that threat was significant
enough to avoid its ever having to be triggered.
Now, as I have said, the proposed legislation would require
that new mandatory or tax policy be paid for. That is the
embodiment of the do-no-harm principle. A keyword here,
however, is ``new''.
We have put forward a statutory PAYGO Act that reflects the
thrust of current policy in three main areas: the sustainable
growth rate formula for how doctors are reimbursed under
Medicare, the 2001 and 2003 tax legislation, and the
alternative minimum tax. In all three areas, we have adopted a
current policy as opposed to a current law approach; and I
would be happy to discuss that further during the question and
answer period.
But the motivation in doing so was to avoid waiving the
rules when current policy was extended in a way that there are
no plausible offsets to pay for. And so we thought it was
better to have a set of rules that could actually be enforced
and that would not be waived, rather than having something that
looked better on paper but then would immediately be waived in
practice in major pieces of legislation.
Let me just conclude by noting that the current debate over
health care reform illustrates the importance of the PAYGO
principle. Some advocates may support health reform even if it
expands the deficit. The administration does not share that
perspective. Some may say that all we need to do is make the
system more efficient in the long run and this will pay for
health care reform. We agree that bending the health care cost
curve over the long run is essential, but it is not enough.
That is why we have put forward $950 billion in hard scoreable
offsets to make sure that the legislation is deficit neutral
not only over 10 years but also in the tenth year alone.
So just to reinforce the point, what we are saying is that
health care reform must be deficit neutral using CBO scored,
hard scoreable offsets over 10 years and in the tenth year.
And then, in addition to that--because if that is all we
did, we would be expanding coverage in a fiscally responsible
way but perpetuating a health care system that did not embody
best practices across the entire country and that did not
capture the opportunity to move towards a higher-quality,
lower-cost system.
So in addition to expanding coverage in a fiscally
responsible way and making sure the package as a whole is
deficit neutral using CBO scoring over the next decade, we also
firmly believe there are a series of changes that must be made
involving health information technology, expanded patient
center health research, changes in financial incentives towards
quality, and changes in the process through which Medicare
policy itself is set that will help us move towards a rapid-
learning, higher-quality, lower-cost system over time.
Thank you very much, Mr. Chairman.
[The prepared statement of Peter Orszag follows:]
Prepared Statement of Peter R. Orszag, Director, Office of Management
and Budget
Chairman Spratt, Ranking Member Ryan, and Members of the Committee,
thank you for giving me the opportunity to discuss the Statutory Pay-
As-You-Go (``PAYGO'') Act of 2009.
The PAYGO Act would hold us to a simple but important principle: we
should pay for new tax or entitlement legislation. Creating a new non-
emergency tax cut or entitlement expansion would require offsetting
revenue increases or spending reductions. In the 1990s, statutory PAYGO
encouraged the tough choices that helped move the Government from large
deficits to surpluses, and I believe it can do the same today. Both
houses of Congress have already taken an important step toward righting
our fiscal course by adopting congressional rules incorporating the
PAYGO principle. But we can strengthen enforcement and redouble our
commitment by enacting the PAYGO Act into law.
Both the President's Budget and the Budget Resolution approved by
the Congress would cut the deficit in half by the end of the
Administration's first term, while laying a new foundation for
sustained and widely shared economic growth through key investments in
health, education, and clean energy. Even though more will ultimately
be needed to restore fiscal responsibility, enacting statutory PAYGO
would complement the efforts already initiated and represent an
important step toward strengthening our budget process.
the paygo principle
The Hippocratic Oath famously reminds doctors to, first, do no
harm. Similarly, but more colloquially, Charlie Stenholm, the long-time
Texas congressman and a founder of the Blue Dogs, often repeated what
he called the ``rule of holes'': If you find yourself in a hole, stop
digging. With respect to taxes and entitlements, the PAYGO Act is the
statutory embodiment of these time-tested principles. It tells Congress
and the Administration that their minimum duty is not to make the
existing multiyear structural deficit any worse than it already is.
This may seem like a relatively easy rule to follow, but history
suggests it is not. One way to see this is by looking at three
relatively recent pieces of legislation that violated the PAYGO
principle: the 2001 and 2003 income tax reductions, or EGTRRA and
JGTRRA, and the Medicare Modernization Act of 2003, which created the
Medicare Part D prescription drug benefit. None of these three pieces
of tax and entitlement legislation was paid for in PAYGO terms. Each
was permanent or intended to be permanent. And those three bills
together increased the 75-year fiscal gap--the difference between
sustainable and unsustainable budgets--by roughly 3 percent of GDP.\1\
Since estimates of the long-term fiscal gap prepared by GAO, CBO, and
other independent analysts place it at around 7 percent of GDP, those
three violations of the PAYGO principle by themselves nearly doubled
the long-term fiscal gap. The difference, then, between adhering to and
violating PAYGO is not a question of few billion dollars around the
edges--but rather can go to the heart of the nation's fiscal path.
---------------------------------------------------------------------------
\1\ The estimate that the 2001 and 2003 tax cuts increased the
fiscal gap by 2% of GDP includes as part of its cost the degree to
which those tax cuts expanded the size of AMT relief, but does not
include cost of AMT relief that would be part of current policy even if
those two tax cuts had not been enacted.
---------------------------------------------------------------------------
how paygo works
PAYGO Ledger
Under the PAYGO Act, the Office of Management and Budget (OMB)
would maintain a PAYGO ledger recording the average ten-year budgetary
effects of all legislation enacted through 2013 that affects
governmental receipts or mandatory outlays relative to the baseline
(``PAYGO legislation''). After recording the average ten-year budgetary
effect for each piece of PAYGO legislation enacted in a given year, OMB
would then sum the budgetary effect of all PAYGO legislation having
effects in that year (including the effects of legislation enacted in
prior years but after the enactment of this proposal) and would record
a net cost (or debit) for that year if the sum is negative.
Spelling out a few of these features in greater detail:
Sunset. The PAYGO Act would expire after five years, on
December 31, 2013.
PAYGO window. The PAYGO Act would measure the cost or
savings of PAYGO legislation in the current year and over the next ten
years.
Averaging. For the budget year and any remaining years on
the PAYGO ledger, the PAYGO Act would require OMB to enter the average
ten-year budgetary effect--rather than the budgetary effect in each
individual year--associated with any piece of PAYGO legislation. This
means that the PAYGO ledger is designed to require budget neutrality
across a time period rather than year-by-year.
Scorecard neutrality. The PAYGO Act would not require that
each piece of enacted PAYGO legislation be budget neutral by itself,
but rather only that the averaged budgetary effects in a given year of
all PAYGO legislation enacted since the proposal becomes effective be
budget neutral.
Look back. To take into account any budgetary effects of
PAYGO legislation in the current year (i.e., the year that PAYGO
legislation is enacted), the PAYGO Act includes a ``look back'' rule,
which provides that any budgetary effects in the current year (i.e.,
the year of enactment) would be treated on the PAYGO ledger as if they
were budgetary effects in the budget year (which is the year subsequent
to the current year).
Timing shifts. The PAYGO Act would not give any credit for
savings created or costs avoided through a shift between year 10, which
is inside the PAYGO window, and year 11, which is outside the window.
This restriction would prevent any gaming of the PAYGO Act that would
occur by hiding the budgetary costs of PAYGO legislation just outside
the PAYGO window.
Basis of estimates. The PAYGO Act stipulates that OMB
would estimate the average ten-year budgetary effects of all PAYGO
legislation on the basis of the economic and technical assumptions
underlying the latest President's Budget and in conformance with the
scorekeeping guidelines determined by OMB after consultation with the
House and Senate Budget Committees and CBO.
Sequestration
The PAYGO Act enforces its budget constraint through the threat of
sequestration. PAYGO forces policymakers to make the hard decisions
necessary to pay for any new mandatory spending or tax reductions by
triggering sequestration--automatic cuts in non-exempt mandatory
programs--if they do not.
Specifically, if there is a net cost on the PAYGO ledger for the
upcoming year when Congress adjourns at the end of a session, the
President is required to issue an order temporarily sequestering
resources--sufficient to fully pay off the PAYGO debit--from non-exempt
mandatory programs in the budget year. With the exceptions of Medicare
and three additional, small health care accounts,\2\ non-exempt
mandatory programs would be cut by a uniform percent; Medicare could be
cut by at most 4 percent. If a cut larger than 4 percent is needed to
offset the debit on the PAYGO ledger, the uniform percentage cut to the
other non-exempt mandatory programs would be increased so that the
sequester of Medicare and the other non-exempt programs would together
produce sufficient savings to offset the budget-year debit.
---------------------------------------------------------------------------
\2\ The three additional health care accounts excepted from a
uniform percentage cut are community health centers, Indian health
facilities, and Indian health services; each is capped at a maximum 2
percent cut.
---------------------------------------------------------------------------
Following in the footsteps of statutory PAYGO from the 1990s, the
proposed legislation would exempt most mandatory programs from
sequester--programs such as Social Security, veterans' disability and
related benefits, and major low-income entitlements such as
Supplemental Security Income and Medicaid. The remaining sequestration
base totals approximately $540 billion in fiscal year 2010 and includes
programs such as Medicare, farm price supports, and a number of grants
to states.
Set up in this way, sequestration strongly encourages policymakers
never to violate the PAYGO budget constraint and trigger
sequestration--in other words, sequestration is in practice a threat,
not a remedy. The sequestration base is broad enough to produce
significant savings in the event sequestration were triggered, but it
is narrow enough that any such cuts would be painful to important
constituencies. In the 1990s, this careful balance resulted in Congress
never triggering sequestration and, instead, making the hard choices
that PAYGO requires.
It's also important to recognize that being exempt from
sequestration does not mean a program is exempt from the PAYGO budget
constraint. The only mandatory or tax legislation that is outside the
scope of the PAYGO Act is legislation dealing with the two programs
that are off-budget by law: Social Security and the Postal Service
Fund. Otherwise, new mandatory spending or tax reductions--irrespective
of whether they relate to programs that are exempt from sequester--
would have to be paid for in order to avoid triggering painful
automatic cuts to the programs in the sequestration base.
adjusting for current policy
As I have said, the proposed legislation would require that new
mandatory or tax policy be paid for--essentially enforcing a ``do no
harm'' fiscal principle. A key word here is ``new.''
To focus the PAYGO Act on applying a strict budget constraint only
to new policy, the proposed legislation includes adjustments in four
policy areas where current policy deviates substantially from current
law: the Medicare sustainable growth rate formula (SGR), the estate
tax, the Alternative Minimum Tax (AMT), and the 2001 and 2003 income
tax reductions. In each of these areas, the policies currently in place
are set to expire or substantially change in coming years in ways that
unrealistically reduce costs or increase revenues--for instance,
payments to doctors under Medicare are scheduled to be cut by about 21
percent next year under the SGR, and virtually all of the 2001 and the
2003 tax cuts are scheduled to expire at the end of 2010. For these
four areas, where the law on the books does not reflect the realities
of current policy, the PAYGO Act would not require a continuation of
those policies to be paid for.
Some have criticized the Administration for designing the PAYGO Act
to reflect current policy rather than current law in these areas. These
critics, however, have provided no indication of how they would offset
the costs of continuing current policy in these areas, and I have seen
no credible proposals for such offsets. The most plausible result of
applying the PAYGO Act to a continuation of these current policies
would therefore be waivers of the statute in these cases. Such waivers
would establish a harmful precedent that could undermine the statutory
PAYGO regime and lead to waivers for new policy, allowing policymakers
to avoid the PAYGO budget constraint.\3\ The Administration therefore
believes it is better to design statutory PAYGO in a credible way to
minimize the potential for waivers, and that is what our proposal does.
---------------------------------------------------------------------------
\3\ Note also that the PAYGO Act would not alter the existing
congressional PAYGO rules. The Senate PAYGO rule would still apply to
legislation that extended current policies; the House PAYGO rule, as
provided in the Budget Resolution, would recognize limited exceptions
for the continuation of current policy if statutory PAYGO were enacted.
---------------------------------------------------------------------------
The PAYGO Act would give a time-limited window for continuing
current policy without paying for it. At the end of 2010, the
adjustment for current policy would expire, unless the President
determines that legislation sufficiently consistent with current policy
has not been enacted in any one or more of the relevant four areas--in
which case the President can choose to continue the adjustment for one
more year, until the end of 2011. Once the adjustment is no longer
allowed, continuing current policy would have to be paid-for, like any
other tax or mandatory policy.
complement to existing congressional paygo rules
Both the House and Senate adopted PAYGO rules in 2007. Congress
should be commended for having done so, and this was a substantial
improvement over the immediately prior years when no such rules
existed. Nonetheless, the House and Senate rules lack the sequestration
mechanism that would give teeth to the PAYGO Act. As a result, the
Administration believes that, while the congressional rules are an
important bulwark for fiscal discipline, putting PAYGO back into law
will complement and strengthen the rules and help to bring us back to a
more sustainable budget. In other words, to borrow an old cliche, we
believe in a ``belt-and-suspenders'' approach to PAYGO budgeting, with
the PAYGO Act and the House and Senate rules working alongside one
another to achieve fiscal discipline in a mutually reinforcing way.
Moreover, the joint presence of PAYGO rules and a PAYGO law would
essentially replicate the situation in the 1990s, when a Senate PAYGO
rule coexisted with statutory PAYGO. Notably, during this period from
1990 to 1999, Congress did not just meet the PAYGO requirement of
budget neutrality, but managed to exceed it with the enactment of tax
and entitlement legislation that in fact reduced deficits. (Congress
accomplished this feat even before counting the effects of the deficit-
reduction packages enacted in 1990, 1993, and 1997, which were
deliberately excluded from the PAYGO scorecard.) It is quite possible
that Congress was able to reach this result of net budgetary savings
during the 1990s because it had to meet the requirement of both
congressional rules and statutory PAYGO.
conclusion
The current debate over health care reform illustrates the
importance of enacting the PAYGO Act and abiding by the ``do no harm''
fiscal principle, even as we seek to invest in areas that have too long
been ignored.
Some advocates may support health reform even if it expands the
deficit; the Administration does not share that perspective. Instead,
the President is insistent that health reform be deficit neutral
through scoreable offsets, and has put forward roughly $950 billion in
Medicare and Medicaid savings and additional revenue for that purpose.
Beyond the need to make deficits no worse in the medium term, it is
also crucial that we enact game-changing proposals that will move the
health system toward one in which best practices are more universal
across the nation, rather than isolated in certain areas and hospitals
within the United States. These game changers may not score
immediately, but they hold the key to containing health care cost
growth in the long term and should be included in the legislation for
this purpose.
We should not waiver from the fiscal principle of ``do no harm''--
in health care reform or elsewhere in the budget. Enacting statutory
PAYGO is another important step in holding us to this goal.
Chairman Spratt. Thank you very much, Dr. Orszag.
Just a few basic questions to start with.
In the past, the Budget Enforcement Act, for example, was
enacted for 5 years because it matched the 5 years of the
Budget Summit Agreement. Is there some particular reason you
chose 5 years here? Would 10 years be applicable and acceptable
to the Administration or even no term limits at all?
Mr. Orszag. We chose 5 years for the duration of the
statutory PAYGO Act just to mimic what was done in 1990 and
then, frankly, done subsequently during the 1990s. But we don't
have any firm principle. And maybe I should have said at the
beginning, wherever possible, we were trying to recreate what
existed in 1990. Since that was initially created for 5 years,
we just said, okay, let us do this for 5 years, also. We would
have no objection to a longer time period.
Chairman Spratt. In addition, you averaged the entries on
the scorecard ledger, a little odd when you first read the
proposal. Would you explain why you proposed to average it
instead of actually making the entries when they occur?
Mr. Orszag. Yeah. The motivation there was that we had
heard some concern from congressional staff that your existing
rules in both the House and Senate look at it in a long-time
period. They look at a 6-year time period and an 11-year time
period and that if we had a statutory PAYGO rule that was year
by year you would be creating inconsistencies between the
congressional rule and the statutory act.
So we thought it was better to just simply reflect the same
principle that you already have in your PAYGO rule in the
House, which is look over, for example, a 10 or 11 year period.
And if the thing is balanced over that window, then it meets
PAYGO. The same principle would apply under statutory PAYGO.
Chairman Spratt. There is another anomaly; and that is, to
implement the new PAYGO, we first have to declare it won't be
applicable to four rather substantial tax provisions that will
be expiring for the most part on December 31, 2010. Why did you
give this exoneration to the current policy baseline for these
particular programs?
Mr. Orszag. Again, I think there is--and they are not just
tax provisions. It is also applying to the sustainable growth
rate formula.
But with regard to the exceptions that we put forward, I
think there is widespread agreement that there will be some
extension. We are not going to allow physician payments to fall
by 20 percent. We are not going to allow the alternative
minimum tax to take over the Tax Code. And I don't think anyone
is proposing or embracing that none of the 2001 and 2003 tax
legislation is extended. Perhaps some Members of Congress are.
But in terms of the bulk of Members of Congress and senators,
it is very likely that some significant part of the 2001 and
2003 tax legislation will be extended. No one has put forward
credible offsets in those categories.
For example, on the sustainable growth rate formula--or let
us take the alternative minimum tax. There have been 1-year
patches that have generally either not been offset at all or
been offset with 10-year offsets. No one has put forward a 10-
year fix with 10-year offsets.
In that situation where there are no credible offsets that
have been put forward, the most likely outcome if you wrote the
legislation based on current law is that the rules would just
be waived when those extensions came up. We thought it would be
better to write the legislation in a way that didn't
immediately trigger waivers, because we think waivers--once you
get in the--I guess the theory of the case is once you get in
the habit of giving waivers, you could get too used to giving
waivers; and it would be better to write the rules in a way
that recognized reality and then not have waivers.
Chairman Spratt. To make it clear, you are not sanctifying
these tax cuts at these levels necessarily or calling for their
reenactment or reinstatement on December 31st?
Mr. Orszag. No, it is not a policy statement at all. It is
just that if the Congress decides to extend, for example, part
of the tax legislation, how that should be treated under
statutory PAYGO.
Chairman Spratt. And there is a time limit on acting to
take advantage of the exclusion here?
Mr. Orszag. That is right.
Again, if we step back and realize why we are in this
situation, the reason we are in this situation is that--
especially with regard to the 2001 and 2003 tax legislation,
which is the biggest single component, there was an artificial
sunset put into the law at the end of 2010, which creates this
awkwardness between the current law and current policy
baseline. That not a good way of making policy.
Chairman Spratt. One more question. The sequestration base.
Did you say a word about how the legislation that could be
subject to sequestration was chosen and what methods you took
to choose it? Are you simply carrying forward what was last in
law or have you made some modifications to it?
Mr. Orszag. We were generally--we were carrying forward the
spirit of what was last in law, which exempted low-income,
veterans, retirement programs, and a few others.
Unfortunately--well, not unfortunately. There were some new
programs created that needed to be put into one bucket or the
other, and we tried to follow the same guidelines that had been
embodied in the previous legislation. So the vast majority of
the exemptions to sequestration are exactly the same as under
the 1990 law. We just had to update it for programs that were
created since then.
Chairman Spratt. One final question. What you are proposing
is statutory PAYGO. The House has a PAYGO rule, which is the
rule of the House. The Senate has a PAYGO rule. Is it your
anticipation that the House and Senate rules will stay in
effect as well?
Mr. Orszag. Yes. That is, I guess, the belt part of the
belt-and-suspenders approach to PAYGO.
Chairman Spratt. I won't ask which ones are the suspenders
and which ones are----
Mr. Orszag. Yeah. Well, I will let you choose.
Chairman Spratt. Mr. Ryan.
Mr. Ryan. Thanks, Chairman.
Peter, in the past, PAYGO was accompanied with
discretionary spending caps; and I think a lot of observers of
your budget would say that your discretionary spending path is
unrealistic. I would like to see it materialize as you lay it
out after the first year. The first year you go up 11 percent,
and then you average less than 3 percent over the rest of the
10-year window. Would you be willing--would the administration
be willing to lock in those numbers with statutory caps?
Mr. Orszag. We would be willing--let me first say--I am
just going to correct a few things. The discretionary spending
increase is artificially affected by things like the Bureau of
the Census.
Mr. Ryan. I will concede the first year is 11 percent, but
it averages less than 3 percent over the next 10 years.
Mr. Orszag. Focusing on the outyears, I think the most
important single thing we could do is enact statutory PAYGO for
mandatory and revenue. Remember, over the past 8 years, we
doubled the size of the long-term fiscal gap in this Nation by
enacting tax legislation that was not offset and a prescription
drug benefit that was not offset and present value that is 3
percent of GDP; and that doubled the size of the fiscal gap.
Now, discretionary spending can matter, also. We have put
forward a path we support. If one were to pursue discretionary
caps, we would want them to be at the level that we have put
forward. That is a discussion we could have. But I think first
things first. Let us focus on where most of the money is, which
is on the mandatory side and the tax side of the budget.
Mr. Ryan. Forty percent of the money is not peanuts. So
since you have a path you subscribe to, you believe in, it is
40 percent of the spending. In the past, it was accompanied
with statutory caps on discretionary. Why not support
discretionary caps at your levels?
Mr. Orszag. It is an idea that we would be willing to
pursue with you and discuss with you. But we thought it was
most important--especially given the past history of where the
most deterioration occurred--focus on where the problem is.
Mr. Ryan. Let us go on to that, then. We are on the verge
of creating a brand new entitlement, a brand new entitlement
that will provide eligibility numbers that rank up there with
the size of Medicare. And, therefore, its liabilities could,
could rank up there with the size of Medicare.
I want to applaud you and thank you for standing by CBO and
rejecting some of the entreaties to have OMB scoring for the
health care bill and to stick with CBO. By the way, I am glad
the administration is sticking with assuring that we have CBO
scoring on the health care legislation and that--I assume you
are sticking with the 10-year pay-for. You are going to pay for
it within the 10-year window, correct?
Mr. Orszag. Health reform must be paid for over 10 years
and in the tenth year.
Mr. Ryan. Right. That is great.
What about the years after that? What about the long-term
fiscal gap? What about the long-term effects of this? Will the
administration give us long-term scoring as to what kind of
debt we are going to be passing on to the next generation in
addition as a result of this program? Will the administration
be able to show us that the revenues, the pay-fors will
actually match the expenditures in the outyears? Or, in fact,
are we creating yet another liability for the next generation
on top of the $62 trillion we have right now, according to the
GAO?
Mr. Orszag. Three comments. First, contrast how different
this is from the process that was used for the prescription
drug benefit where there was no offset at all. We expanded the
long-term fiscal gap by a percent of GDP by doing so with no
offsets.
Second, the reason that we have said that we want deficit
neutrality in the tenth year is that is the best proxy for what
will happen in the second decade. By that time, the program
should be fully phased in. And if you have deficit neutrality
in your 8th, 9th and 10th year, for example, you are not
falling off a cliff towards the back end of the decade----
Mr. Ryan. Great point. So does your deficit.
Mr. Orszag. And there is a third point. And then the third
is, remember, that is not counting any of the transformation
that we believe is crucial. And what I would say on that is
there may be some debate over exactly how much you will get out
in 2050 from these ideas. But everyone must agree they are
necessary. Some people may not believe they are sufficient, but
they are necessary for transforming the health care system.
Under your consumer-driven health approach, for example,
you need health IT and more research into what works and what
doesn't so that consumers have better, more informed choices.
We are doing hard things there precisely because we firmly
believe that if we don't, nothing else is going to matter.
Mr. Ryan. Does your deficit neutrality apply to the
outyears? Does it apply to the long term?
Mr. Orszag. As you know, CBO only does 10-year----
Mr. Ryan. I know.
Let me go to an episode we had in Ways and Means where the
Republicans made a mistake. You know who Rick Foster is? He is
the chief actuary at CMS. I have some House Ways and Means
colleagues that are here with me. Lloyd was here then.
When the prescription drug bill was done, the CMS actuary
put out some long-term estimates. Those estimates were not
provided to Congress, and that was a mistake. We used CBO--I
see Doug Holtz-Eakin shaking his head there. That was a
mistake. And the minority at the time was right to point out
that the administration should not have sat on those estimates
that would have better informed Congress as to the fiscal
decisions they were making.
It turned out those estimates were way off. It turned out
CBO was way off. It turned out this benefit came in 40 percent
below projections.
But my question is, will you allow the CMS actuary to give
us these kinds of scores and make them available to Congress?
Because that was a mistake the last administration made. I hope
you don't repeat that mistake. And will you allow the CMS
actuary to do the long-term scoring, 10-year and long-term
scoring on this new entitlement benefit so we can get a better
picture of what we might be passing in 3 or 4 weeks here?
Mr. Orszag. Three comments. First, I am firmly in favor of
disclosure of information to the Congress.
Second, the CMS actuaries, as you know, are responsible for
Medicare and Medicaid. Their ability to model systemwide health
changes like we are talking about----
Mr. Ryan. Probably better than anybody else's ability.
Mr. Orszag. Although that is not what they are paid to do.
I just want to note that. So there is an awkwardness. The
prescription drug benefit was within their four corners. This
is not.
And then, finally, as you pointed out, I think sometimes
there is a thought that, even if you are deficit neutral,
somehow the projections are always biased too low and therefore
we are going to wind up in a bad situation. And, as you noted,
the prescription drug numbers have actually come in lower than
projected, making the point that, in general--CBO, for example,
does its best job. Sometimes they are too high. Sometimes they
are too low. They are not biased in one direction.
Mr. Ryan. I would argue it is sort of the nature of the
program that brought those numbers where they are.
But let me ask you this. Don't you think we ought to have a
handle on what we are creating over the long-term with this new
entitlement, this new health care entitlement? You of all
people have been so articulate in coming to Congress,
especially in your old job, of saying what a fiasco we have got
financially, the indebtedness of this Nation, the long-term
unfunded liabilities. Shouldn't we get a handle on what kind of
long-term unfunded liability we might be creating before we
vote to create this new entitlement program?
Mr. Orszag. And I would again say by far the best
protection you have against that--a belt-and-suspenders
approach there, too, where you not only have deficit neutrality
over the first decade but in the 10th year alone, using hard
scoreable offsets. And then we have an aggressive set of game
changers which are not even included in those calculations but
that are the most auspicious approach to bending the curve over
the long term.
And just remember, health care is so dominant and the costs
are growing so quickly that even small reductions in the growth
rate dominate everything else. Reducing the growth rate of
health care costs by 15 basis points, point 15 percentage
points per year has a larger impact on the Nation's long-term
fiscal gap than eliminating the actuarial deficit and Social
Security deficit.
Mr. Ryan. So why can't we get those numbers? Don't you
think we ought to have that before we----
Mr. Orszag. Sure. But the only thing--you are looking to
the CMS actuaries, and what I am saying is that is not their
job.
And the second thing is it is very difficult to quantify
many of these game changers precisely because we have never
moved to a high-performing, higher-quality, lower-cost system.
Mr. Ryan. I guess what we are getting is we are going to
vote on a new entitlement program without knowing its long-term
fiscal effects.
Mr. Orszag. No. Again--look, the 10th year constraint is
very similar to the constraint that is often imposed on Social
Security at the end of the 75-year window. If you are not
falling off a cliff at the end of your projection window, that
is your best assurance that the long-term trajectory is also
stable.
Mr. Ryan. Thank you.
Chairman Spratt. Thank you, Mr. Ryan.
Mr. Doggett.
Mr. Doggett. Thank you, Mr. Chairman.
Dr. Orszag, I actually share a number of the concerns that
Mr. Ryan has just raised, if not necessarily all of the
conclusions. I was one of the many sponsors along with our--
under leadership of our colleague, Congressman Hill, last
session. His measure for statutory PAYGO included the
discretionary spending caps that Mr. Ryan was just asking you
about. It did not include all of the exceptions that you have.
I voted against some measures on the House floor that I
support, such as correcting the alternative minimum tax because
they were not paid for. And it seems to me that, to the extent
that you have all these exceptions, that we are basically
prejudicing our policy in favor of continuing Bush tax cuts,
doing some of the other things that you have here and against
other necessary measures.
Let me ask you, though, in order for this process to work,
you have to have honest scores. Who will be the scorekeeper for
statutory PAYGO under your proposal?
Mr. Orszag. Because of constitutional constraints, the
scorecard has to be maintained by the Office of Management and
Budget. So another difference between the congressional rule
and statutory PAYGO, one is sequestration, but the other is--
your rule is based on CBO scoring; statutory PAYGO must be
based on OMB scoring.
Mr. Doggett. Citing the example Mr. Ryan just used, which
was an infamous example, not put in place I think to deceive
Democrats but to deceive Republicans on the true cost of the
prescription drug program as it was originally estimated, how
do you think score keeping would have worked the last 8 years
in the Office of Management and Budget?
Mr. Orszag. Well, again, I think perhaps sometimes the
implication is that the administration biases scores down.
There is an example where it was actually higher than CBO. I
will very firmly defend the staff at OMB who are highly
professional and outstanding analysts. I don't believe that
there is a bias either in CBO scoring or in OMB scoring in
terms of new programs one way or the other.
There are technical differences. Creating a new
prescription drug benefit had--was--you were creating a whole
new program, and analysts can reasonably differ--the CMS
actuaries versus the Congressional Budget Office can reasonably
differ on such things. But if an undercurrent here is that
somehow the administration is always biased in one way or the
other, I am going to defend my staff here and say I don't
agree.
Mr. Doggett. Well, I think it is the decisions that were
made with those numbers that were a problem under the last
administration.
Mr. Orszag. Oh, I agree with that. Withholding information
is a problem. That is a different question.
Mr. Doggett. What is the nature of the constitutional
problem that would prevent anyone other than OMB being the
scorekeeper?
Mr. Orszag. The issue really is that sequestration happens
automatically. And to have that happen automatically based on a
legislative body's judgment is the constitutional issue that
has arisen.
Mr. Doggett. Isn't there a way to write this legislation to
give the Congressional Budget Office a bigger role in score
keeping?
Mr. Orszag. I don't believe so. But if you would like to
have follow-up discussions with the staff, I would be happy to
entertain that. I believe that we have--I think it is very
difficult to do anything other than the way we have designed
it.
Mr. Doggett. While our perspective is not entirely the
same, I do agree that for those of us who are concerned about
education deficits, about health care deficits, about law
enforcement deficits, we won't be able to address those
deficits if interest payments are such a substantial share of
our national budget; and it is essential that we work together,
as you are trying to do today, to address the need for more
responsible pay-as-you-go government.
Thank you very much.
Chairman Spratt. Thank you, Mr. Doggett.
Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Welcome, Dr. Orszag. I found your comments on PAYGO to be
helpful and instructive, although there is still much of what
you say with which I disagree.
As I listened to the PAYGO debate--although I find your own
voice helpful, I find other voices somewhat unhelpful. And as I
listen to the debate, I am struck between the difference
between what I might view as a bumper sticker slogan and a real
program for spending discipline. So I think it is important
that the American people have the facts.
So I want to make sure that we are clear on this point.
Number one, under the administration's PAYGO spending plan,
increases in discretionary spending are exempt, correct?
Mr. Orszag. PAYGO applies to the mandatory part of the
budget and to revenue; and, therefore, discretionary spending
could be handled either through the normal congressional
process, the 302(a) and (b) process, or----
Mr. Hensarling. So is the answer yes?
Mr. Orszag. The answer to that would be PAYGO does not
apply to the discretionary----
Mr. Hensarling. Thank you. Thank you.
So if Congress as is in the current budget planning on
increasing discretionary spending--nondefense discretionary
spending 9.3 percent, they can do that without decreasing
spending elsewhere or raising taxes to pay for it, correct?
Mr. Orszag. Under your House PAYGO rule and under this
statutory PAYGO rule, that is correct.
Mr. Hensarling. And isn't it also true that, under PAYGO,
spending increases in current entitlement programs, they are
not subject to PAYGO either; isn't that correct?
Mr. Orszag. Spending increases that happen naturally
because of demographics----
Mr. Hensarling. Your current entitlement programs.
Mr. Orszag. They are built into the baseline. That is
correct.
Mr. Hensarling. I believe in the CBO baseline, Social
Security is due to grow 4.78 percent. Medicare is due to grow
4.3 percent. Those are spending increases.
Mr. Orszag. PAYGO is intended to make sure we don't dig the
hole deeper.
Mr. Hensarling. But those are spending increases whereby
Congresses doesn't have to decrease spending elsewhere or raise
taxes to pay for it. Is that not correct?
Mr. Orszag. That is correct. Again, statutory PAYGO is
intended to make sure that we are not adopting new programs to
make things work.
Mr. Hensarling. I understand. I understand. My time is
limited, Dr. Orszag. So if one asserts that under PAYGO
Congress can only spend a dollar if it saves a dollar
elsewhere, that is not literally true, is it?
Mr. Orszag. Well, it is true outside of discretionary
again, because it depends on what you mean by spend.
Mr. Hensarling. So out of discretionary, 40 percent of the
budget, and outside of current entitlement programs, which as
of today, by definition, represents the rest of the budget.
Mr. Orszag. I would say spend a new dollar on automatic
programs----
Mr. Hensarling. If one says Congress can only spend a
dollar if it saves a dollar elsewhere, is that literally true?
Mr. Orszag. That may be shorthand for what I just said.
Mr. Hensarling. It may be shorthand.
Mr. Orszag. Yeah. I don't know who----
Mr. Hensarling. Might you concede it is misleading?
Mr. Orszag. It would be a form of shorthand.
Mr. Hensarling. It would be a form of shorthand. So when
the President spoke those very words on June 9th, you would say
he was speaking to the American people in shorthand?
Mr. Orszag. Undoubtedly. He was giving a speech, and in a
speech there aren't as many footnotes about sequestration.
Mr. Hensarling. Well, that is part of the problem here. I
sense the administration is trying to get credit for something
that, frankly, doesn't quite live up to its billing. My fear
is, if the administration was a private firm selling a product
called PAYGO and made those claims about it, they would be sued
by the FTC for false advertising.
Can we pull up charts--chart number 3, please?
Again, my concern is is that people are trying to get
credit for something that doesn't actually occur. Chart 3 shows
the spending increases that were subject to PAYGO in 2009. Yet
$870 billion in spending increases in 2009, 2 percent, 2
percent subject to PAYGO.
Can I get chart number 4, please?
2010 spending, we have got $3.5 trillion of spending
estimated for 2010, of which 3 percent is subject to PAYGO.
I guess I would ask this question, Dr. Orszag--and I also
see that there is an op-ed in the Wall Street Journal by the
Democrat majority leader and Chairman Miller, ``Congress must
pay for what it spends.'' Well, clearly Congress is not paying
for what it spends.
So, on the one hand, we either have false advertising; or
if PAYGO actually does live up to its billing, that Congress
must pay for what it spends, given that under CBO projections
by 2019 we are looking at a deficit of $1.2 trillion, first
income tax revenues of $2 trillion, we would have to increase
taxes--income taxes 60 percent to make good on the PAYGO
promise.
So which is it? Are we looking at a proposal to increase
personal income taxes 60 percent over the next 10 years or
simply is PAYGO false advertising?
Mr. Orszag. Neither. And remember----
Mr. Hensarling. I thought that might be your answer.
Mr. Orszag. Well, look, if we had this system in place over
the past 8 years, roughly 3 percent of GDP was adopted by the
Congress and not offset. That is exactly what this PAYGO law is
intended to address. So that is almost as large as the entire
nondefense discretionary budget is today.
To Mr. Ryan's point, 3 percent of GDP from the prescription
drug benefit and from tax cuts that were not offset, that is
this year alone almost $450 billion. That would be a very big
chunk of your pie chart, adopted without being offset. That is
what this law is intended to address. It is not a panacea.
Chairman Spratt. Mr. Becerra.
Mr. Becerra. Thank you, Mr. Chairman.
Dr. Orszag, nice to see you again.
Mr. Orszag. Nice to see you.
Mr. Becerra. Let me ask a few questions about some of the
provisions that incorporate within the baseline some of the
programs that exist that are expected to expire like these tax
cuts. Give me a sense of the 10-year cost of some of those
provisions that will not be counted on the PAYGO ledger, AMT
indexing. What is the number on that?
Mr. Orszag. There is an interaction effect with the 2001,
2003 legislation, but it is about $500 billion or so.
Mr. Becerra. And the estate tax?
Mr. Orszag. The estate tax, I have to get the exact number,
but it will be a few hundred billion, several hundred billion.
Mr. Becerra. Okay. And then the some of the other tax cuts
include the two top rates, capital gains dividends. There is a
whole category of them.
Mr. Orszag. Yeah. All in the exemptions are north of $3
trillion.
Mr. Becerra. So north of $3 trillion. That would include
things like the child tax credit as well, the reduction in the
lower-middle income tax brackets as well?
Mr. Orszag. That is correct.
Mr. Becerra. So there is about north to $3 trillion over
the next 10 years that would not be counted towards the PAYGO
ledger. And you explained part of the reasons for doing that,
which there is a lot of logic to it, because we in essence, de
facto, or ad hoc'ly are doing that already.
But I am wondering if you can tell me how you--OMB projects
our budgets in the future, if we continue to have these
deficits hovering above $500 billion, which would be a
tremendous accomplishment to get them below the deficit that we
saw the President inherit this year from the previous
administration of $1.3 trillion or so----
So let us say you are able to achieve President Obama's
goal to reduce the deficits in half in his first 4 years in
office. We will not be counting in that calculation many of
these provisions which are costing the government resources,
because you can't do certain things if you don't have the
revenues. But we have decided because of the way Congress and
the administration have operated over the last several years
that you are, in essence, institutionalizing what de facto
happens every year ad hoc'ly when we extend these things, patch
them through, et cetera. Is that more or less what you are
saying?
Mr. Orszag. But with a very limited time window and the
hope that we will stop this process of patching. Because that
is, again, something I said before. It is not good policy to
have such large sunsets in the Tax Code or in Medicare policy.
Mr. Becerra. And I think there is at least a degree of
honesty in what you are proposing. At least you are saying we
admit that it would be tough to tell American families we are
not going to extend a tax credit that we have provided for
children. So I recognize that.
Now, let me ask this. If Congress were in the future to
decide to allow some of these tax provisions to expire, how
would those be treated? How would the revenue that would now
come in be treated if we were to not extend some of these tax
cuts.
Mr. Orszag. That would go for deficit reduction.
Mr. Becerra. So all of it would go for deficit reduction?
Mr. Orszag. If you were not to extend the tax provisions,
yes.
Mr. Becerra. So there is a good chance if you don't extend
some of the Bush tax cuts that you might actually be able to
see an increased reduction in the deficits over the next
several years?
Mr. Orszag. Yeah. And let me just comment on that. The
deficit this year is elevated $1.8 trillion. $1.3 trillion of
that is due to the economic downturn and steps necessary to
address it. That $1.3 trillion will gradually disappear as the
economy recovers and the extraordinary steps necessary to
stabilize the economy are no longer necessary.
Beyond that, to address that underlying structural deficit,
there are various things that could be done. As you go out
further over time, we are back into exactly what we were
discussing before, which is the key driver of our long-term
deficits is health care. That is exactly why we are putting
such emphasis on getting health reform done now in a way that
is fiscally responsible and also puts in place a structure so
that we could bend the curve over the long term.
Cost containment in health care is going to be a continual
effort that we have to keep--it is not--you know that Staples
thing? It is not like you pass the bill and go ``that was
easy.'' You have to keep at it over time, and we are putting in
place a structure that will allow that to happen more
naturally. That is perhaps the most important single thing we
can do to put the Nation on a sounder fiscal course.
Mr. Becerra. Mr. Chairman, I appreciate it. Thank you very
much.
Chairman Spratt. Thank you, Mr. Becerra.
Mr. Garrett.
Mr. Garrett. Thank you, Mr. Chairman.
Dr. Orszag, as Jeb just mentioned to me before he left, so
what you are saying is the appropriate rallying cry for the
administration and the Democratic majority should be stop us
before we spend again?
Mr. Orszag. Was that a question?
Mr. Garrett. Well, I don't know. I appreciate your
commentary. I appreciate the administration's new-found
interest in spending restraint. I wish it had come a little bit
earlier in their administration.
Some of us sitting on this side of the aisle had been
willing to vote against our majority, when our President, when
we were in power, were asking us to spend more than we thought
was fiscally prudent, more than you thought so when you came
before the committee and testified was fiscally prudent; and we
were willing to stand up to our party.
I guess maybe you are like I am, sitting on the edge of
your seat waiting for someone from the other side of the aisle
to exemplify that same restraint that some of us, maybe a
minority on our own side, exemplified during that time. So far
we haven't seen it in the 3 years that they have been in the
majority.
I am discouraged that, as Jeb was pointing out, that this
proposal applies, as he indicated, to increases or reductions
in tax rates and any new expanded entitlement programs. It does
nothing to affect the wave of entitlement spending as Paul was
talking about before that we are going to see come in. It does
nothing to address the waste, fraud, and abuse of taxpayer
dollars that we have been seeing through discretionary
spending. So enacting PAYGO at this point is a little bit like
closing the barn door after the horse has gone out.
The chairman mentioned that they implemented PAYGO on the
first day of the 110th Congress, but haven't they waived it a
whole bunch of times--can you just answer that yes or no--since
they came in?
Mr. Orszag. I am not aware of PAYGO being waived.
Mr. Garrett. No? How about his----
Mr. Orszag. Let me----
Mr. Garrett. Let me just tell you this. In the first 2
years after reinstalling it----
Mr. Orszag. Sorry. I thought you said this year.
Mr. Garrett. He said the 110th Congress.
Mr. Orszag. Oh, yeah. No, there have been waivers. And, in
fact, again one of the reasons that we were focused on
providing these exclusions was precisely to minimize the
waiver----
Mr. Garrett. Let me just remind you what that did. They
waived it for $420 billion of legislation in the first 2 years,
including $23 billion for the farm bill. They had a scheme set
up with regard to SCHIP so that--what he signed in law in
February. The bill increases SCHIP spending by an annual of 23
percent for 5 years and then cuts SCHIP funding by 65 percent
in its sixth year based on their plan. And the bill is
basically deficit neutral over 10 years in order to meet the
schedule. So they were able to waive it despite the chairman
proudly saying that they were doing something great during that
time.
Senator Coburn back on June 16th released a report that
contains some truly interesting information. Despite the claims
that the Obama administration said that they wouldn't include
funding in the stimulus package for the so-called program
called FutureGen project in Illinois, the Department of Energy
announced that FutureGen would be receiving $1 billion of
stimulus money. So see Chart 1.
Now, let us review. This is a project that just last year
the Secretary said was a waste of money. He said that since
2003 when the project was announced, the project's estimated
cost had almost doubled, and innovations in technology and
changes in the marketplace had created other viable solutions,
and it became clear the Department of Energy could not in good
conscience continue to support the program, and none of the
benefits, et cetera, was worthwhile.
So, Dr. Orszag, are there any provisions in the statutory
PAYGO that you are talking about that would do anything to
curtail this particular program or future programs, such as
this that come out of the administration?
Mr. Orszag. Again, as was discussed before, the
discretionary part of the----
Mr. Garrett. So the answer is--I don't have much time. So
the answer is no.
Mr. Orszag. The discretionary part of the budget is dealt
with under separate rules.
Mr. Garrett. Right. The answer is no. We will continue to
see things out of the administration like this.
How about chart number 2? Look at chart number 2. Also
contained in the stimulus package was what was deemed so
critical that we voted on it without having any time to read
the bill, and that is the stimulus plan. There was $800,000 for
repaving a backup runway at the John Murtha Airport. To review,
this is an airport that, according to ABC News, has only three
commercial flights and about 20 passengers per day. So is there
anything in the proposal that would either, A, eliminate this
particular program that seems to be a waste of money or, B,
stop this type of program in the future?
Mr. Orszag. I suppose we can go through the entire
discretionary----
Mr. Garrett. I only have two charts.
Mr. Orszag. Okay. Same answer.
Mr. Garrett. Okay. So at the end of the day, we come down
to it, that the program in place that had been touted on by the
other side since they came into power has not been implemented
fully as they suggested, has been waived repeatedly as we have
seen from upwards--in the farm bill for $420 billion and other
bills and the like; and going forward we will see that it will
just be a de minimus amount of the portion of the budget.
Mr. Orszag. I am going to again remind us, though, we
doubled the size of the Nation's long-term fiscal gap over the
past 8 years----
Mr. Garrett. Let me cite those numbers. You keep on saying
those numbers are around $450 billion under the Bush
administration, right, that you are citing as an example of
that?
Mr. Orszag. Just new, unpaid-for measures in one year
alone, yes.
Mr. Garrett. But in the stimulus program, which was $787
billion, none of that was offset, was it?
Mr. Orszag. Nor should it be, given that the intention was
to bolster aggregate demand. There is----
Mr. Garrett. PAYGO would have an exemption if the intention
is good?
Mr. Orszag. No, no, no. Look, there is a much different
situation when the economy is weak, facing negative--remember
what the situation was towards the end of last year?
Mr. Garrett. Are there exemptions in the law for that then?
Mr. Orszag. Growth was falling. Again--well, two things.
One is, there are emergency exemptions built into statutory
PAYGO, as there should be, because we do not need Herbert
Hoover economics during a great--during a downturn. Cutting
back--one of the things that is I think crucial to remember--
and I, again, am very concerned about fiscal discipline. But
during a situation where GDP is falling 6 percent on an
annualized basis, a temporary increase in the deficit, by all
mainstream economic thought, is beneficial; and preventing that
would actually be quite detrimental.
The problem is, as you go out over time and the economy
recovers, you don't want structural deficits at that point. And
this legislation, admittedly not a panacea, is just intended to
make sure you are not making those structural deficits in
outyears bigger.
Mr. Garrett. Thank you.
Chairman Spratt. Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
Can we get the chart?
Dr. Orszag, you are familiar with this chart that shows
that when the Clinton administration came in, we had inherited
a great deficit and created a surplus, enough so that if we
hadn't messed up the budget over the last 8 years we could have
paid off the national debt held by the public by last year. You
don't create a chart like that by accident. There are reckless
fiscal policies in the red and fiscal responsibility in the
blue.
My question to you is, how does it feel to get lectured on
economic policy and fiscal policy by the authors of the red
policy?
Mr. Orszag. I am not sure that was a question either. So I
will just let it stand there.
Mr. Scott. In the setoffs--we have a 10-year setoff. It
seems to me that that is one of the problems we got into in
creating the red. We would score things with setoffs much later
on that never would take place. Would a 5-year window make more
sense than things like the Medicaid setoffs put way down and
when you got there you knew you wouldn't do it? Would a 5-year
window be more responsible?
Mr. Orszag. There are tradeoffs. But I would say, actually,
a big problem was the most expensive things enacted during that
most recent red period were not even offset at all. So it
wasn't a question about whether the offsets were back-loaded or
front-loaded or whatever. They were nonexistent.
Mr. Scott. Part of the fraud on the numbers was this phase-
in fraud, and I think you were discussing that a little bit
with the ranking member, where you have a delayed
implementation and a kind of phase-in so that the 10-year cost
was--for a billion dollar a year program could only be $2 or $3
billion in the first 10 years. For the next 10 years, fully
phased in, you have to pay it all. What does the PAYGO--
statutory PAYGO do about that phase-in fraud?
Mr. Orszag. Well, what it would do actually is, if you had
a hockey stick kind of profile, you would have to pay some of
that up front. And that would actually--so if you can imagine,
you know, a cost out in year 9 would actually create a PAYGO
violation to the extent it wasn't fully offset in year one,
this year, and it would trigger sequestration this year. So
there are tradeoffs. There is no perfect set of rules.
But one desirable attribute of this approach is that if you
try to adopt a hockey stick kind of thing, you could get--
immediately facing a threat of sequestration and that may help
to prevent hockey sticks.
Mr. Scott. So you would have to pay--you would have to
consider the fully phased-in cost, not just the 10-year average
cost?
Mr. Orszag. Well, the 10-year average cost would reflect in
part the fully phased-in cost.
Mr. Scott. Yeah. But you could have--a 10-year, billion-
dollar-a-year program phased in could cost $3 billion the first
10 years and $10 billion the last 10 years.
Mr. Orszag. Right. And one of the problems--I think there
are a lot of improvements in the version that we have to try to
prevent gaming, but no set of rules is going to be perfect. And
there are always going to be very clever Members of Congress
and Senators and members of staff that can work their way
around any set of rules. We think in a variety of ways we have
come up with a better approach than the 1990 legislation to
prevent gaming. But one has to be constantly vigilant, because
any set of rules always has some flexibility to it and could be
abused.
Mr. Scott. Now, your baseline includes current policy. Does
that include as policy the 2001, 2003 tax cuts that primarily
apply to the income over $250,000?
Mr. Orszag. It includes both those below $250,000 and above
$250,000. I understand there is some debate about whether--from
a policy perspective, we do not support extending the tax cuts
above $250,000. So the fact that--their treatment in the
baseline for this purpose would be irrelevant, because we don't
support their extension.
If you are going to count those tax cuts as part of the
business line, shouldn't we be able to choose not to extend
those and instead pay for health care? People may decide that
they want to have health care than an AMT or health care than
an estate tax repeal or estate tax rather than other taxes. And
the whole point of this is making the right choices. Would we
have the opportunity to make those choices under statutory
PAYGO as introduced.
Mr. Orszag. No, you would not have the opportunity to use
the non-extension of the upper-income tax provisions as an
offset for health care reform. That non-extension would go for
deficit reduction.
Mr. Scott. Shouldn't we have that choice?
Mr. Orszag. The administration's position is the non-
expansion of those provisions should go for deficit reduction.
Chairman Spratt. Thank you, Mr. Scott.
Mrs. Lummis.
Mrs. Lummis. Thank you, Mr. Chairman.
I am always amazed, as a freshman Member of Congress, when
I hear the excuse for Federal spending going forward at
alarming rates that it was at alarming rates before now.
Because, as a freshman, I would argue that Congress overspent
before I got here and Congress is overspending now.
Could we put up a chart, number one, please?
This chart illustrates what was happening before I arrived.
It also illustrates that Democrats reinstituted PAYGO; and at
the reinstitution of PAYGO, the deficits just got larger, and
larger, and larger going forward. The red bars are increasing
deficit levels in billions of dollars.
So, as a freshman, as I said, I am just stunned by the
logic in this town where people say, because the Republicans
overspent while they were in charge, we, the Democrats, get to
overspend to two and three times the level that the Republicans
overspent when they were in charge.
I am dismayed, I am frustrated, I am disappointed with this
year's spending spree. How does the administration intend to
enforce fiscal discipline on the discretionary side,
particularly after fiscal year 2010?
Mr. Orszag. Again, we have put forward--even just focusing
on fiscal year 2010--a set of proposals; and thereafter, as you
know, a glide path that will get non-defense discretionary
spending to the lowest levels since 1962. We put forward a set
of specific reductions also as part of the fiscal year 2010
budget to terminate programs.
I appreciated that your caucus or members of your caucus
put forward your own ideas on specific spending reductions that
could be adopted. I would note that, in terms of specific
spending reductions, individual programs that you all put
forward, you were able to come up with $3 billion a year. That
is a good start, and we are looking at the suggestions, but
there is also just a recognition that this is hard work, and we
would want to work with you to do better than that.
Mrs. Lummis. I would like to return my attention for the
next question to what is admittedly a small part of that, but
it is one that irks the American people, and that is earmarks.
Earlier this year, the President signed a $410 billion
appropriations bill with nearly 9,000 earmarks; and the reason,
apparently, that that was signed was because that was last
year's business. But just last week, the House considered the
Commerce, Justice, and Science appropriations bill with roughly
1,100 earmarks in that bill alone. So my question is, would
this legislation, as it passed the House, be signed into law by
the President?
Now, this is a President, when he was campaigning, said
that he wanted to change earmark policy, that he opposed
earmarks, and that this was an important hallmark of his
campaign. Thus far, I haven't seen a demonstration of the
principle he articulated during his campaign.
Mr. Orszag. Three things. First, with regard to earmarks
that go to for-profit entities, we are glad that the Congress
has agreed we are going to make sure that those are competed.
So that will be beneficial.
Second, the administration is now, before a conference
report, actually asking the relevant agencies to scrub the
language and look for earmarks that can be identified much
earlier in the process than had been the case before.
Third, we have already identified, for example--the example
that comes to mind is the pre-disaster accounts at FEMA. We
have expressed concern in one of our statements of
administration policy about earmarks in those accounts.
So you will be seeing us expressing concerns where we can
quickly identify inappropriate earmarks, and I would look
forward to working with you to reduce them as much as possible.
Mrs. Lummis. And will the President veto bills that have
earmarks that don't meet your standards?
Mr. Orszag. The President will veto bills that don't meet
his standards. Now exactly what they are, we need to work with
you, and that was what I was just describing, a process for
trying to get earmarks down as much as possible and also
identify them as quickly as possible so that we all know what
we are talking about.
Mrs. Lummis. Thank you, Mr. Chairman.
I have just one more comment. I do not see how we can add
trillions in deficits in debt over 5 years and still be PAYGO
compliant.
But my time is up, and I yield back.
Chairman Spratt. Ms. Schwartz.
Ms. Schwartz. Thank you, Mr. Chairman, and thank you for
this hearing. And, Dr. Orszag, good to be with you.
I am one of the original cosponsors of the original PAYGO
legislation, and while we certainly can go back over history--
both positive and negative--the fact is that, going forward,
this administration has proposed or is taking very seriously
our rules on PAYGO and suggested making it statutory. I am
going to embrace that. I believe that we should.
And I appreciate the fact that you have been very
straightforward with us about how hard this is going to be to
do. To be fiscally disciplined is not easy. There are a lot of
things that call on us to do it, but we are making a determined
commitment to do so. And your building on the experience of
1992 is extremely helpful.
When people say, can you do it--the previous speaker just
asked, can you change what we do? And the fact is that, in
1992, the Federal deficit was--it was a lot then. It was $290
billion. And, by 1998, the government had a surplus of $69
billion. So we did reverse a trend towards increasing annual
deficits and a national debt with PAYGO, with spending
discipline, and with tax discipline as well.
So I appreciate your pointing out the fact that the change
in history from 2002-2011 was really due to the previous
administration's very clear policies on tax decreases and
increased spending. And that was not sustainable, and we are
trying to reverse that by being more responsible on both
spending and tax policy.
What I want to ask you about--and I recognize that this is
not easy--I think that we have made it very clear that we work
with CBO, we listen to CBO. How CBO scores what we do is
extremely important. I think it is appropriate for CBO to be
pretty conservative about scoring savings. I think that is very
important and would want them to do that.
I think, you know, in health care--and you pointed this out
in your testimony--that we have made a commitment in health
care reform working with the administration to make this
revenue neutral in 10 years, over 10 years, at 10th year--
however you say it. And that is a very strong commitment to pay
for through savings and through increased revenues if you need
to. What we are looking at now in Ways and Means is at least
half coming from savings, which is very significant, and, of
course, the tough decisions about how we raise revenues.
There is a frustration--I will put it that way--in some of
the aspects that you have talked about, in improving the
delivery system, in the incentives we are going to put in for
primary care, and helping to do chronic disease management
better, comparative effectiveness so that we can do research
and disseminate that to physicians in a more timely fashion so
that they are providing best practices for their patients, some
of the accountable care organizations, the kinds of ways that
we are very determined to make investments now. Health IT that
we have done already but want to continue to. That we can make
investments and changes in the delivery system that will save
money. Most of those investments are not scored to savings.
Now, in other economic think tanks, in other sort of--I was
going to say public initiatives. In Pennsylvania, we have
something called the Health Care Cost Containment Council, and
they are charged with giving the State legislature actual
analysis of what investments would save money. I have to ask
for it. They come back. We sometimes disagree with what they
say, but it does give us the ability to say we are going to
actually cover new mandates that is arguable whether it is
useful to do. Cancer screenings, does it save us money? Should
we do it?
Do you think that there is anything more that we should
encourage CBO to do, that CBO could be doing or someone else
could be doing to help us in Congress be able to know that
these investments actually do end up in savings, whether scored
or not and preferably scored?
Mr. Orszag. Well, actually, Senator Conrad and Senator
Gregg asked exactly that question of CBO last week; and the
letter that came back from CBO said exactly what I said, which
is cost containment over the long term is difficult, and it
will be an ongoing process. But in a section on options that
could reduce long-term cost growth, they pointed to many of the
same things that you just described: accountable care
organizations, bundled payments, a process for updating
Medicare policy and health care policy in a continual way, and
so on and so forth, most of which is fully under discussion as
part of health care reform. There wasn't a single item on their
list that isn't under discussion up here on Capitol Hill.
So that is a reflection of what I have been trying to say
for a while, which is no one can quantify out in 2040 or 2050
what the impact of these things will be, but the set of
policies under discussion reflect the most auspicious set of
policies that could help bend the curve under the long term.
Ms. Schwartz. What you are saying is that, in addition to
the savings that are quantifiable, we do expect, while
difficult to quantify, that there will be additional savings,
particularly over the long term. So when the question is where
do we go in 10 years, are we actually going to see an increase
in costs, we actually may see--the suggestion is and the belief
is from the economists and from all those who work in health
care is that we are actually going to see more savings than we
actually have been able to quantify right now in a way that
will help protect Medicare and be able to pay for Medicare
going forward and hopefully bring down costs in the private
sector as well through cost savings and the delivery system. I
think that is correct.
Mr. Orszag. Let me even be more direct here, because I
think this has been a subject that deserves more attention.
There is no plausible way that we are going to get our
long-term fiscal situation under control without structural
change to the health system. And people can disagree about
whether what we are putting forward is enough or not, but
without that, a change in the infrastructure so that we have
computerized records, so that we have a system of evaluating of
what is working and what is not, without changes in financial
incentives so that we are oriented towards quality instead of
quantity, and without some way, in a more facile way, updating
Medicare policy, there is nothing that anyone can propose that
will put us on a sustainable fiscal course.
Now, some people say those set of policies are not enough
to put us on a sustainable fiscal course, and that may be
right. But to those of you--those who are saying that, I think
you have to agree that we have to at least do that. In other
words, even if you don't think it is sufficient, I think
everyone has to agree those steps are necessary.
Ms. Schwartz. Just to make clear that all of those steps
are actually in the health care reform draft legislation that
we are debating right now in Congress?
Mr. Orszag. Correct.
Chairman Spratt. Mr. Schrader.
Mr. Schrader. Thank you, Mr. Chairman.
I apologize for not being here for some of your remarks.
Why did the Republicans allow PAYGO to lapse?
Mr. Orszag. I think you would have to ask them. I am not
exactly sure. But presumably there is--well, I will let you ask
your colleagues.
Mr. Schrader. You have talked pretty eloquently about the
opportunity for health care reforms to bend the cost curve long
term and get us back into balance hopefully in our long-term
national debt situation.
Do you, by offering up the PAYGO legislation and making it
statutory, do you think that also has an opportunity, given the
propensity for Congress with all of our well-meaning
intentions, to help in the cost of government growth over the
long term, also, compared to what we have been doing?
Mr. Orszag. It reflects our approach to health care reform.
I would not support an approach where all we were doing are
these steps that are aimed at transforming the health system
and kind of bank on that.
If I could just spend a second--some people have equated
what we are trying to do with the steps that we were taking in
the early 1980s in proponents of supply side economics. Huge
difference. Those tax provisions, there was a theory that the
case put for them. They were not offset.
So we are saying, do the key things that we think will
change the structure of health care over the long term and that
are necessary and perhaps sufficient to bending the curve over
the long term but also offset what you are doing up front, and
that reflects the PAYGO principle, which is at the heart of
this legislation.
Mr. Schrader. A couple of technical questions, if I may.
The estimates in section 4, they talk about using the
President's proposed budget as the baseline. Why not use
whatever is in the budget resolution by Congress instead, since
it has more force of law? Because the President's budget is a
proposed budget.
Mr. Orszag. There are different ways of doing it. I need to
just check on exactly what section 4 is. Because if it was
speaking to the exclusions as opposed to the way that the
ledger works--I mean, one could write the legislation in
different ways.
I again, though, want to come back to the constitutional
issue that was discussed briefly before. One of the reasons
that OMB scorings has to be used and therefore it would make
sense to use the President's baseline is a constitutional issue
regarding the triggering of sequestration.
Mr. Schrader. This was slightly different. I don't need the
answer right now.
The other technical question would be, you talk about the
scoring procedures and you indicate how usually Congress and
the executive branch usually end up with somewhat the same type
of scoring estimates and stuff and scoring procedures. Is there
any reason you wouldn't want to encourage or, more
specifically, get Congress and the President of the executive
branch, if you will, to use the same scoring procedures and
make that more definitive in the legislation?
Mr. Orszag. Again, in just looking at the legislation,
section 4, which describes how the PAYGO ledger works, the
reason that you are using administration numbers there is a
constitutional issue. So my previous answer was, now that I see
the section, was exactly correct, which was that we can't use
congressional estimates to trigger sequestration and,
therefore, we can't use congressional estimates to enter items
on the statutory PAYGO ledger.
Mr. Schrader. Thank you.
Mr. Orszag. If you could fix the constitutional problem.
Mr. Schrader. We can't seem to fix much in that regard,
which may be a good thing.
Last question. There is reference in here within 14 days
the President would--hopefully, it would never go to
sequestration. It is a deterrent. I understand that. But
assuming that, unfortunately, we may have to go there for
whatever reason at some point in our country's history, the
President issues the order within 10 to 14 days--I forget
exactly which--but what is the hammer to make it actually
happen? Is there a time the agencies have to be implementing
his order?
Mr. Orszag. Most of these would be automatic, so his order
would go into effect pretty much immediately. I will have to
look. But, in general, the agencies--there is nothing
subsequent that would have to occur after the sequestration is
triggered.
Mr. Schrader. One last, last question. With regard to the
four exceptions for the next year--maybe two--with the AMT,
estate tax, the SGR, and the low-income tax cuts, I assume that
is to make sure we don't raise taxes on hardworking Americans
at this point in time but realize that within a couple of years
after the economy recovers that those two should be subject to
PAYGO going forward.
Mr. Orszag. I think what those exclusions are intended to
reflect is there have been a series of extensions and waivers
and to avoid a series of waivers that would undermine--the
theory of the case, again, is once you get in the habit of
giving lots of waivers, it is hard to stop. So it is better to
have a set of rules that you will actually abide by.
Mr. Schrader. Thank you.
Chairman Spratt. Mr. Diaz-Balart.
Mr. Diaz-Balart. Thank you, Mr. Chairman.
Good to see you, sir. I know you have been slightly busy,
so we appreciate you being here.
Actually, a semi-related question. We are now in the midst
of putting together the Transportation Reauthorization bill.
And do you--understanding the situation, of course, that you do
about the DOT trust fund now, which is basically almost
insolvent. We are going to have to put some general funds money
into it. Is the administration going to be making
recommendations as to how we should fund the DOT trust fund,
the shortfall, and also the reauthorization, or is that
something that you are----
Mr. Orszag. What we have said is we would favor an 18-month
extension and additional funds being provided during that
period and that those funds would have to be offset.
So, again, it reflects the statutory principle, even though
this is a different setting, but we support the notion that any
additional funds provided to the transportation trust funds
would be offset; and we would work with the Congress to make
sure that is the case.
Mr. Diaz-Balart. Again, Mr. Chairman, if I may, I
understand that, and I know you are getting some bipartisan
pushback on the 18-month, which I know you expected on that
extension, but are you going to make any specific
recommendations as to either what is in those offsets should be
or not?
Mr. Orszag. I think we are working with Mr. LaHood and
others are working with the relevant committees to decide the
best way forward on identifying offset. But what we have said
is it must be offset. So regardless of whether we put forward
the offsets or we jointly work with you on the offsets or
however the process works, at the end of the day, it has to be
offset.
Mr. Diaz-Balart. I appreciate that.
Last thing. This may not be a fair question, but I have you
here. Any comment on the Vice President's statement about the
fact that--and I am going to paraphrase him roughly--but
basically that everybody guessed wrong on the impact of the
stimulus?
We do know that, and we had other people testify here
recently, and, obviously, the numbers that the administration
believed, as far as unemployment numbers, et cetera, that there
was going to be a cap of about 8 percent if the stimulus were
to pass, we now see that it has greatly exceeded--it has
actually greatly exceeded the unemployment according to, again,
the administration, that would have taken place if we did
nothing. Again--and the Vice President obviously had a comment
on that which has gotten a lot of press coverage. Anything you
want to--this is an opportunity--kind of a softball opportunity
for you to hit out of the park about what is going on here.
Mr. Orszag. Let me comment on the unemployment projections.
The unemployment projections this were embodied in the
President's budget put forward in February were locked down in
basically November and December of last year before we had
information that the last quarter of last year was minus 6
percent, before there was information about just how weak the
economic situation towards the end of last year was.
In the intervening period, it became obvious that the
situation was worse than that. We are going to be updating our
economic assumptions when we put out the mid-session review
later this summer.
I would note about the path of the unemployment rate is
that indicators suggest--and this is a small silver lining in
an otherwise problematic trend--that part of the increase of
the unemployment rate, a significant part reflects the part
that people are no longer leaving the labor force but rather
they are continuing to search for work. That elevates the
unemployment rate, because, otherwise, they wouldn't even be
counted. That part of it is actually encouraging, because it
means people aren't completely giving up.
That having been said, clearly, the unemployment rate is
elevated and the whole motivation by the Recovery Act was to
help bring it down over time, even though the starting level
was higher than we initially thought.
Mr. Diaz-Balart. I understand that. But, again, kind of
paraphrasing the Vice President--and I understand that. This is
not a precise science. But, clearly, the estimates were wrong,
flawed.
Mr. Orszag. Yeah. But that is independent of the Recovery
Act.
Mr. Diaz-Balart. I understand that. But it is evident that
if you looked at the numbers what the administration was saying
publicly and privately, unemployment--is it not accurate that
unemployment numbers now are higher than the estimates were if
we had not done anything?
Mr. Orszag. What I would say is--we locked down our
economic projections in November or December of last year.
Since then, I would say the economic outlook generally
deteriorated based on what was happening at the end of last
year. It since either kind of flattened or maybe if you look at
private sector forecasts turned up slightly.
Comparing where we are now to when we locked things down,
yes, it is worse now.
Mr. Diaz-Balart. Thank you, sir.
Chairman Spratt. Ms. DeLauro.
Ms. DeLauro. Thank you very much, Mr. Chairman.
Dr. Orszag, welcome again to the committee. Delighted to
see you. I am going to be parochial in my questioning, and it
is a subject that you and I have had conversations about before
and that is the legislation which several of us have, the
National Infrastructure Development Bank Act. And, as you know,
it establishes a development bank to leverage private-sector
dollars to invest in transportation, environmental, energy, and
telecommunications infrastructure.
There is of late real momentum behind this concept, a
concept that the President spoke about during the campaign and,
in fact, was part of the budget submission.
I might add that, in terms of what this concept could do,
given the leverage--and it was meant to have a $5 billion
appropriations price tag for 5 years totaling $25 billion with
paid-in capital, another $225 billion in callable capital from
the Treasury, and a conservative leverage, which is what the
European Investment Bank does, of about 2\1/2\ to 1 allowing
the bank to issue up to $625 billion in 30-plus year bonds.
Aside from the economic recovery package, which was $787
billion to get this economy back on track, again, this is the
largest sum of resources or the potential for resources to, in
fact, do something about our infrastructure, make an attempt at
capital budgeting, if you will, the first attempt to try to do
that. And in addition to that to take this earmark project,
process, which is not something that this administration looked
favorably upon and a whole lot of our other colleagues on the
other side of the aisle, except when it is their projects, but,
in fact, it would depoliticize that process in a way to take us
not only short term but long term to economic recovery and
growth.
My question is--and you know all of that, but I needed to
say it. In any case, do you have a sense of how the cost of
this proposal should be measured and how your PAYGO proposal
would apply to this effort?
Mr. Orszag. A couple comments.
First, as you know, the administration is working with the
relevant committees on a possible approach to an infrastructure
bank, and there are discussions that are ongoing. And, as you
know, there were provisions made in the budget resolution for
such an infrastructure bank. So just on the underlying idea,
something that the administration does support.
As you know, the treatment of transportation, the
transportation part of the budget, even for people who have
spent years in the budget world, is a particularly complex and
arcane area of budgeting. We have contract authority and
special rules and odd limits and what have you. And my only
point is it is not directly relevant to the statutory PAYGO
legislation, but there are different rules that would apply.
You could create, in theory, create an infrastructure bank that
was not funded through----
Ms. DeLauro. That is what I am making reference to. Because
this is a much wider portfolio. It is not just transportation.
In fact, it is a bank and would be a separate entity, not
supplant what transportation--the transportation bill does, but
a separate entity.
Mr. Orszag. If the infrastructure bank had a call on the
Federal Government, in other words, a free flow of money and
the creation was just to set up a set of parameters and
basically make it a mandatory program and then it would just
evolve as the world evolved, that would presumably fall under
statutory PAYGO.
Ms. DeLauro. Yes.
Mr. Orszag. I don't believe that is the way the existing
proposals are structured, however.
Ms. DeLauro. In an answer to which earlier you said--I
mean, this is a proposal that might contribute to the deficit
in the immediate future, but its economic benefit in the long
run of making what are significant investments for today and
the future clearly outweigh--my view--outweigh the costs in
terms of its ability to deal with those high unemployment
numbers that we are talking about. And I don't know if those
considerations can be applied to this effort.
We were only able to get about, over the next 2 years,
about $7 billion as the budget was passed; and, clearly, in
order to get to the 6\1/4\ or over 6, you know, one has to take
a look at what the size of the initial appropriations capital
is. And obviously the concern is how it gets--how it can--the
financing of this is critical and looking at it in terms of its
ability to have one of the largest impacts in terms of the
economic growth of this country for the long term, not a short-
term economic recovery program but a long term.
So they can deal with high-speed rail, if you wanted to go
back in history, an Erie Canal, the Rural Electrification
Administration, all of which had an enormous impact on the
economy of this Nation. And I would hope that we could have
some way in which we could look at making this a reality
instead of a, you know, a vision or a blueprint.
Chairman Spratt. Ms. McCollum.
Ms. McCollum. Thank you, Mr. Chair.
I am going to read back to you from your first paragraph,
because I think it is important to go back to basics. There has
been a lot of discussion and people trying to get their points
across, but I want to make sure that I clearly understand the
point that you are getting across to me. Because I have to say,
I believe in it.
You started out with saying, the PAYGO Act would hold us to
a simple but important principle: We should pay for new tax or
entitlement legislation. Creating a new non-emergency tax cut
or entitlement expansion would require offsetting revenue
increases or spending reductions.
So I am going to have two questions. My first question is
going to be, why should PAYGO apply to both sides, both
revenues and spending? Because that is one of the reasons why I
didn't vote for the tax cuts 8 years ago, because I didn't see
that we were being honest and transparent about the effect it
was going to have on the economy.
The second part of your first paragraph is, in the 1990s,
statutory PAYGO encouraged the tough decisions that helped move
the government from large deficits to surpluses. I believe it
can do the same today.
So if PAYGO only applies to new legislation and not
budgetary costs we already included in the baseline, does PAYGO
still make sense? And I believe it does. So could you restate
again how this isn't the solution to every problem that we are
facing, but it stops us from digging the hole deeper?
Mr. Orszag. On your first question, the reason PAYGO needs
to apply to both sides of the budget is that a reduction in
revenue of a dollar has the same impact on public debt and the
evolution of our fiscal future as an increase of spending of
$1. And, in fact, if you exempted the revenue side of the
budget, it is the easiest thing in the world to create a tax
credit that does something that is very similar to a spending
program, and you create then a substantial bias towards doing
things in one form rather than the other, even though there may
not be an underlying rationale for doing so. So it is both that
revenue reductions increase the deficit, and also that you
would create a sort of policy problem in how--in incentives for
creating new proposals in one way as opposed to another.
Now, it is looking forward. It is the case that all PAYGO
does is make sure we don't make things worse. But that is not a
trivial thing for two reasons. One is there has been a period
of time when we did make things much worse.
Again, I want to come back--our long-term fiscal gap over
75 years is about 7 percent or so of the economy. Three percent
of that, almost half, comes from policies that were enacted
since 2000 and not offset.
So we basically doubled the size of our long-term fiscal
gap by putting income place a bunch of policies and not
offsetting them. We can't do that again, and that is an
important thing.
I go beyond that and say I have what has been described as
the broken window of budgeting, which is having that discipline
in place helps create a culture in which you can do even more
than that. And not having that in place, just like a broken
window, has been shown to increase crime. Even though it may
not be the mechanism through which the crime occurs, not having
it in place creates this era of anything goes that would be
highly problematic.
Chairman Spratt. Mr. Langevin is not here.
Mr. Boyd of Florida.
Mr. Boyd. Thank you, Mr. Chairman.
Director Orszag, thank you, sir, for your service and your
advocacy for this fiscal discipline tool that we are discussing
today.
I was interested in some of the comments earlier about the
overspending that happened in the previous administration and
some criticism of the fact that that didn't necessarily mean we
had to do that now, and I agree with that in part. But I notice
you were asked earlier by Ms. Lummis about the administration's
intent to instill discipline on the discretionary spending
side.
I would like for you to answer two questions for me, if you
could. One is, what is the total amount of discretionary
spending, and how much of that is defense? And, secondly, if
you could, walk us through what would have happened in terms of
the spending that we put in place, the tax cuts and the
spending that we put in place since the expiration of PAYGO in
2002 if PAYGO had not expired and the Congress and the
administration would have had to comply with PAYGO rules. I
assume that that would have applied to the 2003 tax cuts; it
would have applied to the Medicare prescription drug program;
it would apply to all the AMT fixes, FGR fixes. All of those
issues. Can you walk us through what we would look like today
if PAYGO had not been allowed to expire?
Mr. Orszag. Sure.
First, with regard to discretionary spending in 2010, we
project $1.26 trillion in discretionary spending, $687 billion
of which--in other words, more than half--is for the Defense
Department, including funding for overseas' contingencies
operations.
Mr. Boyd. Does that include Homeland Security?
Mr. Orszag. Homeland Security is actually in the non-
defense part of the budget. So some of the numbers that are
discussed about the increase in non-defense discretionary
spending reflect not only the Census but also Homeland
Security.
Non-defense discretionary spending is projected to be $573
billion.
With regard to policies that were put in place since the
PAYGO rules were expired, I would also first note when they
were waived right before they expired--and on that basis,
again, I am going to come back to we are talking about hundreds
of billion of dollars this year in policies that were adopted,
not offset. If you threw in interest, it would be even more,
because the rules were not either abided by or didn't exist.
For the policies that were adopted since 2002, when you
look at the 2003 tax legislation, the prescription drug benefit
in particular, you are talking about well over a percent of GDP
in offset costs. And so you are again talking about well more
than a hundred billion dollars a year and perhaps in the
hundreds of billions of dollars a year in policies that were
adopted and not offset.
Mr. Boyd. So from that we could conclude that if we had
those fiscal discipline rules in place and we abided by them,
we would have been in much better shape today than we are.
Mr. Orszag. No doubt about it.
Mr. Boyd. Mr. Chairman, thank you.
Chairman Spratt. Mr. Berry.
Mr. Berry. Thank you, Mr. Chairman; and thank you, Dr.
Orszag, for being here and your service and all of the good
things that you have done.
My question is, there is an increase in the money supply
that the Congress has nothing to do with; isn't that correct?
Mr. Orszag. Yes, sir. Well, only in the sense that you
originally created the Federal Reserve.
Mr. Berry. And authorized them to do such things. But we
have not lately had anything do with that.
Mr. Orszag. Yeah.
Mr. Berry. When that money supply is increased, is there
any basis for the value of it, other than the good faith and
credit of the United States?
Mr. Orszag. I guess what I would say is that the underlying
rate of inflation can be viewed in a variety of different ways.
One of the things that influences it is the rate at which the
money supply is increased.
Mr. Berry. How does the amount that the money supply has
been increased compare to the amount of money that we have
authorized and appropriated by the Congress since the crisis
began, let us say, last Labor Day?
Mr. Orszag. There has been a very--instead of measuring it
in terms of direct money creation--and there are different
measures of money--if you look at the expansion of the Fed's
balance sheet, that has actually exceeded the Recovery Act
funds that have flowed to date, for example, and many of the
other steps that have been taken.
Mr. Berry. Do you have any idea how much it is?
Mr. Orszag. North of a trillion dollars in terms of
expansion.
Mr. Berry. Okay. Thank you.
Thank you, Mr. Chairman.
Chairman Spratt. I believe that completes our questioning
for Mr. Orszag. Thank you very much for coming.
But, before you leave, I would look for you to take one
question for the record.
Mr. Orszag. Sure.
Chairman Spratt. The legislative proposal you submitted
lists mandatory accounts that would be exempt from
sequestration but does not list those accounts that would be
subject to sequestration. For the record and for our purposes,
could you provide us with a list of those programs that would
be subject to sequestration and a list of those that would not
be subject, along with a dollar amount estimated for each?
Mr. Orszag. I could even take that out of my binder and
hand it to you now, but we will provide it in writing.
[The information follows:]
A bill to reinstitute and update the Pay-As-You-Go requirement of
budget neutrality on new tax and mandatory spending legislation,
enforced by the threat of annual, automatic sequestration.
SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Statutory Pay-As-
You-Go Act of 2009''.
(b) Table of Contents.
Section 1. Short Title and Table of Contents
Section 2. Purpose and Expiration
Section 3. Definitions
Section 4. PAYGO Estimates and PAYGO Ledger
Section 5. Annual Report and Sequestration Order
Section 6. Calculating a Sequestration
Section 7. Special, Temporary Rule to Reflect Current Policy
Section 8. Application of BBEDCA
Section 9. Amendments to the Baseline
Section 10. Technical Corrections
Section 11. Conforming Amendments
Section 12. Exempt Programs and Activities
SECTION 2. PURPOSE AND EXPIRATION.
(a) Purpose.--The purpose of this Act is to re-establish a
statutory procedure to enforce a rule of budget neutrality on new tax
and mandatory spending legislation enacted through the end of calendar
year 2013, by creating an automatic statutory penalty that Congress and
the President will seek to avoid.
(b) Expiration.--Sections 1 through 8 of this Act shall expire on
the later of December 31, 2013, or the issuance and implementation of a
sequestration order for fiscal year 2014 if one is required by this
Act.
SECTION 3. DEFINITIONS.
As used in this Act----
(1) The term ``BBEDCA'' means the Balanced Budget and Emergency
Deficit Control Act of 1985, as amended including by this Act.
(2) The terms ``appropriations Act'', ``budget authority'', and
``outlays'' have the meanings given to them in section 3 of the
Congressional Budget and Impoundment Control Act of 1974.
(3) The terms ``baseline'', ``budget year'', ``CBO'', ``current
year'', ``deposit insurance'', ``OMB'', ``sequester'', and
``sequestration'' have the meanings given to them in section 250 of
BBEDCA.
(4) The term ``AMT'' means the Alternative Minimum Tax for
individuals under sections 55-59 of the Internal Revenue Code of 1986,
the term ``EGTRRA'' means the Economic Growth and Tax Relief
Reconciliation Act of 2001 (Public Law 107-16), and the term ``JGTRRA''
means the Jobs and Growth Tax Relief and Reconciliation Act of 2003
(Public Law 108-27).
(5) The term ``budgetary effects'' means the amounts by which PAYGO
legislation changes mandatory outlays or revenues relative to the
baseline. Budgetary effects that increase mandatory outlays or decrease
revenues are termed ``costs'' and budgetary effects that increase
revenues or decrease mandatory outlays are termed ``savings''. For
purposes of these definitions, off-budget effects and debt service
effects are not counted as budgetary effects.
(6) The term ``debit'' refers to the net total amount, when
positive, by which costs recorded on the PAYGO ledger for a fiscal year
exceed savings recorded on that ledger for that year.
(7) The term ``discretionary programs'' refers to programs funded
though appropriations Acts other than mandatory programs.
(8) The term ``entitlement law'' means the statutory mandate or
requirement of the United States to incur a financial obligation unless
that obligation is explicitly conditioned on the appropriation in
subsequent legislation of sufficient funds for that purpose.
(9) The term ``mandatory outlays'' refers to outlays flowing from
(A) budget authority provided by laws other than appropriations Acts,
(B) entitlement laws, or (C) the Supplemental Nutrition Assistance
Program, and the term ``mandatory programs'' refers to programs that
produce mandatory outlays.
(10) The term ``outyear'' means a fiscal year that occurs one or
more years after the budget year.
(11) The term ``PAYGO ledger'' refers to a table maintained by OMB
(A) containing a column for each fiscal year 2010 through 2014 and
recording in the applicable column or columns the average of the
budgetary effects of each PAYGO Act enacted after the enactment of this
Act and before January 1, 2014, and (B) displaying the net sum for each
of those fiscal years of the average budgetary effects of all such
Acts.
(12) The term ``PAYGO legislation'' or a ``PAYGO Act'' refer to
legislation that is scored as increasing or decreasing governmental
receipts or mandatory outlays relative to the baseline, except that
when those budgetary effects are caused by substantive legislative
provisions in appropriations Acts, the current-year and budget-year
effects of those provisions are not considered PAYGO legislation.
(13) The term ``timing shift'' refers to a delay of the date on
which mandatory outlays would otherwise occur from the ninth outyear to
the tenth outyear or an acceleration of the date on which revenues or
offsetting receipts or collections would otherwise occur from the tenth
outyear to the ninth outyear.
SECTION 4. PAYGO ESTIMATES AND PAYGO LEDGER.
(a) CBO Estimates.--As soon as practicable after Congress completes
action on any PAYGO legislation, CBO shall provide an estimate of its
budgetary effects to OMB.
(b) PAYGO Ledger.--OMB shall maintain and make publicly available a
document containing a PAYGO ledger and, not later than 7 days
(excluding weekends and legal holidays) after the enactment of any
PAYGO legislation, OMB shall record on that ledger its estimate of the
legislation's budgetary effects in each fiscal year, applying the look-
back requirement of subsection (e) and the averaging requirement of
subsection (h). The document shall also explain any major differences
between the OMB and CBO estimates of the budgetary effects of PAYGO
legislation.
(c) Basis of OMB Estimates.--When estimating and recording the
budgetary effects of a PAYGO Act, OMB shall employ economic and
technical assumptions consistent with those in the President's most
recent Budget submitted under 31 U.S.C. Sec. 1105 and shall use
probabilistic methods where appropriate. Once it enters budgetary
effects on the ledger, OMB shall not change the entries other than to
correct errors. OMB's assumptions, data, determinations, estimates, and
methodology under this Act are not subject to review in any judicial or
administrative proceedings.
(d) Current Policy Exceptions for Certain Legislation.--
Notwithstanding the definitions in paragraphs (5), (11), and (12) of
section 3, OMB estimates of provisions of legislation within the four
areas of the budget identified in section 7 shall be entered on the
PAYGO scorecard as specified in that section, and the estimates so
entered shall be treated as the budgetary effects of PAYGO legislation
for purposes of this section.
(e) Look-Back to Capture Current-Year Effects.--For purposes of
this section, OMB shall treat the budgetary effects of PAYGO
legislation enacted during a session of Congress that occur during the
current year as though they occurred in the budget year.
(f) Timing Shifts.--For purposes of this section, OMB and CBO shall
not count timing shifts in their estimates of the budgetary effects of
PAYGO legislation.
(g) Emergency Legislation.--If a provision of PAYGO legislation is
enacted that the President designates as an emergency requirement and
that the Congress so designates in statute, OMB shall display the
budgetary effects of that provision as an addendum in the document
containing the PAYGO ledger but shall not record the budgetary effects
in the ledger itself.
(h) Averaging Used to Measure Compliance Over Ten Years.--OMB shall
cumulate the budgetary effects of a PAYGO Act over the budget year
(which includes any look-back effects under subsection (e)) and the
nine subsequent outyears, divide that cumulative total by ten, and
enter the quotient in the budget-year column of the PAYGO ledger and in
each subsequent column, if any, through the column for 2014.
(i) Scorekeeping Guidelines.--OMB and CBO shall prepare estimates
under this paragraph in conformance with scorekeeping guidelines
determined after consultation among the House and Senate Committees on
the Budget, CBO, and OMB.
(j) Treatment of Program Conversions.--For purposes of this
section, and notwithstanding other provisions of this Act----
(1) If legislation converts an identifiable element of a mandatory
program into a discretionary program (with that program element or a
substantially similar one continuing to be authorized), OMB and CBO
shall not score the conversion of that element as reducing mandatory
outlays.
(2) If legislation converts an identifiable element of a
discretionary program into a mandatory program, OMB and CBO shall
estimate the legislation's budgetary effects in each year by
subtracting the discretionary baseline levels of that element from the
amount by which that legislation increases mandatory outlays in that
year.
SECTION 5. ANNUAL REPORT AND SEQUESTRATION ORDER.
(a) Annual Report.--No later than 14 days (excluding weekends and
holidays) after Congress adjourns to end a session, OMB shall make
publicly available an annual PAYGO report and publish in the Federal
Register a notice of the report and information on how it can be
obtained. The report shall include an up-to-date document containing a
PAYGO ledger and information about estimating differences as required
by section 4(b), a description of and justification for any current
policy exceptions made under section 4(d), information about emergency
legislation (if any) required by section 4(g), information about any
sequestration if required by subsection (b), and other data and
explanations that enhance public understanding of this Act and actions
taken under it. If Congress does not adjourn to end a session, then for
the purposes of this Act it shall be deemed to have done so on December
31 of that session.
(b) Sequestration Order.--If the annual report issued at the end of
a session of Congress under subsection (a) shows a debit on the PAYGO
ledger for the budget year, OMB shall prepare and the President shall
issue an order sequestering budgetary resources from mandatory programs
by enough to fully offset that debit, as prescribed in section 6. OMB
shall include that order in the annual report and transmit it to the
House of Representatives and the Senate. If the President issues a
sequestration order, the annual report shall contain, for each budget
account to be sequestered, estimates of the baseline level of budgetary
resources subject to sequestration, the amount of budgetary resources
to be sequestered, and the outlay reductions that will occur in the
budget year and the subsequent fiscal year because of that
sequestration.
SECTION 6. CALCULATING A SEQUESTRATION.
(a) Sequestration Base.--For purposes of this section, OMB shall
assume that mandatory programs are at the levels in the baseline before
the implementation of the sequestration order.
(b) Reducing Non-Exempt Budgetary Resources by a Uniform
Percentage.--OMB shall calculate the uniform percentage by which the
budgetary resources of non-exempt mandatory programs are to be
sequestered such that the outlay savings resulting from that
sequestration, as calculated under subsection (c), shall fully offset
the budget-year debit on the PAYGO ledger, if any. If the uniform
percentage calculated under the prior sentence exceeds 4 percent, the
Medicare programs described in section 256(d) of BBEDCA shall be
reduced by 4 percent and the uniform percentage by which the budgetary
resources of all other non-exempt mandatory programs are to be
sequestered shall be increased, as necessary, so that the sequestration
of Medicare and of all other non-exempt mandatory programs together
produces the required outlay savings.
(c) Outlay Savings.--In determining the amount by which a
sequestration offsets a budget-year debit, OMB shall count----
(1) the amount by which the sequestration in a crop year of crop
support payments, pursuant to section 256(j) of BBEDCA, reduces outlays
in the budget year and the subsequent fiscal year;
(2) the amount by which the sequestration of Medicare payments in
the 12-month period following the sequestration order, pursuant to
section 256(d) of BBEDCA, reduces outlays in the budget year and the
subsequent fiscal year; and
(3) the amount by which the sequestration in the budget year of the
budgetary resources of other non-exempt mandatory programs reduces
mandatory outlays in the budget year and in the subsequent fiscal year.
SECTION 7. SPECIAL, TEMPORARY RULE TO REFLECT CURRENT POLICY.
(a) Purpose.--The purpose of this section is to establish a
temporary rule addressing the scoring of legislation affecting four
areas of the budget and superseding the scoring rules otherwise
provided by this Act to the extent they are inconsistent. The four
areas covered by this section are----
(1) payments made under section 1848 of the Social Security Act
(titled Payment for Physicians' Services),
(2) the Estate and Gift Tax under subtitle B of the Internal
Revenue Code of 1986,
(3) the AMT, and
(4) provisions of EGTRRA or JGTRRA that amended the Internal
Revenue Code of 1986 (or provisions in later statutes further amending
the amendments made by EGTRRA or JGTRRA), other than----
(A) the provisions of those two Acts that were made permanent by
the Pension Protection Act of 2006 (Public Law 109-280),
(B) amendments to the estate and gift tax referred to in paragraph
(2), and
(C) the AMT referred to in paragraph (3).
(b) Duration.--This section shall remain in effect through December
31, 2010, for each of the four areas specified in subsection (a),
except that if the President determines that legislation sufficiently
consistent with current policy as described in subsection (c)(2) has
not been enacted in one or more of those four areas by that date, the
provisions of this section will remain in effect with respect to that
area or those areas until such legislation has been enacted or until
December 31, 2011, whichever occurs sooner.
(c) Current Policy Projection and Initial Current Law
Projections.----
(1) For purposes of this section, the budgetary effects of
legislation of the type referred to in subsection (a) shall be
estimated relative to the baseline under section 257 of BBEDCA but the
budgetary effects of that legislation shall be entered on the PAYGO
ledger only to the extent that they fall outside a range bounded by the
current policy projection under paragraph (2) and the initial current
law projection under paragraph (3), as specified under subsections (d),
(e), or (f), as applicable. Each of those two boundary projections
shall be estimated using the policy assumptions stated in paragraph (2)
or (3) as applicable, regardless of the enactment of subsequent
legislation, but the estimates of the dollar levels of those two
boundary projections shall change----
(A) when economic and technical assumptions change with the
issuance of a new budget under 31 U.S.C. 1105,
(B) with changes in the assumed effective date of the legislation
that is measured against those two projections, and
(C) to the extent the policy assumptions under either of those two
projections interact with other aspects of law, when legislation
affecting those other aspects of law is enacted.
With respect only to legislation affecting the AMT or the
amendments to provisions of the income tax referred to in subsection
(a)(4), the dollar levels of those two boundary projections shall be
estimated separately, and the determination of whether and the extent
to which budgetary effects fall outside the boundaries shall be made
separately, for each separate provision within that legislation.
(2) During the period specified in subsection (b), there shall
exist a current policy projection in addition to the baseline specified
in section 257 of BBEDCA. This projection shall----
(A) with respect to payments made under section 1848 of the Social
Security Act, assume that the applicable payment rates and payment
policies in effect for 2009 remain in effect thereafter without change;
(B) with respect to the estate and gift tax, assume that the tax
rates, nominal exemption amounts, and related parameters in effect for
tax year 2009 remain in effect thereafter without change;
(C) with respect to the AMT, assume that the exemption amounts and
related parameters in effect for tax year 2009 are increased in each
subsequent year by an amount equal to the cost-of-living adjustment
determined under section 1(f)(3) of the Internal Revenue Code of 1986
for the calendar year in which the taxable year begins, determined by
substituting ``calendar year 2008'' for ``calendar year 1992'' in
subparagraph (B) thereof ; and
(D) with respect to the income tax provisions referred to in
subsection (a)(4), assume that each such separate provision scheduled
on June 8, 2009, to be in effect for tax year 2010 remains in effect
thereafter without change, other than applicable indexing.
(3) Initial Current Law Projection.--During the period specified in
subsection (b), there shall exist an initial current law projection in
addition to the baseline specified in section 257 of BBEDCA. This
projection shall----
(A) with respect to payments made under section 1848 of the Social
Security Act, assume that the applicable payment rates and payment
policies scheduled on June 8, 2009, to be in effect for each subsequent
fiscal year shall be in effect as scheduled;
(B) with respect to the estate and gift tax, assume that the tax
rates, nominal exemption amounts, and related parameters scheduled on
June 8, 2009, to be in effect for each subsequent tax year shall be in
effect as scheduled;
(C) with respect to the AMT, assume that the exemption amounts and
related parameters scheduled on June 8, 2009, to be in effect for each
subsequent tax year shall be in effect as scheduled; and
(D) with respect to provisions of the income tax referred to in
subsection (a)(4), assume that each such provision scheduled on June 8,
2009, to be in effect for each subsequent tax year shall be in effect
as scheduled.
(d) Budgetary Effects of Certain Medicare Legislation.--
Notwithstanding the definitions in paragraphs (5), (11), and (12) of
section 3, OMB shall enter on the PAYGO ledger the budgetary effects of
any provision of PAYGO legislation that amends or supersedes the system
of payments under section 1848 of the Social Security Act----
(1) only to the extent that the level of net Medicare outlays are
estimated to be higher in a fiscal year than if that provision of PAYGO
legislation had instead enacted (or maintained) the current policy
projection, or
(2) only to the extent that the level of net Medicare outlays are
estimated to be lower in a fiscal year than if that provision of PAYGO
legislation had instead enacted (or maintained) the initial current law
projection.
(e) Budgetary Effects of Estate and Gift Tax Legislation.--
Notwithstanding the definitions in paragraphs (5), (11), and (12) of
section 3, OMB shall enter on the PAYGO ledger the budgetary effects of
any provision of PAYGO legislation that amends the estate and gift
tax----
(1) only to the extent that total revenues in a fiscal year are
estimated to be changed because tax liability under the estate and gift
tax is estimated to be higher in tax year 2010 than if that provision
of PAYGO legislation had instead enacted (or maintained) the current
policy projection,
(2) only to the extent that total revenues in a fiscal year are
estimated to be changed because tax liability under the estate and gift
tax is estimated to be lower in tax year 2010 than if that provision of
PAYGO legislation had instead enacted (or maintained) the initial
current law projection,
(3) only to the extent that total revenues in a fiscal year are
estimated to be changed because tax liability under the estate and gift
tax is estimated to be lower in a tax year after 2010 than if that
provision of PAYGO legislation had instead enacted (or maintained) the
current policy projection, or
(4) only to the extent that total revenues in a fiscal year are
estimated to be changed because tax liability under the estate and gift
tax is estimated to be higher in a tax year after 2010 than if that
provision of PAYGO legislation had instead enacted (or maintained) the
initial current law projection.
(f) Budgetary Effects of AMT and Certain Income Tax Legislation
Taken Separately; Stacking Order and Interactive Effects.--
Notwithstanding the definitions in paragraphs (5), (11), and (12) of
section 3, OMB shall enter on the PAYGO ledger the budgetary effects of
any PAYGO legislation that amends the AMT or amends one of the income
tax provisions referred to in subsection (a)(4)----
(1) only to the extent that the level of income tax revenues is
estimated to be lower and the level of outlays for refundable tax
credits is estimated to be higher in a fiscal year than if that PAYGO
legislation had instead enacted (or maintained) the current policy
projection with respect to that provision of the income tax, or
(2) only to the extent that the level of income tax revenues is
estimated to be higher and the level of outlays for refundable tax
credits is estimated to be lower in a fiscal year than if that PAYGO
legislation had instead enacted (or maintained) the initial current law
projection with respect to that provision of the income tax.
In making estimates under this section of the budgetary effects of
a PAYGO Act that amends both the AMT and at least one separate
provision of the income tax, or amends more than one separate provision
of the income tax, OMB shall first estimate the budgetary effects of
any amendment to the AMT contained in that Act, and shall then estimate
the budgetary effects of each remaining amendment to the income tax
contained in that Act as though any AMT amendments contained in that
Act and the preceding amendments made by that Act had been enacted but
the succeeding amendments had not. For purposes of this section, each
separate income tax rate shall be considered a separate provision.
SECTION 8. APPLICATION OF BBEDCA.
For purposes of this Act----
(1) notwithstanding section 275 of BBEDCA, the provisions of
sections 255, 256, and 257 of BBEDCA, as amended by this Act, shall
apply to the provisions of this Act;
(2) references in sections 255, 256 and 257 to ``this part'' shall
be interpreted as applying to this Act;
(3) references in sections 255, 256 and 257 of BBEDCA to ``section
254'' shall be interpreted as referencing section 5 of this Act;
(4) the reference in section 256(b) of BBEDCA to ``section 252 or
253'' shall be interpreted as referencing section 5 of this Act;
(5) the reference in section 256(d)(1) of BBEDCA to ``section 252
or 253'' shall be interpreted as referencing section 6 of this Act;
(6) the reference in section 256(d)(4) of BBEDCA to ``section 252
or 253'' shall be interpreted as referencing section 5 of this Act;
(7) section 256(k) of the BBEDCA shall apply to a sequestration, if
any, under this Act;
(8) references in section 257(e) to ``section 251, 252, or 253''
shall be interpreted as referencing section 4 of this Act; and
(9) the term ``direct spending'' in section 257 of BBEDCA shall be
interpreted as applying to mandatory programs or the funding for
mandatory programs, as appropriate.
SECTION 9. AMENDMENTS TO THE BASELINE.
In section 257 of BBEDCA----
(a) Strike ``entitlement authority'' and insert in lieu thereof
``entitlement laws''.
(b) Amend subsection (b)(2)(A) to read----
``(A) If any law expires before the budget year or before any
outyear, then any program with estimated current-year outlays of more
than $50,000,000 operating under that law is assumed to continue to
operate under that law as in effect immediately before its expiration.
For purposes of the preceding sentence, the Food, Conservation, and
Energy Act of 2008 or a similar successor act is treated as a program
assumed to be continued after its scheduled expiration.''.
(c) Amend subsection (b)(2)(D) to read----
``Payments of social insurance, deposit insurance, pension
insurance, and any similar statutory financial insurance guarantees are
assumed to be made in full regardless of the sufficiency of the funds
supporting those programs, and funding for flood insurance and any
similar contractual insurance programs is assumed to be sufficient to
fulfill existing contracts.''.
(d) Amend subsection (c)(1) by striking ``Budgetary resources'' and
inserting in lieu thereof ``Except as provided in subsection (d),
budgetary resources'' and by striking ``to offset pay absorption and
for pay annualization'' and inserting in lieu thereof ``to adjust Pell
grant funding''.
(e) Amend subsection (c)(2) to read----
``(2) EXPIRING HOUSING CONTRACTS.--New budget authority shall be
added to the baseline in the budget year and the outyears to cover the
costs of renewing expiring subsidized housing contracts that were
funded in the current year under multiyear contracts whose budget
authority was recorded in years prior to the current year. The amount
added (before adjusting for inflation) shall be the amount needed to
renew the expiring contracts through an uninterrupted series of 12-
month contracts, assuming unchanged rental or equivalent prices.''.
(f) Amend subsection (c) (4) to read----
``(4) PELL GRANTS.--Notwithstanding paragraph (1), new budget
authority for the Pell grant program shall be included in the baseline
in an amount sufficient to cover the costs of the program at the
maximum award level specified in the most recently enacted full-year
appropriations Act, the budget authority in the budget year shall be
adjusted for any cumulative funding shortfall or surplus from prior
academic years, and the adjustment for inflation under paragraph (5)
shall not apply.''.
(g) Insert after subsection (c) the following, and redesignate the
subsequent subsections accordingly----
``(d) DISASTERS.--Notwithstanding subsections (b) and (c),
temporary mandatory funding and tax provisions related to major natural
or man-made disasters shall be assumed to expire on schedule, and
discretionary funding for major natural or man-made disaster shall not
be projected. In lieu, the baseline shall include a disaster allowance
that is not designated as mandatory or discretionary and is not
allocated to any committee of Congress. The amount of budget authority
assumed for this disaster allowance shall equal a probabilistic
estimate of the amount of federal exposure to the risk of major natural
or man-made disasters occurring in the remainder of the current year,
the budget year, and each outyear, and the amount of outlays shall
equal the estimated expenditures of that budget authority. Major
disasters shall include disaster costs other than those normally
covered by routine firefighting funding and normal and ongoing costs of
disaster agencies, programs, or activities.''.
SECTION 10.--TECHNICAL CORRECTIONS.
(1) Section 250(c)(18) of BBEDCA is amended by striking ``the
expenses the Federal deposit insurance agencies'' and inserting ``the
expenses of the Federal deposit insurance agencies''.
(2) Section 256(k)(1) of BBEDCA is amended by striking ``in
paragraph (5)'' and inserting ``in paragraph (6)''.
SECTION 11.--CONFORMING AMENDMENTS.
(a) Section 256(a) of BBEDCA is repealed.
(b) Section 256(b) of BBEDCA is amended by striking ``origination
fees under sections 438(c)(2) and 455(c) of that Act shall each be
increased by 0.50 percentage point.'' and inserting in lieu thereof
``origination fees under sections 438(c)(2) and (6) and 455(c) and loan
processing and issuance fees under section 428(f)(1)(A)(ii) of that Act
shall each be increased by the uniform percentage specified in that
sequestration order, and, for student loans originated during the
period of the sequestration, special allowance payments under section
438(b) of that Act accruing during the period of the sequestration
shall be reduced by the uniform percentage specified in that
sequestration order.''.
(c) Section 256(c) of BBEDCA is repealed.
(d) Section 256(d) of BBEDCA is amended----
(1) by redesignating paragraphs (2), (3), and (4) as paragraphs
(3), (5), and (6);
(2) in paragraph (1) to read as follows:
``(1) CALCULATION OF REDUCTION IN PAYMENT AMOUNTS.--To achieve the
total percentage reduction in those programs required by section 252 or
253, subject to paragraph (2), and notwithstanding section 710 of the
Social Security Act, OMB shall determine, and the applicable
Presidential order under section 254 shall implement, the percentage
reduction that shall apply, with respect to the health insurance
programs under title XVIII of the Social Security Act----
``(A) in the case of parts A and B of such title, to individual
payments for services furnished during the one-year period beginning on
the first day of the first month beginning after the date the order is
issued (or, if later, the date specified in paragraph (4)), and
``(B) in the case of parts C and D, to monthly payments under
contracts under such parts for the same one-year period,
such that the reduction made in payments under that order shall
achieve the required total percentage reduction in those payments for
that period.'';
(3) by inserting after paragraph (1) the following:
``(2) UNIFORM REDUCTION RATE; MAXIMUM PERMISSIBLE REDUCTION.--
Reductions in payments for programs and activities under such title
XVIII pursuant to a sequestration order under section 254 shall be at a
uniform rate, which shall not exceed 4 percent, across all such
programs and activities subject to such order.'';
(4) by inserting after paragraph (3), as so redesignated, the
following:
``(4) TIMING OF SUBSEQUENT SEQUESTRATION ORDER.--A sequestration
order required by section 252 or 253 with respect to programs under
such title XVIII shall not take effect until the first month beginning
after the end of the effective period of any prior sequestration order
with respect to such programs, as determined in accordance with
paragraph (1).'';
(5) in paragraph (6), as so redesignated, to read as follows:
``(6) SEQUESTRATION DISREGARDED IN COMPUTING PAYMENT AMOUNTS.--The
Secretary of Health and Human Services shall not take into account any
reductions in payment amounts which have been or may be effected under
this part, for purposes of computing any adjustments to payment rates
under such title XVIII, specifically including----
``(A) the part C growth percentage under section 1853(c)(6);
``(B) the part D annual growth rate under section 1860D-2(b)(6);
and
``(C) application of risk corridors to part D payment rates under
section 1860D-15(e).''; and
(6) by adding after paragraph (6), as so redesignated, the
following:
``(7) EXEMPTIONS FROM SEQUESTRATION.--In addition to the programs
and activities specified in section 255, the following shall be exempt
from sequestration under this part:
``(A) PART D LOW-INCOME SUBSIDIES.--Premium and cost-sharing
subsidies under section 1860D-14 of the Social Security Act.
``(B) PART D CATASTROPHIC SUBSIDY.--Payments under section 1860D-
15(b) and (e)(2)(B) of the Social Security Act.
``(C) QUALIFIED INDIVIDUAL (QI) PREMIUMS.--Payments to States for
coverage of Medicare cost-sharing for certain low-income Medicare
beneficiaries under section 1933 of the Social Security Act.''.
SECTION 12. EXEMPT PROGRAMS AND ACTIVITIES.
(a) Designations.--Section 255 of BBEDCA is amended by
redesignating paragraph (i) as (j) and striking ``1998'' and inserting
in lieu thereof ``2010''.
(b) Social Security, Veterans Programs, Net Interest, and Tax
Credits.--Subsections (a) through (d) of section 255 of BBEDCA are
amended to read as follows----
``(a) SOCIAL SECURITY BENEFITS AND TIER I RAILROAD RETIREMENT
BENEFITS.--Benefits payable under the old-age, survivors, and
disability insurance program established under title II of the Social
Security Act (Title 42, United States Code, section 401 et seq.), and
benefits payable under section 231b(a), 231b(f)(2), 231c(a), and
231c(f) of Title 45 United States Code, shall be exempt from reduction
under any order issued under this part.
``(b) VETERANS PROGRAMS.--The following programs shall be exempt
from reduction under any order issued under this part:
Canteen Service Revolving Fund (36-4014-0-3-705);
National Service Life Insurance Fund (36-8132-0-7-701);
Native American Veteran Housing Loan Program (36-1120-0-1-704);
Service-Disabled Veterans Insurance Fund (36-4012-0-3-701);
Veterans Insurance and Indemnities (36-0120-0-1-701);
Veterans Reopened Insurance Fund (36-4010-0-3-701);
Veterans Special Life Insurance Fund (36-8455-0-8-701);
United States Government Life Insurance Fund (36-8150-0-7-701);
Benefits under chapter 21 of title 38, United States Code, relating
to specially adapted housing and mortgage-protection life insurance for
certain veterans with service-connected disabilities (36-0120-0-1-701);
Compensation and Pensions (36-0102-0-1-701) to include Burial
Benefits under Chapter 23 of Title 38;
Benefits under chapter 33 of title 38, United States Code, relating
to educational assistance provided by the Post-9/11 Educational
Assistance Act of 2008 (36-0137-0-1-702);
Benefits under chapter 39 of title 38, United States Code, relating
to automobiles and adaptive equipment for certain disabled veterans and
members of the Armed Forces (36-0137-0-1-702);
Benefits under chapter 35 of title 38, United States Code, related
to educational assistance for survivors and dependents of certain
veterans with service-connected disabilities (36-0137-0-1-702);
Assistance and services under chapter 31 of title 38, United States
Code, relating to training and rehabilitation for certain veterans with
service-connected disabilities (36-0137-0-1-702);
Benefits under subchapters I, II, and III of chapter 37 of title
38, United States Code, relating to housing loans for certain veterans
and for the spouses and surviving spouses of certain veterans Housing
Program Account (36-1119-0-1-704); and
Special Benefits for Certain World War II Veterans (28-0401-0-1-
701);.
``(c) NET INTEREST.--No reduction of payments for net interest (all
of major functional category 900) shall be made under any order issued
under this part.
``(d) REFUNDABLE INCOME TAX CREDITS.--Payments to individuals made
pursuant to provisions of the Internal Revenue Code of 1986
establishing refundable tax credits shall be exempt from reduction
under any order issued under this part.''.
(c) Other Programs and Activities, Low-Income Programs, and
Economic Recovery Programs.--Subsections (g) and (h) of section 255 of
BBEDCA are amended to read as follows----
``(g) OTHER PROGRAMS AND ACTIVITIES.----
(1)(A) The following budget accounts and activities shall be exempt
from reduction under any order issued under this part:
Activities resulting from private donations, bequests, or voluntary
contributions to the Government;
Activities financed by voluntary payments to the Government for
goods or services to be provided for such payments;
Administration of Territories, Northern Mariana Islands Covenant
grants (14-0412-0-1-808);
Advances to the Unemployment Trust Fund and Other Funds (16-0327-0-
1-600);
Appropriations for the District of Columbia (to the extent they are
appropriations of locally raised funds);
Black Lung Disability Trust Fund Refinancing (16-0329-0-1-601);
Bonneville Power Administration Fund and borrowing authority
established pursuant to section 13 of Public Law 93-454 (1974), as
amended (89-4045-0-3-271);
Claims, Judgments, and Relief Acts (20-1895-0-1-808);
Colorado River Basins Power Marketing Fund, Western Area Power
Administration, (89-4452-0-3-271);
Compact of Free Association (14-0415-0-1-808);
Compensation of the President (11-0209-0-1-802);
Construction, Rehabilitation, Operation and Maintenance, Western
Area Power Administration (89-5068-0-2-271);
Comptroller of the Currency, Assessment Funds (20-8413-0-8-373);
Continuing Fund, Southeastern Power Administration (89-5653-0-2-
271);
Continuing Fund, Southwestern Power Administration (89-5649-0-2-
271);
Dual Benefits Payments Account (60-0111-0-1-601);
Emergency Fund, Western Area Power Administration (89-5069-0-2-
271);
Exchange Stabilization Fund (20-4444-0-3-155);
Federal Deposit Insurance Corporation, Deposit Insurance Fund (51-
4596-4-4-373);
Federal Deposit Insurance Corporation, FSLIC Resolution Fund (51-
4065-0-3-373);
Federal Deposit Insurance Corporation, Non-Interest Bearing
Transaction Account Guarantee (51-4458-0-3-373);
Federal Deposit Insurance Corporation, Office of Inspector General
(51-4595-0-4-373);
Federal Deposit Insurance Corporation, Senior Unsecured Debt
Guarantee (51-4457-0-3-373);
Federal Housing Finance Agency, Administrative Expenses (95-5532-0-
2-371);
Federal Payment to the District of Columbia Judicial Retirement and
Survivors Annuity Fund (20-1713-0-1-752);
Federal Payment to the District of Columbia Pension Fund (20-1714-
0-1-601);
Federal Payments to the Railroad Retirement Accounts (60-0113-0-1-
601);
Federal Reserve Bank Reimbursement Fund (20-1884-0-1-803);
Financial Agent Services (20-1802-0-1-803);
Foreign Military Sales Trust Fund (11-8242-0-7-155);
Hazardous Waste Management, Conservation Reserve Program (12-4336-
0-3-999);
Health Education Assistance Loans Program Account (75-0340-0-1-
552);
Host Nation Support Fund for Relocation (97-8337-0-7-051);
Internal Revenue Collections for Puerto Rico (20-5737-0-2-806);
Intragovernmental funds, including those from which the outlays are
derived primarily from resources paid in from other government
accounts, except to the extent such funds are augmented by direct
appropriations for the fiscal year during which an order is in effect;
Medical Facilities Guarantee and Loan Fund (75-9931-0-3-551);
National Credit Union Administration, Central Liquidity Facility
(25-4470-0-3-373);
National Credit Union Administration, Corporate Credit Union Share
Guarantee Program (25-4476-0-3-376);
National Credit Union Administration, Credit Union Homeowners
Affordability Relief Program (25-4473-0-3-371);
National Credit Union Administration, Credit Union Share Insurance
Fund (25-4468-0-3-373);
National Credit Union Administration, Credit Union System
Investment Program (25-4474-0-3-376);
National Credit Union Administration, Operating fund (25-4056-0-3-
373);
National Credit Union Administration, Share Insurance Fund
Corporate Debt Guarantee Program (25-4469-0-3-376);
National Credit Union Administration, U.S. Central Federal Credit
Union Capital Program (25-4475-0-3-376);
Office of Thrift Supervision (20-4108-0-3-373);
Operation and Maintenance, Alaska Power Administration (89-0302-0-
1-271);
Operation and Maintenance, Southeastern Power Administration (89-
0302-0-1-271);
Operation and Maintenance, Southwestern Power Administration (89-
0303-0-1-271);
Panama Canal Commission Compensation Fund (16-5155-0-2-602);
Payment of Vietnam and USS Pueblo prisoner-of-war claims within the
Salaries and Expenses, Foreign Claims Settlement account (15-0100-0-1-
153) ;
Payment to Civil Service Retirement and Disability Fund (24-0200-0-
1-805);
Payment to Department of Defense Medicare-Eligible Retiree Health
Care Fund (97-0850-0-1-054);
Payment to Judiciary Trust Funds (10-0941-0-1-752);
Payment to Military Retirement Fund (97-0040-0-1-054);
Payment to the Foreign Service Retirement and Disability Fund (19-
0540-0-1-153);
Payments to Copyright Owners (03-5175-0-2-376);
Payments to Health Care Trust Funds (75-0580-0-1-571);
Payments to Social Security Trust Funds (28-0404-0-1-651);
Payments to the United States Territories, Fiscal Assistance (14-
0418-0-1-806);
Payments to trust funds from excise taxes or other receipts
properly creditable to such trust funds;
Payments to widows and heirs of deceased Members of Congress (00-
0215-0-1-801);
Postal Service Fund (18-4020-0-3-372);
Reimbursement to Federal Reserve Banks (20-0562-0-1-803);
Salaries of Article III judges;
Soldiers and Airmen's Home, payment of claims (84-8930-0-7-705);
Tennessee Valley Authority Fund, except non-power programs and
activities (64-4110-0-3-999);
Tribal and Indian trust accounts within the Department of the
Interior which fund prior legal obligations of the Government or which
are established pursuant to Acts of Congress regarding Federal
management of tribal real property or other fiduciary responsibilities,
including but not limited to Tribal Special Fund (14-5265-0-2-452),
Tribal Trust Fund (14-8030-0-7-452), Indian Land and Water Claims
Settlements (14-2303-0-1-452), White Earth Settlement (14-2204-0-1-
452), and Indian Water Rights and Habitat Acquisition (14-5505-0-2-
303);
United Mine Workers of America 1992 Benefit Plan (95-8260-0-7-551);
United Mine Workers of America 1993 Benefit Plan (95-8535-0-7-551);
United Mine Workers of America Combined Benefit Fund (95-8295-0-7-
551);
United States Enrichment Corporation Fund (95-4054-0-3-271);
Universal Service Fund (27-5183-0-2-376);
Vaccine Injury Compensation (75-0320-0-1-551);
Vaccine Injury Compensation Program Trust Fund (20-8175-0-7-551);
and
Western Area Power Administration, Borrowing Authority, Recovery
Act (89-4404-0-3-271).
(B) The following Federal retirement and disability accounts and
activities shall be exempt from reduction under any order issued under
this part:
Black Lung Disability Trust Fund (20-8144-0-7-601);
Central Intelligence Agency Retirement and Disability System Fund
(56-3400-0-1-054);
Civil Service Retirement and Disability Fund (24-8135-0-7-602);
Comptrollers general retirement system (05-0107-0-1-801);
Contributions to U.S. Park Police annuity benefits, Other Permanent
Appropriations (14-9924-0-2-303);
Court of Appeals for Veterans Claims Retirement Fund (95-8290-0-7-
705);
Department of Defense Medicare-Eligible Retiree Health Care Fund
(97-5472-0-2-551);
District of Columbia Federal Pension Fund (20-5511-0-2-601);
District of Columbia Judicial Retirement and Survivors Annuity Fund
(20-8212-0-7-602);
Energy Employees Occupational Illness Compensation Fund (16-1523-0-
1-053);
Foreign National Employees Separation Pay (97-8165-0-7-051);
Foreign Service National Defined Contributions Retirement Fund (19-
5497-0-2-602);
Foreign Service National Separation Liability Trust Fund (19-8340-
0-7-602);
Foreign Service Retirement and Disability Fund(19-8186-0-7-602);
Government Payment for Annuitants, Employees Health Benefits (24-
0206-0-1-551);
Government Payment for Annuitants, Employee Life Insurance (24-
0500-0-1-602);
Judicial Officers' Retirement Fund (10-8122-0-7-602);
Judicial Survivors' Annuities Fund (10-8110-0-7-602);
Military Retirement Fund (97-8097-0-7-602);
National Railroad Retirement Investment Trust (60-8118-0-7-601);
National Oceanic and Atmospheric Administration retirement (13-
1450-0-1-306);
Pensions for former Presidents (47-0105-0-1-802);
Postal Service Retiree Health Benefits Fund (24-5391-0-2-551);
Rail Industry Pension Fund (60-8011-0-7-601);
Retired Pay, Coast Guard (70-0602-0-1-403);
Retirement Pay and Medical Benefits for Commissioned Officers,
Public Health Service (75-0379-0-1-551);
Special Benefits for Disabled Coal Miners (16-0169-0-1-601);
Special Benefits, Federal Employees' Compensation Act (16-1521-0-1-
600);
Special Workers Compensation Expenses (16-9971-0-7-601);
Tax Court Judges Survivors Annuity Fund (23-8115-0-7-602);
United States Court of Federal Claims Judges' Retirement Fund (10-
8124-0-7-602);
United States Secret Service, DC Annuity (70-0400-0-1-751); and
Voluntary Separation Incentive Fund (97-8335-0-7-051).
(2) Prior legal obligations of the Government in the following
budget accounts and activities shall be exempt from any order issued
under this part:
Biomass Energy Development (20-0114-0-1-271);
Check Forgery Insurance Fund (20-4109-0-3-803);
Credit liquidating accounts;
Credit reestimates;
Employees Life Insurance Fund (24-8424-0-8-602);
Federal Aviation Administration, Aviation Insurance Revolving Fund
(69-4120-0-3-402);
Federal Crop Insurance Corporation fund (12-4085-0-3-351);
Federal Emergency Management Agency, National Flood Insurance Fund
(58-4236-0-3-453);
Geothermal resources development fund (89-0206-0-1-271);
Homeowners Assistance Fund (97-4090-0-3-051);
International Trade Administration, Operations and administration
(13-1250-0-1-376);
Low-Rent Public Housing--Loans and Other Expenses (86-4098-0-3-
604);
Maritime Administration, War Risk Insurance Revolving Fund (69-
4302-0-3-403);
Natural Resource Damage Assessment Fund (14-1618-0-1-302);
Overseas Private Investment Corporation, Noncredit Account (71-
4184-0-3-151);
Pension Benefit Guaranty Corporation Fund (16-4204-0-3-601);
Rail service assistance within the Safety and Operations account
(69-0700-0-1-401);
San Joaquin Restoration Fund (14-5537-0-2-301);
Servicemembers' Group Life Insurance Fund (36-4009-0-3-701); and
Terrorism Insurance Program (20-0123-0-1-376).
(3) Non-budgetary accounts and activities, including the following,
are exempt from sequestration under this part:
Credit financing accounts;
Deposit funds;
Federal Reserve;
Government Sponsored Enterprises, including the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation;
and
Thrift Savings Fund.
``(h) LOW-INCOME PROGRAMS.--The following programs shall be exempt
from reduction under any order issued under this part:
Academic Competitiveness/Smart Grant Program (91-0205-0-1-502);
Child Care Entitlement to States (75-1550-0-1-609);
Child Enrollment Contingency Fund (75-5551-0-2-551);
Child Nutrition Programs (with the exception of special milk
programs) (12-3539-0-1-605);
Children's Health Insurance Fund (75-0515-0-1-551);
Commodity Supplemental Food Program (12-3512-0-1-605);
Contingency Fund (75-1522-0-1-609);
Family Support Programs (75-1501-0-1-551);
Federal Pell Grants under section 401 Title IV of the Higher
Education Act;
Grants to States for Low-Income House Projects in Lieu of Low-
Income Housing Credit Allocations, Recovery Act (20-0139-0-1-604);
Grants to States for Medicaid (75-0512-0-1-551);
Payments for Foster Care and Permanency (75-1545-0-1-609);
Special Supplemental Nutrition Program for Women, Infants, and
Children (WIC) (12-3510-0-1-605);
Supplemental Nutrition Assistance Program (12-3505-0-1-605);
Supplemental Security Income Program (28-0406-0-1-609); and
Temporary Assistance for Needy Families (75-1552-0-1-609).''.
(d) Economic Recovery Programs.--Section 255 of BBEDCA is amended
by adding the following after subsection (h)----
``(i) ECONOMIC RECOVERY PROGRAMS.--The following programs shall be
exempt from reduction under any order issued under this part:
All programs enacted in, or increases in programs provided by, the
American Recovery and Reinvestment Act of 2009;
Exchange Stabilization Fund-Money Market Mutual Fund Guaranty
Facility (20-4274-0-3-376);
Office of Financial Stability (20-0128-0-1-376);
Financial Stabilization Reserve (20-0131-4-1-376);
GSE Mortgage-Backed Securities Purchase Program Account (20-0126-0-
1-371);
GSE Preferred Stock Purchase Agreements (20-0125-0-1-371);
Office of Financial Stability (20-0128-0-1-376);
Special Inspector General for the Troubled Asset Relief Program
(20-0133-0-1-376);
Troubled Asset Relief Program Account (20-0132-0-1-376);
Troubled Asset Relief Program Equity Purchase Program (20-0134-0-1-
376);
Troubled Asset Relief Program, Home Affordable Modification Program
(20-0136-0-1-604).''.
Chairman Spratt. Thank you very much. We look forward for
working with you for the passage of this particular bill.
Thank you again, Dr. Orszag.
Now, Douglas Holtz-Eakin and Bob Greenstein.
Earlier, Alice Rivlin was to testify, but, due to the
schedule change, she could not make it, but if there is no
objection, her testimony will be made part of the record at
this point.
[The prepared statement of Alice Rivlin follows:]
Prepared Statement of Alice M. Rivlin, the Brookings Institution and
Georgetown University
Chairman Spratt and members of the Committee: I am happy to be back
before this Committee to support the enactment of statutory PAYGO.
Enshrining in law the PAYGO rules which Congress adopted in 2007 would
highlight their importance and make them easier to enforce. Statutory
PAYGO is a small, but important step toward restoring fiscal discipline
to the federal budget. Along with President Obama, the Blue Dog
Coalition, and many other proponents of responsible federal budgeting,
I urge you to take this step without delay.
the long term budget outlook: impending catastrophe
No one needs to remind this Committee that the outlook for the
federal budget is worrisome--indeed, scary. Long before the financial
crisis and the current deep recession, this Committee was anxiously
pointing out that current federal spending and revenue policies are on
a risky, unsustainable course. Promises made under the major
entitlement programs (especially Medicare and Medicaid) will increase
federal spending rapidly over the next couple of decades, as the
population ages and medical spending continues to rise faster than
other spending. Federal expenditures are projected to grow
substantially faster than revenues, opening widening deficit gaps that
cannot not be financed.
The financial crisis and the recession, combined with the measures
the government has taken to mitigate both, have worsened the budget
outlook dramatically. The federal deficit will probably reach 13
percent of the GDP this year and will likely remain at worrisome levels
even as the economy recovers. Federal debt held by the public,
including our foreign creditors, is projected to double as a percent of
GDP over the next decade. The recent rise in long term Treasury rates
is a timely reminder that our creditors, foreign and domestic, may lose
faith in America's willingness to take the difficult steps necessary to
move the budget toward balance. This loss of faith--reversing the
widespread perception that U.S. Treasuries are the safest securities in
the World--could lead to rapidly rising interest rates, killer debt
service costs for the federal government and others, a plunging dollar,
and an aborted recovery.
As I testified before this Committee on January 27, 2009, I
strongly believe that most of the emergency actions that authorities
have taken to stimulate the economy and rescue the financial sector
were the right policies in these dire circumstances. An escalating
deficit and huge amounts of debt were necessary to avoid a much deeper
and longer recession and a total meltdown of the financial system.
However, these actions have made it absolutely necessary for Congress
and the Administration to work together aggressively to bring future
deficits under control. Unpopular actions to restrain future spending
and augment future revenues must be taken now, even before recovery has
been achieved. Putting Social Security on a sound fiscal base, credibly
reducing the rate of growth of federal health spending, and raising
future energy-related and other revenues are all actions that could be
taken now to reduce future deficits.
Immediate actions to reduce long-term deficits--such as fixing
Social Security this year--will enhance the prospects for recovery by
restoring confidence in government and reducing long-term interest
rates. These actions to reduce future deficits will require political
courage. Stronger budgetary rules, such as statutory PAYGO, can bolster
political courage.
statutory paygo: one tool for fiscal discipline
PAYGO is budget speak for ``do no harm'' or ``don't make future
deficits worse.'' PAYGO rules are designed to discourage Congress and
the Administration from enacting legislation that would add new
mandatory benefits or reduce revenues without taking other actions that
would have equal and opposite effects on the deficit over a ten year
period. Statutory PAYGO affecting both mandatory spending and taxes was
in effect from 1991 through 2002, when the legislation lapsed and was
not reenacted. Currently PAYGO is part of the House and Senate rules,
but does not have the force of law.
I believe that statutory PAYGO proved a highly effective deterrent
to deficit-increasing legislation in the 1990's--at least until the
surplus was achieved in 1998. The effects of PAYGO were not visible to
the public or the press because they involved spending and taxing
proposals that never saw the light of day. At the Office of Management
(OMB) in President Clinton's first term my uncomfortable job was to
tell the President and rest of the Administration that many of their
most cherished ideas could not even be proposed because we could not
find a way to off-set them under the PAYGO rules. Similar conversations
took place in Congressional committees. Detractors of PAYGO, who point
out that a serious sequestration has never been enforced, miss the
point that sequestration is a deterrent, not a policy. It would be a
more powerful deterrent if it could be waived only by enacting a law
subject to veto. I believe sequestration would be an even more
effective as a deterrent if there were fewer exceptions to its
automatic cuts.
the difficult problem of defining the baseline
The most difficult decision in designing a strong PAYGO rule is
answering the question, ``Don't make deficits worse compared to what?''
Should the baseline be strictly current law or a more realistic
appraisal of what is likely to happen? In general, it is best to stick
with current law, because it is the easiest rule to understand and
explain. However, occasionally extending currently law is clearly not
what most people expect to happen.
President Obama's statutory PAYGO proposal recognizes that four
specific provisions of existing law are so unrealistic that
incorporating them in a current law baseline would make the PAYGO rule
unworkable. The proposal recognizes that Medicare payments to
physicians under Part B will not automatically be cut by 21 percent as
the law requires; the estate and gift tax will not expire in 2010 and
return to pre-2001 levels in 2011; that the current AMT patch will not
be allowed to expire without replacement; and that all of the 2001 and
2003 tax provisions will not all expire at the end of 2010. Critics of
the Administration's proposal point out that allowing these adjustments
to a current law baseline amounts to accepting the damage already done
to future budgets that these bizarre legislative provisions were
designed to hide. They argue that in making these exceptions Congress
would be ducking the responsibility to face the consequences of its
past lack of budgetary courage. I agree that these are four examples of
legislative sleight of hand covering up future bad news. But the bad
news must be dealt with head-on in a comprehensive policy process.
Keeping these four legislative anomalies in the current law baseline
for PAYGO purposes, would only guarantee that PAYGO would be
immediately waived and its future usefulness seriously impaired.
moving beyond statutory paygo
While I support the Administration's proposal for Statutory PAYGO,
I regard it as a small first step on the arduous path that will move
the budget to long run sustainability. We also need firm caps on
discretionary spending. But the biggest threat to future budget
solvency is not new legislation; it is the budgetary consequences of
legislative decisions already made--both with respect to mandatory
spending and the tax code.
While the current annual budget process involves Herculean efforts
to scrutinize discretionary spending, it leaves entitlement programs
and revenues on automatic pilot outside the budget process. Fiscal
responsibility requires that all long-term spending commitments be
subject to periodic review along with taxes and tax expenditures. There
is no compelling logic for applying caps and intense annual scrutiny to
discretionary spending, while leaving huge spending commitments, such
as Medicare or the home mortgage deduction entirely outside the budget
process and not subject to review on a regular basis. Nor is there any
good reason for subjecting new mandatory spending and revenue
legislation to an elaborate PAYGO procedure while ignoring the budget
implications of past legislation.
I am a member of a bipartisan group called the Fiscal Seminar
(sponsored by The Brookings Institution and the Heritage Foundation)
that addressed this problem in a controversial paper entitled, Taking
back our Fiscal Future, in 2008. We proposed that Congress enact long
run budgets for the three biggest entitlement programs. These budgets
would be reviewed every five years. Spending overruns would trigger
automatic spending cuts or revenue increases that would take effect
unless Congress acted. We recognized that we had proposed only a
partial solution--the tax side of the budget should be included--and
others may have better ideas. However, we clearly identified a glaring
defect in the budget process that stands in the way of getting the
federal budget on a sustainable long run track. We believe it is
imperative for Congress to adopt a new budget process that includes ALL
spending and revenue and subjects the budget impacts of long-term
commitments to serious periodic review.
Thank you, Mr. Chairman and members of the Committee.
Chairman Spratt. Our witnesses are no strangers to us.
Bob Greenstein is the founder and executive director of the
Center on Budget and Policy Priorities. He provides testimony,
expertise, and assistance to us on a wide range of budget
policies; and we are fortunate to have you with us here today.
Douglas Holt-Eakin, we know him well. He served as the
sixth Director of CBO, worked with both President Bushes and
with the McCain campaign. We are glad to have you with us as
well.
STATEMENTS OF DOUGLAS HOLTZ-EAKIN, PH.D., FORMER DIRECTOR,
CONGRESSIONAL BUDGET OFFICE AND ROBERT GREENSTEIN, EXECUTIVE
DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES
Chairman Spratt. Let us begin with you, Mr. Holtz-Eakin.
You have submitted your testimony. We will make it part of the
record and you may summarize it as you see fit.
The floor is yours.
STATEMENT OF DOUGLAS HOLTZ-EAKIN
Mr. Holtz-Eakin. Thank you, Mr. Chairman, for the chance to
be back at the House Budget Committee, one of my favorite
places.
Let me make just a few brief points which have--given the
conversation thus far--won't be terribly original.
Point number one is that this discussion begins with a
budgetary outlook that is quite bleak. The President's budget,
as priced by CBO, shows very large deficits which get only as
low as 3.9 percent of GDP over the next 10 years. They are
above that and rising towards the end of the budget window. The
net effect of that is debt in the hands of the public as a
fraction of GDP again doubles from 40 to 82 percent and is
rising at the end of that window; and we find ourselves in the
position on this trajectory that the United States is borrowing
large amounts of money, two-thirds of which is used simply to
pay the interest on debt.
So this is a situation which, taken at face value, is
alarming, to say the least. And, at least to my eye, it is an
optimistic outlook, because there are many assumptions in the
President's budget which I don't see as likely to come to pass;
and they are in my written testimony. But the revenues from
cap-and-trade auction of permits doesn't look to be likely to
arrive on the schedule that is assumed in the budget; and some
of the tax proposals may not materialize.
The upshot of that is from a perspective of the actions
that are presumed to be in there, everything is a risk toward
even larger deficits, additional debt, and that poses to this
Nation a very serious economic threat.
So, in light of that, I welcome the notion that the
administration is interested in statutory measures that would
stop the decay in our fiscal situation and maybe even improve
it, and I believe the legislation that they submitted for the
Congress represents such a step, and it should be applauded for
that. But it is, at best, a modest step in the right direction
and for the reasons that have been noted earlier.
This PAYGO proposal does not constitute a broad-based,
comprehensive budget enforcement approach. Multi-year
discretionary spending caps are not present, as everyone has
noted; and the absence of a comprehensive approach does lead to
the possibility of gaming the PAYGO proposals in a way that
limits their effectiveness.
For example, at least as I read the legislation, it does
appear possible to create programs on the discretionary side,
convert them to mandatory programs and evade this entirely. And
that is troubling if one wants to limit the growth in spending
which, in the end, is the ultimate threat to the Federal
budget.
So I think a stronger proposal would be one that was more
comprehensive, did focus on spending and getting it under
control and put us moving in the right direction.
The second, as has been discussed extensively, is the
notion that we would exclude these large policies, sustainable
growth rate mechanisms, tax policy from 2001, 2003, from the
PAYGO rules. And this does a couple of things.
Number one, those will increase deficits. I mean, there is
no way around it. There will be large, significant impact on
the deficit by excluding them. So you can't pretend that you
haven't incurred that.
The second is it creates an unlevel playing field. Those
policies are preferred under these rules to other policies, and
it is not obvious to me why a Congress would adopt a set of
rules that would prefer some policies over others. The idea
should be that we have a level playing field, a policy debate,
and an enforcement mechanism to make sure those policies don't
damage the fiscal situation.
That is one of the ways in which these proposals would
actually change the balance between Congress and the
administration. The administration's policies get preferential
treatment. The administration does the scoring, as a matter of
necessity, under this proposal; and the Congress should
recognize that that is part of what goes on in these proposals.
The other thing that jumps out is that they strike me as
unnecessarily complex for what they accomplish. I think the 10-
year averaging, unlike the previous version of PAYGO that we
saw, raises more problems than it solves. It would be entirely
possible to squeeze the Medicare sustainable growth rate
procedures right through this 10-year averaging. Every year,
you could give the docs a big update, promise to cut it 37
percent in the outyears. The 10-year average would be zero. You
could repeat this charade year after year. So that doesn't
strike me as improvement.
That is a problem, and I would encourage you to revisit
that in anything you pass through the Congress.
And, in closing, I think it is important to recognize that
rules such as PAYGO are no substitute for the genuine political
will to solve the problem that we can see before us in any
budgetary presentation. And it is unlikely, I think, that these
rules will be in place for the legislation on health care
reform that both Houses of Congress will contemplate this year
and so that we will see in that discussion whether the Congress
understands the gravity of the problem that faces us.
The very best-case scenario is that legislation will not
worsen an already bleak fiscal picture. That is the best thing
that could happen. And I find that a troubling best-case
scenario. The possibility that the Congress would choose to do
less than the best and actually make this worse while
ostensibly reforming the health care system is something I
think we ought to keep our eye out for.
I thank you for the chance to appear today, and I look
forward to your questions.
[The prepared statement of Douglas Holtz-Eakin follows:]
Prepared Statement of Douglas Holtz-Eakin, Former Director,
Congressional Budget Office
Chairman Spratt, Ranking Member Ryan, and Members of the Committee,
thank you for the opportunity to discuss the outlook for the U.S.
federal budget and, in particular, the Administration's PAYGO
proposals. I wish to make three primary points:
The budgetary outlook for the federal government is bleak,
the policy risks are that it will worsen, and a failure to address the
deficits and rising debt are a danger to the Nation's economic outlook.
The Administration's PAYGO proposals are a modest step, at
best, toward this objective. Stronger budgetary controls would be more
comprehensive in scope and focused on controlling federal spending.
PAYGO procedures are not a substitute for the political
will to undertake fiscally-responsible policy proposals. The health
care reform debate will be a test of whether Congress and the
Administration are serious about addressing the budgetary outlook.
I discuss these in more detail below.
the budget outlook
The federal budget outlook is bleak. As estimated by the
Congressional Budget Office, under the President's Budget proposals,
the federal deficits exceeds $600 billion every year from 2010 to 2019,
falls only as low as 3.9 percent of Gross Domestic Product (GDP) in
2013, and is rising both in absolute value and as a fraction of GDP
toward the end of the budget window. As a result, debt in the hands of
the public is estimated to be 82 percent of GDP in 2019--up from 41
percent in 2008--and rising. In 2019, net interest costs are
essentially $800 billion, over two-thirds of the overall deficit.
The bottom line is clear: these policies place the U.S. on a path
of dangerously large deficits, spiraling debt burdens, and borrowing
dominated by the need to pay interest costs on previous borrowing.
On balance, I think this is an optimistic assessment of the outlook
as the budget has large political and economic risks. To begin, the
expected climate auction revenues are unlikely to materialize. There
has never been a climate bill that auctioned a significant fraction of
the permits. There has never been a climate bill that passed the
Senate. There has never been a climate bill that has been voted on the
floor in the House. In short, there has to be an incredible shift in
the history for this to happen in a timely enough fashion to get the
anticipated revenues that exceed $600 billion. Evidence from the House
debate further solidifies the assessment that the odds are that it
won't happen and the deficit will be higher.
In the same way, many of the Administration's tax hikes on
individuals and businesses are politically difficult and economically
undesirable. The business community has correctly pointed out the anti-
competitive impacts of moving away from the ability to defer taxes on
foreign-source income. Higher marginal tax rates will impact productive
Americans and small businesses. If the economy is not strong in 2011,
will it be a good idea to hit it with a massive tax hike? In short,
these revenue increases are risky.
In contrast, the tax credits and spending that these revenues are
planned to pay for are already on the books courtesy of the
``stimulus'' bill. A reasonable reading of the outlook is that all the
revenue will not show up, all the spending and transfers will not go
away, and deficits will be even higher than CBO estimates.
In addition, interest rates could easily exceed the projected
levels, adding an economic risk to the policy risks. As debt continues
to pile up, U.S. international creditors will impose unpleasant terms
and a potentially-struggling economy will be further burdened.
the administration's paygo proposal
In light of the budgetary outlook, it is encouraging that the
Administration has put forward proposed statutory changes to impose
PAYGO rules on the budget process. At the same time, the proposals are
far from a comprehensive framework for budgetary enforcement, contain
too many ``loopholes'', are needlessly complex, and ultimately are not
likely to contribute significantly to improving the fiscal outlook.
The first observation is that the PAYGO proposals fall short of a
comprehensive framework for budget enforcement. In particular, they are
not accompanied by complementary proposals for discretionary spending
such as multi-year spending caps. In their absence, there will be an
unavoidable temptation to migrate proposals to the appropriations
process. The Administration's proposals do recognize this incentive and
attempt to mitigate it. However, my reading of the language suggests it
remains possible to start initiatives as discretionary programs,
convert them to mandatory spending after several years, and avoid PAYGO
constraints.
A more comprehensive approach would be desirable. And any such
budget enforcement initiative would be well-served to focus on the
outlay side. As successive publications of the CBO's Long Term Budget
Outlook have made clear, the long-run fiscal policy problem is a
spending problem; it is not reasonable to expect to ``grow our way''
out of the problem or economically feasible to ``tax our way'' out of
it. Setting in place comprehensive budgetary controls to limit spending
growth should be the top enforcement priority.
A second issue with the Administration's proposals is the
exemptions for particular policies such as fixes to the Alternative
Minimum Tax, updates to physicians' payments in Medicare baseline
policies, extension of the tax policies enacted in 2001 and 2003, and
(apparently) the resources to fund Fannie Mae and Freddie Mac. Spending
is spending, tax cuts are tax cuts, and deficits are deficits. Any
PAYGO should provide a level playing field among such initiatives and
these proposals do not.
In effect, the Administrations proposals tilt the playing field
toward their preferred policies. In this regard, it is worth noting
that the operation of the PAYGO procedures potentially raise the power
of the Administration relative to Congress, as the Office of Management
and Budget would have the only say over the scorekeeping related to
operation of the proposals.
In addition to the favored treatment of particular policy
initiatives, the proposals exempt large amounts of spending from the
potential for sequester. This has a two-fold effect on the operation of
the enforcement. First, it becomes unlikely that a substantial
sequester will be tolerated on such a narrow budgetary base, thereby
undermining the very discipline that PAYGO is intended to introduce.
Second, because the procedures will be most effective in negative
``small'' violations, it begs the question as to whether these
proposals represent a significant enough advance over the existing
rules in both the House and Senate budget procedures.
Finally, the procedures appear to be needlessly complex. In
previous implementations of PAYGO, it was necessary to offset any
deficit increases as they occurred in each budget year, or else face a
sequester in that year. These proposals require the average deficit
increase over the next 10 years to entered into the budget year and,
thus, trigger a potential sequester. This appears to permit nothing to
be offset up front. Why is this a better system, given that it is both
more complicated and less stringent?
fiscal discipline
Fiscal discipline will not take the form of new rules for the
budget process. Instead, it must be a collective political effort.
There is a lot of talk about the need for bipartisanship in Washington,
and I think fiscal responsibility would be a good place to start. And
there is no greater opportunity than in proposals to reform the health
care system.
Health care reform is one of the most important issues facing the
United States is its underperforming health care sector. There are
three major problems. First, it costs too much. For the past three
decades health care spending per person has grown roughly 2 percentage
points faster every year than income per capita. That is, in the horse
race between costs and resources, costs have been winning. The result
is that health care spending right now exceeds 17 cents of every
national dollar--and will rise to 20 percent by the end of next decade.
Within the federal budget, the rising cost of Medicare and Medicaid
threatens a tsunami of red ink in the decades to come.
Second, because health care is getting more expensive, the cost of
health insurance is skyrocketing. Over the last decade, insurance costs
have increased by 120 percent--three times the growth of inflation and
four times the growth of wages. With higher costs has come reduce
insurance coverage--more than 45 million are uninsured. It is important
to solve the first problem--rising costs--before committing to large-
scale coverage expansions. Doing them in the wrong order will be
prohibitively expensive, and likely cause the reform effort to unwind.
Finally, both the health insurance and health care systems under-
perform. A job loss typically also means loss of health insurance. High
spending has not yielded comparably high outcomes for infant mortality,
longevity, or treatment of chronic disease.
Health care reform can address these issues. However, it will not
automatically be consistent with budgetary objectives. It seems likely
that mandatory health care legislation addressing reform will be
considered before any PAYGO legislation is put in place. One will not
be able to count on its provisions to constrain the budgetary impact of
health care reform. Instead, the Congress must make a commitment to
impose this on the legislation.
This suggests that the first principle should be to focus on the
value provided by care. Any reform that does not address low-value care
and cost growth will fail. Suppose, for example, that the ``reform''
consisted of a mandate to purchase insurance, thereby achieving
``universal'' health insurance. In the absence of changes to the growth
in health-care spending, this insurance would become increasingly
expensive and ultimately force families to evade the mandate as a
matter of economic necessity. At the same time, those dollars that were
devoted to health care would purchase care that was of no greater
overall effectiveness than at present. In short, the reform would fail
to address the policy problems.
Fiscal responsibility also suggests that it would be unwise to move
immediately to universal coverage or other massive expansion. Reforms
to the delivery system could generate system-wide savings that could be
funneled to expanding coverage, and opportunities within government
programs could generate savings as well. But it is implausible that
these savings would be sufficient for an immediate, large-scale
coverage expansion costing over $1 trillion. Instead, the fiscally-
responsible reform should be a process that leads to increasing
insurance.
I believe that a fiscally responsible and durable reform is more
likely if it is genuinely bipartisan enterprise. Any other path will
likely lead to even larger budget pressures; perhaps so large that it
undercuts the momentum of health reform itself and opens the economy to
the risk of higher interest rates and pressures from international
capital markets.
Chairman Spratt. Bob Greenstein.
STATEMENT OF ROBERT GREENSTEIN
Mr. Greenstein. Mr. Chairman, Congressman Ryan, and members
of the committee. I appreciate the opportunity to explain why I
think pay-as-you-go discipline is very important and enactment
of a statutory pay-as-you-go rule would be beneficial. I would
like to make five points.
First, as you know, the U.S. faces a serious long-term
fiscal problem that we need to address. But without changes in
policies we face the prospect of rapidly growing Federal
deficits and debt over time that in the long run will pose a
threat to the U.S. economy, to the standard of living of
Americans, and to the ability of the government to meet the
needs of its citizens.
Second, I would note that this proposal represents a
significant break from the past. The last administration pushed
deficit financing of nearly all of its major initiatives,
including the 2001 and 2003 tax cuts and the 2004 prescription
drug legislation. In contrast with this proposal, the Obama
administration is proposing to bar deficit financing for its
own top initiatives like health care reform, even though that
may make the initiatives harder to push through Congress.
Proponents of fiscal responsibility should applaud that
commitment.
Third, while a well-designed pay-as-you-go rule can make a
real contribution to fiscal discipline, it will have little
effect if there is no real commitment on the part of Congress
to abide by it. That is why we think criticism of the
President's proposal to exempt the cost of extending certain
specified policies that are scheduled to expire is misguided.
To be sure, it would be highly desirable to pay for any
extensions of expiring current policies. But it has become
quite clear that there is no chance the tax cuts enacted in
2001 and 2003 that benefits the middle-class provisions enacted
to limit the scope of the estate tax, relief to prevent the
alternative minimum tax from hitting tens of millions of
middle-class families and the deferral of a requirement to cut
Medicare physician payments by 21 percent, there is no chance
that they will be allowed to expire or be paid for.
Doesn't make any sense to put in place a pay-as-you-go rule
that says these extensions must be paid for when everyone knows
that they won't be. Rather than making a phony promise that
will inevitably lead to a series of waivers of the pay-as-you-
go statute, waivers that would undermine support for the rule
itself and open the door to wholesale waivers for other costly
new policies, rather than doing that, it is better to
acknowledge up front that these specified extensions of current
law will not be subject to the rule and insist that the rule be
strictly applied to any other legislation that is not paid for.
As a result, I believe these exceptions actually strengthen the
fiscal discipline aspects of the rule.
And I would note that this aspect of the proposal parallels
the treatment in this year's budget resolution with respect to
House enforcement of its own pay-as-you-go rule.
Fourth, I would note that the pay-as-you-go rule proved
very successful in the 1990s, an experience that demonstrates
the vacuity of claims that pay-as-you-go is some gimmick with
no real effect.
For a good part of the 1990s, Congress and the President
paid for virtually all increases and mandatory programs and tax
cuts, including even paying for the extension of the measures
known as the tax extenders. Pay-as-you-go contributed to
achieving the first Federal budget surpluses in 30 years.
Fifth and finally, having made the first four points, I do
want to emphasize that abiding by the pay-as-you-go rule will
certainly not be sufficient by itself to address the Nation's
long-term fiscal problems. Budget rules such as PAYGO can be
important. The actual policy decisions, including those made in
coming months on issues like health care, will be even more
important in demonstrating a real commitment to begin dealing
with the problem.
The decisions that will be made on health care reform are
crucial. I believe it is essential for Congress and the
President to demonstrate a commitment to the PAYGO principle by
fully paying for the cost of health care reform over the next
10 years, and it is also crucial that health care reform be
designed to produce changes in our health system that begin the
steps of the slowing of the growth of health care costs
systemwide, both the public and private sectors, without which
we will never be able to assure sustainability of the Federal
budget.
Let me close by saying that a failure to deal with the
long-term fiscal problem will have deleterious consequences.
Eventually, the run-up in debt would harm the economy and the
standard of living of Americans. It is also possible that even
before the debt rises to such levels failures to address the
problem would leave credit markets around the world to decide
that continuing to lend large amounts to the U.S. to finance
its deficits isn't desirable, pushing up interest rates and
potentially triggering a financial crisis that could cost
millions of U.S. jobs.
It is also clear that spiraling deficits and efforts to
deal with them in a crisis atmosphere could threaten crucial
Federal programs that provide assistance to the Nation's most
vulnerable citizens as well as to veterans, students seeking a
college education, and many others. I need only cite what is
going on in the crisis atmosphere in the State of California
right now as an example. In that circumstance, rather than
being addressed, vital unmet needs would grow.
The bottom line is that virtually no one in this country
would go unharmed if we simply keep kicking the can down the
road and putting off for years to come beginning to address the
long-term fiscal problem.
Thank you.
[The prepared statement of Robert Greenstein follows:]
Prepared Statement of Robert Greenstein, Executive Director, Center on
Budget and Policy Priorities
Mr. Chairman, Congressman Ryan, and members of the Committee, I
appreciate the opportunity to appear here today to explain why I think
pay-as-you-go discipline is important, why enactment of a statutory
pay-as-you-go rule to reinforce Congressional rules can be beneficial,
and why enactment of a statutory pay-as-you-go rule is not itself
sufficient to achieve fiscal sustainability.
To explain my view of the benefits and limits of a pay-as-you-go
rule, I would like to make three points:
The United States faces a serious long-term fiscal problem
that must be addressed. The current high deficits levels are
unfortunate, although it would not be sensible to try to reduce them
while the economy remains weak. Deficits are then expected to decline
over the next few years as the economy improves. But without changes in
current policies, we face the prospect of rapidly growing federal
deficits and debt over time that will pose a significant threat to the
U.S. economy, to the standard of living of all Americans, and to the
ability of the government to meet the needs of its citizens.
A well-designed pay-as-you-go rule can make a real
contribution to the fiscal discipline needed to address the long-term
fiscal problem, if there is a real commitment to abiding by the
principle that any new tax cuts or mandatory program increases must be
paid for. Putting the pay-as-you-go rule in statute does not guarantee
that Congress and the President will comply with the rule. Just as is
the case with House and Senate rules, a statutory PAYGO rule can be
waived if there is sufficient support in the Congress for tax cuts or
entitlement increases that are not paid for and the President does not
veto legislation that violates the rule. But a statutory pay-as-you-go
rule can increase the likelihood the pay-as-you-go principle will be
followed. Some lawmakers may be more hesitant to support a waiver of a
statutory rule they have supported. In addition, it would be harder for
a future Congress to simply eliminate a rule that has been written into
statute. Finally, the process of enacting such a rule may help create
and demonstrate commitment to the principle behind the rule.
As noted, the statutory rule will have little effect if there is no
real commitment to living by it. That is why we think criticism of the
President's proposal to exempt the cost of extending specified current
policies that are scheduled to expire under current law is misguided.
To be sure, the Center on Budget and Policy Priorities believes that in
light of the long-term fiscal problem we face, it would be highly
desirable to pay for any extensions of expiring current policies. But,
it has become absolutely clear that there is no chance that tax cuts
enacted in 2001 and 2003 that benefit the middle class, provisions
enacted in 2001 that limit the scope of the estate tax, relief to
prevent the alternative minimum tax from hitting tens of millions of
middle-class families, and the deferral of the requirement to cut
Medicare physician reimbursement payments by 21 percent starting next
January (which could cause a major exodus of physicians from the
Medicare program) will either be allowed to expire or be paid for. It
makes no sense to put in place a pay-as-you-go rule that says these
extensions must be paid for when everyone knows they will not be.
Rather than making a phony promise that will lead inevitably to a
series of waivers of the pay-as-you-go statute--waivers that will
undermine support for the rule itself and open the door to waivers for
other costly policies--it is appropriate to acknowledge up front that
these specified extensions of current policy will not be subject to the
rule and to insist that the rule be strictly applied to any other
legislation that is not paid for. I should note that this is exactly
the approach followed in this year's budget resolution with respect to
House enforcement of its pay-as-you-go rule,.
Abiding by the pay-as-you-go principle will not itself be
sufficient to deal with the long-term fiscal problem. To put the budget
on a sustainable basis it will be necessary to increase revenues above
the level produced under current policies (and under President Obama's
budget proposals) and to reduce the growth of spending--especially
health care spending--below what is currently anticipated.
Before exploring these points in more detail, I would like to make
a plea. While budget rules, such as the pay-as-you-go rule, can be
important, actual policy decisions that will be made in the next few
months will be far more important in demonstrating a real commitment to
begin dealing with the long-term fiscal problem. In particular, the
decisions that are made about health reform will be crucial. Whether a
statutory pay-as-you-go rule is enacted or not, it is essential for the
Congress and the President to demonstrate a commitment to the pay-as-
you-go principle by fully paying for the cost of health care reform
over the next 10 years. That will require some painful steps, such as
adopting politically unpopular changes both in tax laws and in payments
to health care providers. But if Congress and the President do not
demonstrate that they are willing to take such steps to keep from
making an already unsustainable fiscal situation worse, the enactment
of a statutory pay-as-you-go rule will ring hollow and will not
persuade anyone (including financial markets) that policymakers are
willing to deal in a real way with the problems we face. In addition,
it is absolutely crucial that the health reform that is enacted
produces changes in our health system that begin taking the steps
necessary to slow the growth of health care costs systemwide (i.e., in
both the public and private sectors). We will never be able to ensure
sustainability of the federal budget--or the health of the economy--
unless we bring down the growth rate of those costs.
long-term fiscal problem
Projecting federal spending and revenues for coming years, much
less for coming decades, is an inexact science and subject to great
uncertainty. Nevertheless, there is virtual consensus among budget
analysts that current fiscal policies are not sustainable. (Economists
generally define a sustainable fiscal path as one in which debt held by
the public does not steadily increase as a share of the nation's gross
domestic product.). While the precise estimates have differed according
to the specific assumptions made, the Congressional Budget Office, the
Government Accountability Office, the Office of Management and Budget
in both Republican and Democratic administrations, and the Center on
Budget and Policy Priorities have all conducted analyses which find
that, unless current policies are changed, federal deficits and the
debt held by the public will grow steadily in coming decades, relative
to the size of the economy, and reach levels far in excess of those
previously experienced in the United States or that are safe for the
economy.\1\
---------------------------------------------------------------------------
\1\ See ``The Long-Term Fiscal Outlook is Bleak: Restoring Fiscal
Sustainability Will Require Major Changes to Programs, Revenues, and
Nation's Health Care System,'' Richard Kogan, Kris Cox, and James
Horney, Center on Budget and Policy Priorities, December 16, 2008;
``The Long-Term Budget Outlook,'' Congressional Budget Office, December
2007; ``The Nation's Long-Term Fiscal Outlook: March 2009 Update,''
United States Government Accountability Office, March 2009; ``Part
III--The Long-Run Budget Outlook,'' in Chapter 13 of the ``Analytical
Perspectives'' volume of the Budget of the U.S. Government: Fiscal Year
2010 and the Budget of the U.S. Government: Fiscal Year 2009.
---------------------------------------------------------------------------
For example, in the Center's most recent study of the long-term
fiscal problem, published last December, we projected that if current
policies remain unchanged--assuming for example, that the middle-class
tax cuts enacted in 2001 and 2003 are extended beyond 2010 and AMT
relief is continued--deficits will grow to levels far in excess of this
year's unusually large deficit (likely to total 13 percent of GDP),
which is swollen by the deepest recession since World War II. We
project that by 2050, the deficit will total 21 percent of GDP with the
economy operating at full capacity. Moreover, by that year, the federal
debt held by the public would total 280 percent of GDP, far in excess
of the record-high 109 percent of GDP reached at the end of World War
II.\2\ The increase in deficits relative to the size of the economy
under current policies is driven by a decline in revenues as a share of
GDP (to 17.2 percent of GDP by 2050) and a big increase in the cost of
Medicare, Medicaid, and Social Security (from 8.5 percent of GDP last
year to 18.9 percent in 2050). (It's worth noting that other programs
do not contribute to the growth in deficits as a share of GDP. All
mandatory programs other than Social Security, Medicare, and Medicaid
are projected to shrink relative to GDP both over the next 10 years and
in the decades that follow. In addition, both defense and non-defense
discretionary spending have generally fallen as a share of GDP over the
last 25 years and are projected to continue to do so.)
---------------------------------------------------------------------------
\2\ Because these projections were made last December, they do not
take into account the full effects of the economic downturn that are
apparent now or the cost of the American Recovery and Reinvestment Act
(ARRA) enacted this year to help stimulate the economy. Because these
effects are temporary, however, they have a much smaller effect on the
long-term fiscal problem than many people assume. For instance, the
Center on Budget has estimated that roughly $800 billion in stimulus
costs would increase the size of the long-term problem by only 3
percent. See, ``Economic Recovery Bill Would Add Little to Long-Run
Fiscal Problem,'' Kris Cox and Paul N. Van de Water, Center on Budget
and Policy Priorities, January 16, 2009.
---------------------------------------------------------------------------
The increase in the cost of the ``big three'' programs--Medicare,
Medicaid, and Social Security--is partly due to demographic changes;
with the aging of the baby-boom population, an increasing share of the
population will be elderly. But the growth of Medicare and Medicaid is
much greater than the growth of Social Security, and the primary reason
for the growth in those two programs is the growing cost of providing
health care per person. (CBO has estimated that more than three-
quarters of the projected growth of Medicare and Medicaid through 2050
is due to rising per person health care costs.) It is important to note
that the anticipated rising per-person cost of providing health care
through Medicare and Medicaid reflects the anticipated cost of
providing care system wide. Medicare and Medicaid costs per person have
essentially followed the path of system-wide costs--private as well as
public--for more than 30 years and are expected to do so in the future
under current policies.
It also may be noted that since entitlements other than the ``big
three'' are actually declining as a share of GDP and are projected to
continue doing so for as far as the eye can see, we do not face a
general entitlement problem. The causes of our long-term fiscal problem
are, essentially, rapidly-rising health care costs systemwide, an aging
population, and an inadequate revenue base.
Other projections differ somewhat from ours--some have higher
deficits and debt, some have lower. But virtually all agree that
deficits and debt will grow to levels that will pose a real threat to
the economic health of the United States and the well-being of its
citizens. It is clear that this long-term problem must be addressed.
pay-as-you-go in the 1990s
A pay-as-you-go rule was first established in the Budget
Enforcement Act (BEA), which was part of the 1990 deficit reduction
agreement negotiated by President George H.W. Bush and Congressional
Democrats and Republicans. It is important to remember that the
enforcement procedures were a secondary part of that deal--the most
important part of the deal was a package of specific changes in law
that increased revenues and cut mandatory program spending. Those
legislative changes, along with an enforceable agreement to limit
future discretionary appropriations, reduced deficits by an estimated
$500 billion below the levels projected under then-current policies
over five years.
The pay-as-you-go rule was intended to lock in the savings achieved
through the tax increases and mandatory cuts by requiring that any
subsequent legislation that undid any of those tax or spending
provisions, or otherwise cut taxes or increased mandatory spending, had
to be paid for with offsetting tax increases or budget cuts. (The BEA
also established statutory caps on discretionary appropriations to
enforce the agreement to limit that spending.) Specifically, the pay-
as-you-go rule required the Office of Management and Budget to
determine at the end of a session of Congress whether all of the tax
and mandatory spending legislation (other than legislation designated
as emergency legislation) enacted during that session had the net
effect of increasing the deficit in the current fiscal year (and the
fiscal year most recently ended if the legislation had any effect in
that year). If OMB estimated that the deficit had been increased, the
BEA required implementation of automatic cuts--called sequestration--in
spending for mandatory programs that were not specifically exempt
(generally, exempt programs were programs meeting the needs of low-
income Americans, Social Security, and programs in which the government
has a contractual requirement to make payments, such as interest on the
federal debt). The Senate also adopted a pay-as-you-go rule aimed at
prohibiting consideration of tax and entitlement legislation that would
increase the deficit.
The pay-as-you-go approach proved very successful in the 1990s (an
experience that demonstrates the vacuity of claims that pay-as-you-go
is a gimmick with no real effect). Congress and the President paid for
any increases in mandatory programs and any tax cuts, including the
extension of expiring measures such as ``tax extenders.'' \3\ Along
with the effects of the deficit reduction packages enacted in 1990 and
1993 and a vibrant economy (which was likely helped by the federal
government's commitment to fiscal discipline), the pay-as-you-go rule
helped achieve the first federal budget surpluses in 30 years. At the
end of that decade, however, the broad consensus on the importance of
abiding by the pay-as-you-go rule broke down in the face of federal
budget surpluses, and Congress and the President began enacting waivers
that allowed spending increases and tax cuts without offsets. In 2001,
in particular, large tax cuts were enacted that were not paid for. The
statutory pay-as-you-go rule then was allowed to expire at the end of
2002. A Senate pay-as-you-go rule remained in effect, but was modified
in a way that allowed consideration of legislation that increased the
deficit so long as the deficit increase had been assumed in the budget
resolution, which made the rule rather ineffectual.
---------------------------------------------------------------------------
\3\ During the 1990s, every mandatory increase and tax cut was paid
for except for one emergency spending measure. In the face of lingering
high unemployment 1993, a final six-month extension of extended
unemployment benefits enacted in the 1990-1991 recession was declared
an emergency by both the Congress and the President and for that reason
was not subject to the pay-as-you-go statute.
---------------------------------------------------------------------------
pay-as-you-go now
At the beginning of the 110th Congress, the House adopted a new
pay-as-you-go rule to limit House consideration of tax and entitlement
legislation that would increase the deficit, and the Senate reinstated
a version of the pay-as-you-go rule that had been in effect in the
Senate in the 1990s. These rules have had significant effect in
deterring enactment of new tax and entitlement policies that would
increase the deficit.\4\ Those who doubt this deterrent effect have not
been involved in the numerous difficult discussions that have occurred
with lawmakers and their staffs over how to pay for proposed increases
in entitlement benefits or tax cuts and have not seriously considered
what would have happened in the absence of the rules.
---------------------------------------------------------------------------
\4\ See ``The House Has Complied This Year with Its New `Pay-as-
you-go' Rule: But Greater Challenges Lie Ahead,'' Richard Kogan and
James Horney, Center on Budget and Policy Priorities, November 7, 2007.
---------------------------------------------------------------------------
There have been exceptions to the rule, however. The House and
Senate enacted substantial tax cuts and entitlement increases as part
of legislation aimed at stimulating the sagging economy and shoring up
the nation's financial system without offsetting the costs of those
provisions. This was entirely appropriate. The original statutory pay-
as-you-go rule, the current House and Senate rules, and the President's
proposed statutory rule all provide exceptions for emergency
legislation. Legislation needed to deal with a near meltdown of the
financial system and the worst economic downturn since the Great
Depression certainly qualifies as emergency legislation. Not only would
abiding by a requirement to find offsets for these efforts have greatly
complicated and delayed enactment of this crucial legislation, placing
the economy and financial markets at risk, but it also would have
undermined the goal of stimulating the economy during a recession. With
severely lagging consumer purchases, business cutbacks in employment
and investment, state and local government reductions in employment and
purchases of goods and services, and short-term interest rates near
zero, a deficit-financed increase in federal spending (for direct
purchases of goods and services, transfers to individuals who would
increase their purchases, and relief for state and local governments to
reduce the cutbacks they are making) and a reduction in federal taxes
were the best, if not only, hope of boosting aggregate demand, braking
the spiral of cutbacks and layoffs, and keeping an already dire
situation from reaching tragic proportions. If the stimulus legislation
had raised other taxes or cut other spending to offset the cost of the
tax cuts and increased spending provided in the legislation, there
would have been no net increase in the aggregate demand for goods and
services and no boost to the economy. Any sensible pay-as-you-go rule
should allow for an emergency exception for circumstances such as those
we have recently faced.
The other notable exceptions cannot be defended on such policy
grounds, but they illustrate the political reality that any statutory
pay-as-you-go rule needs to take into account. Congress--particularly
the Senate--has demonstrated an unwillingness to offset the cost of
extending several current policies such as relief from the alternative
minimum tax and the deferral of the large reductions in Medicare
physician reimbursements required under the so-call sustainable growth
rate (SGR) rules. The budget resolution adopted this year also makes
clear that the cost of extending the expiring reductions in middle-
class taxes and the estate tax enacted in 2001 and 2003 will not be
offset. Given the long-term fiscal problem the nation is facing, and
the inevitable need for higher revenues and slower spending in coming
decades, I believe it is unwise to extend any expiring tax cuts or
relief from required reductions in spending without offsetting the cost
of those extensions, and I wish that enactment of a pay-as-you-go rule
would ensure that they would be paid for. But, it is clear that the
majority of lawmakers do not believe these extensions should be paid
for and that, regardless of whether a statutory pay-as-you-go rule is
enacted that applies to those extensions, Congress will not let those
provisions expire or offset the cost of extending them.
Given that basic political reality, it is appropriate that the pay-
as-you go rule make an exception for the cost of extending the
specified policies. That is what the President's proposal would do, and
what the language in this year's budget resolution that governs
application of the House pay-as-you-go rule did.
I believe these exceptions strengthen the rule. If there are no
such exceptions, there is no doubt that Congress will vote to waive the
application of pay-as-you-go when legislation extending those policies
is considered. I fear that those waivers will undercut support for the
pay-as-you-go rule itself--that having voted to waive the rule a number
of times for these extensions, Congress is more likely to vote to waive
the rule for other tax cuts or entitlement increases. For example, it
is absolutely clear that Congress will not let the estate tax exemption
level and tax rates revert to the levels set in law prior to 2001. It
also is clear that Congress will not pay for the cost of extending the
estate-tax exemption and tax rate at the levels currently in effect
and, unfortunately, that there is considerable support in the Senate
for further increasing the exemption level and further reducing the tax
rate without paying for the billions of dollars of additional revenue
losses that would generate. If the pay-as-you-go rule is designed so
that it applies even to the cost of extending the current estate-tax
parameters, then the rule will unquestionably be waived. And if the
Senate Finance Committee already must secure a waiver just to bring
legislation to the Senate floor that simply extends current estate-tax
policies, no additional waiver will be needed for a Finance Committee
bill that goes considerably beyond that and further increases the
exemption amount and reduces the tax rate without offsetting the cost.
To be sure, it is not certain that it will be possible to hold the
line at extension of the current estate-tax policies in any case (or to
pay for any costs of further weakening the estate tax). But there will
be a much greater chance of doing so if the line in the sand is clearly
drawn at extending current policies. The principle should be clear--if
Congress extends current policies there will be no need to waive pay-
as-you-go, but any attempt to go beyond extension of current policies
without offsetting the cost--i.e., to engage in new deficit financing--
will require a vote to waive the PAYGO rule that lawmakers have pledged
to support.
A number of critics of the President's proposal to except the cost
of extensions of current policies from the pay-as-you-go rule have made
their point by analogy, comparing the proposal, for instance, to a
promise to abide by a diet that excludes chocolate cake or other highly
caloric desserts from dietary restrictions. Such analogies are clever,
but inaccurate; they miss the mark. A more apt analogy is with a
promise to limit caloric intake in order to lose weight. If a person
promises to eat nothing for 30 days, the promise is meaningless and
clearly will not help achieve the desired outcome. The person will
violate the promise every day, and after the person takes the first
bite each day there is no useful yardstick to encourage the dieter to
stop eating before he or she is satiated. If, however, the person sets
a daily caloric intake at a reasonable level, the pledge might actually
help the dieter stop overeating. It is true that the promised diet
would be meaningless if the caloric intake is set at such a high level
that the dieter can eat virtually anything he or she would like without
exceeding the limit. But anyone who thinks the Congressional appetite
for tax cuts and entitlement increases would be satisfied once Congress
extends the expiring policies has not been paying attention. Drawing a
line at extending current policies thus should help significantly in
promoting fiscal responsibility.
It is important to be clear that simply putting the pay-as-you-go
rule in statutory form and enforcing it with an automatic sequestration
does not by itself substantially increase the effectiveness of the rule
beyond what the House and Senate rules have already accomplished. The
House rule can be waived if the Rules Committee recommends such a
waiver and a majority of the House then votes for the resolution (or
``rule'') the Rules Committee has reported. The Senate rule can be
waived with a \3/5\ vote of the Senate. It is true that in order to
waive a statutory pay-as-you-go requirement, Congress would have to
include a specific waiver in legislation and that the President could
veto the legislation containing the waiver if he objects to the
violation of the pay-as-you-go rule. But the President already can veto
any legislation that violates the pay-as-you-go principle if he objects
to the violation.
Nonetheless, I believe that enacting a statutory pay-as-you-go rule
to reinforce the current House and Senate rules would be useful. It
seems likely that at least some lawmakers would be more reluctant to
support an effort to override a statutory pay-as-you-go requirement
than to vote for a waiver of House and Senate rules. It also would be
more difficult for a new Congress to simply eliminate a statutory rule.
Finally, the very process of enacting a statutory pay-as-you-go rule
could help build support for and commitment to the pay-as-you-go
principle. And that commitment is the key to success of any pay-as-you-
go rule. Just as no diet will succeed in getting a person to eat less
if he or she is not committed to losing weight, no budget process rule
can force Congress and the President to forgo deficit-increasing
legislation if they are not committed to bringing deficits under
control. And, just as a sensible and realistic diet can help a
committed individual lose weight, so can a sensible and realistic pay-
as-you-go rule help Congress and President adhere to a commitment to
stop digging the deficit hole deeper.
pay-as-you-go is not sufficient
Abiding by the pay-as-you-go principle and avoiding making the
long-term fiscal problem worse than it is under current policies is not
enough to put the federal budget on a sustainable path. This is not to
underestimate the importance of this first step, both in symbolic and
substantive terms. As a symbol, it is particularly important because it
will demonstrate a clear break with the approach taken in the first
years of this decade when Congress and the President enacted large tax
cuts and new entitlement benefits (particularly a new Medicare
prescription drug benefit) without offsets and substantially increased
both short- and long-term deficits. In substantive terms, it is
important because major changes in policies, such as health care
reform, that are not paid for would add significantly to the long-term
problem.
Of course, merely avoiding making the fiscal problem worse will not
avoid the inevitable day of reckoning for the federal budget. As I
noted earlier, without changes in current policies, deficits are
projected to rise to and remain at unsustainable levels.
Congress and the President will have to take further steps to
increase revenues above the level produced under current policies or
under the policies proposed by President Obama and, similarly, to
reduce spending below the levels produced under current policies or
those the President has proposed. Such steps will not be easy, but they
are necessary. Ideally, there will be a time in the near future when it
is possible for the President and Democratic and Republican
Congressional leaders to work together to develop a broad and balanced
package of revenue increases and spending reductions that will
significantly shrink projected deficits, as occurred in 1990 when
President George H.W. Bush negotiated a deficit reduction package with
the Congress. In the meantime, it is critical to abide by the pay-as-
you-go principle--and to do so in designing a health reform package
that is both paid for and contains elements that will facilitate the
long-term reduction in the growth of health-care costs.
A failure to deal with the long-term fiscal problem would have very
deleterious consequences. Eventually, the run-up in debt would
seriously harm the U.S. economy and the standard of living of
Americans. It is also possible that even before the debt rises to such
levels, the failure to address the problem would lead credit markets
around the world to decide that continuing to lend large amounts to the
United States to finance its deficits is not desirable, pushing up
interest rates and potentially triggering a world-wide financial
crisis. It is also clear that spiraling deficits, and any effort to
deal with them in a crisis atmosphere, could threaten crucial federal
programs that provide assistance to the nation's most vulnerable
citizens as well as to veterans, students seeking a college education,
and many others. Rather than being addressed, vital unmet needs would
grow. Virtually no one in this country will go unharmed if we do not
begin to address the long-term fiscal problem in a thoughtful,
responsible manner.
Chairman Spratt. Just to the two of you, let me put a few
basic questions.
Do you both agree that process plays a significant part in
our efforts to get our hands around this problem and in fact
did have a significant role to play in our successes in the
1990s?
Mr. Greenstein. I agree with that. I sometimes think the
role of process gets overstated. It is critical, it is
necessary, but it is far from sufficient. Nothing substitutes
for actually making the hard choices themselves. I think that--
--
Let me make a distinction. I think process can be very
useful as in the pay-as-you-go rules of the 1990s in averting
policy decisions that make the problem worse. I don't think
process does that much in actually starting to fill the hole
itself. For that, we just need policymakers of both parties to
start making the tough choices. However, keeping the hole from
getting deeper is very important; and process can be very
important in helping to accomplish that.
Chairman Spratt. Mr. Holtz-Eakin.
Mr. Holtz-Eakin. Process certainly matters, but I guess I
am going to agree with Bob in that I think it is most useful in
cementing policy choices that the Congress has made.
If you can decide which direction you want to head, as in
the 1990s, you can use PAYGO budget enforcement and the budget
process measures to make sure you don't get off that path. The
concern I have about this particular set of proposals is that
it takes the proposals the administration has chosen and says,
let us stay on that path, but their budgetary path is a path to
disaster.
So I think make some big choices, get us on the right path,
and then process the support that that policy decision is a
good one.
Chairman Spratt. Mr. Greenstein, Dr. Holtz-Eakin was
critical of the 10-year averaging that is built into this
particular proposal. Do you think that is a wise, useful
proposal?
Mr. Greenstein. I have mixed feelings about it.
On the one hand, let's take an issue like health care. I
certainly think that we need the 10-year averaging approach for
health care. We know that measures to slow the rate of growth
of health care costs take time. They gradually phase in over
time. It would be too great a constriction not to allow that.
On the other hand, I share a concern that you could have in
other circumstances a temptation to put all your deficit
reduction in some huge effect in the 9th or 10th year, and then
it is so big you can't let it take effect.
So I am not positive where I come--I think this needs some
further thought in looking at this before you actually move the
bill. One possibility might be, unless you think this is too
complex, to put in such a 10-year averaging rule for health
care reform--I think the circumstances strongly warrant it
there--but maybe not apply it across the board to everything,
as the administration's proposal would do.
Chairman Spratt. Doug?
Mr. Holtz-Eakin. I still think that, on balance, it creates
more problems than it solves. You know, we have experience with
PAYGO rules from the 1990s that were much simpler. They
supported, effectively, deficit reduction that had been agreed
upon in a bipartisan way. I think that is a good model.
There is an eloquent argument to exempt health care. I do
not underestimate the capacity of people to come up with
eloquent arguments to exempt every policy that they prefer. So
I would pick a simple set of rules. And the 10-year averaging
just looks to be too big a hole to drive things through, and
particularly in these circumstances where the last thing you
want to do is hide things in the out-years. It is the worst
thing in this moment.
Chairman Spratt. A lot of the things we are dealing with
have a lot longer time horizon than 5 years. Do you think it is
unreasonable to have a 5-year life on this particular proposal?
Or should we put it in there, in a sense, in a tentative way to
test whether or not it is useful?
Mr. Greenstein. I think that is a good question. A minimum
of 5--I think there is a balance. I am not sure I would pass
it, and I don't know if it would cost you votes in passing it
to try to make it permanent.
I think there is a question as to whether to have a 5-year
life or whether to have a 10-year life, but definitely no less
than 5 years.
Now, an argument for the 5 years might be that there is
some value in getting congressional leaders periodically to
reaffirm their commitment to it. You could look at what
happened in the late 1990s when, even though we still had PAYGO
on the books, we kind of walked away from it.
On the other hand, you could argue that is a bit of a
special circumstance. Budget surpluses were reappearing, and
people began to take PAYGO less seriously.
So I haven't really thought through whether it should be 5
years or 10. I might have a slight inclination for 10 years
over 5, though.
Chairman Spratt. Doug?
Mr. Holtz-Eakin. I don't think it is obvious, but I think
that if you go for something that looks like 4 or 5 years, that
is a sensible horizon. I don't think stretching it out to 10
would buy you any additional discipline in the process. And if
it looks like it is not working effectively after 2 or 3 years,
it is going to be changed anyway. So I think if you, you know,
pick 5 years and get started on the process, that would be
good.
Chairman Spratt. Bob Greenstein, Dr. Holtz-Eakin was
critical of--as I understood your testimony--the tax measures
giving preferred status to the current policy tax measures that
were adopted in 2001 and 2003 and the AMT and the sustainable
growth rate.
What the OMB has done here really is recognized a political
reality and said it is not realistically likely that these will
not be renewed, and so let's simply assume they will be for
purposes of this particular rule. Do you see fault in that?
Mr. Greenstein. No. As I said in my testimony, I think that
strengthens the rule, because going the other route would
simply lead the rule to be, right out of the box, all sorts of
big waivers. And then we would create an atmosphere in which
the routine thing to do was to waive PAYGO.
The only thing I would note there, if we are talking
political reality, I would note that--and I think this is the
right thing to do--the administration proposed that, with
regard to the estate tax, the line be drawn at the 2009,
today's current policy. There is a question for you, with
regard to the 2001 and 2003 tax cuts, whether you want to draw
the pay-as-you-go line at the continuation of the full tax cuts
or whether you wanted to take the two top rates, the upper-
income provisions, and draw the line there, which would have
some parallel to the proposal with regard to the estate tax.
I would note something important in the administration's
proposal. If you go the route it proposed, which is to say that
extending the full 2001 and 2003 tax cuts is exempt from PAYGO,
then it is critical to maintain the provision that they
included, under which if you don't extend the full tax cuts, if
you roll back the tax cuts at the top, you do not get to spend
the savings for something else. That is very important to
maintain in the bill.
You can either maintain it as is or what I think might be
even better, just draw the pay-as-you-go line to put
continuation of the top two rates and a few of the other upper-
income provisions on the other side--in other words, apply
PAYGO to them.
Chairman Spratt. Doug, your response to that?
Mr. Holtz-Eakin. I understand the political reality point,
and there is something to that. And, in the end, it is a
judgment about how to take this step to, sort of, get more
discipline in the process.
You know, I will just make a couple of observations about
it.
Number one, in the House rules and in the Senate, there has
been a waiver for small items, as well. It is not obvious that
just the size of the policy drives the desire to waive PAYGO
rules. And so, if it is the case that they get waived, it could
be for small items, as well. You have to get the discipline
regardless.
The second is that the budget, in the end, is designed to
reflect costs. And it is not about the benefits, and it is not
about virtues. It is a numerical accounting of the costs of
what the Federal Government does. And if the Congress wants to
say the benefits of extending these policies are so large that
we want to waive the rules, then they should. But that should
be done publicly and not embedded in a piece of PAYGO
legislation. I think that is a better overall process for
policymaking.
And the last thing is, by doing it this way, they are
deciding policy. We don't have a consensus policy on
physicians' updates. The Congress has done a different thing
every year. But they have said zero is current policy. We
haven't got a consensus policy on what to do with the AMT. In
fact, many different patches have been applied. But they have
made an assertion in setting this up that there is a particular
way that is the right way. You know, estate tax--you can go
down the line. You know, Bob wants to draw the line at a
different place on the 2001, 2003 tax policy.
So, you know, I think all of that argues for not giving
these preferential treatments, because we don't know what the
right treatment is. The assertion by the administration is that
they have the right treatment. Congress should have the
opportunity to decide that.
Chairman Spratt. Thank you both for your testimony.
Mr. Ryan?
Mr. Ryan. Thank you, Chairman.
Bob, you just said something that I thought was pretty
interesting, and I agree with it. If we don't fully extend all
of the 2001, 2003 tax cuts, let's say dividends, capital gains,
top rates, which probably is what is going to happen, make sure
it goes to deficit reduction, doesn't get plowed into something
else, I would like to think we can all agree on that as this
thing continues through the process. I believe it is written
that way right now.
Mr. Greenstein. It is in the administration's----
Mr. Ryan. Right. So I hope--I think all of us would agree
with that. Even though I would prefer to keep those, I hope we
can keep that kind of language and that framework put together.
And that is something I think we can all have consensus on.
Would you add anything to this bill? Any other enforcement
mechanism you have seen, Bob and Doug, that you have liked and
that you think ought to be added to this?
Mr. Greenstein. No. The only other change I would consider
making--and it sounds like Doug and I have a similar view on
this--is, I understand what the administration was trying to do
in the rules it is proposing on mandatory and discretionary
programs, so that, for example, they don't want you to get
credit for savings----
Mr. Ryan. Timing shift----
Mr. Greenstein. No, no, the timing shift stuff is
excellent. You want to make sure that, at the end of the 10-
year period, you don't move a payday and get credit. And they
ruled that out. That is very good.
It is this question about converting mandatory to
discretionary programs and discretionary to mandatory programs.
The way they wrote it, it has some pluses that would strengthen
discipline and some minuses.
But I am worried about the same thing I think Doug is
worried about, about the potential to create a new
discretionary program, let's say for a year, and then you
convert it to a mandatory program and you move out from under
the PAYGO.
So I probably--I think we are saying the same thing, Doug
and I, on that. I probably wouldn't include that in the bill.
Mr. Ryan. What would you add, Doug?
Mr. Holtz-Eakin. Oh, I guess I would second what I think
was the request of the chairman at the end of Dr. Orszag's
testimony on finding out exactly what the base is for the
sequester. Because if you have a really tiny base and you have
a substantial PAYGO violation, it is going to be difficult
politically to make it go, and the same kinds of arguments
coming into play. So I would worry about the base and
broadening it as much as you can.
I would add discretionary spending caps. I think that is
the simple solution to all the gaming issues that arise. They
have written a very complicated piece of legislation to try to
control that, but the simpler way to do it is just to put the
caps in and get that enforcement back into the process. And
that would be the biggest piece, addition that I think you
could add.
The last thing that I, and maybe only I, worry about right
now is, given the large current TARP interventions and Fannie
Mae/Freddie Mac and what is going on and the continued, what
appears to be, use of credit-reform-style scoring for these
kinds of financial transactions, I worry about creating
something, the initial estimate being a tiny, ``Oh, we are only
going to lose 10 percent on this,'' the reality being we are
losing 25 or 30 percent, and that additional spending just
flying right through here.
So if there was a way to catch that, where the re-estimates
revealed exactly what that mandatory process was----
Mr. Ryan. Are you saying we should stick with the original
cash basis, or are you saying we should just----
Mr. Holtz-Eakin. I think there are arguments to be made for
going back to the original cash basis, number one. I understand
the other side of that. But my point is simply, if you are
going to do it in a credit reform fashion, which makes sense in
some cases, the re-estimates are no longer benign when they are
that big and we have this scale of intervention. I don't know
quite what to do with that.
Mr. Ryan. In a----
Chairman Spratt. Bob had----
Mr. Ryan. Oh, go ahead, Bob. I didn't realize.
Mr. Greenstein. I was just going to say I disagree, but let
me explain why, with Doug on putting discretionary caps in this
bill.
I don't think you need it to prevent the gaming because
there is a cap set for each year in the budget resolution. And
if you try and move things around, you are going to violate the
budget resolution cap.
But the larger reason is the following. Pay-as-you-go keeps
you from digging the hole deeper. It doesn't start to address
the underlying hole itself. It seems to me that the right
configuration is we need, sooner or later--sooner is better
than later--a bipartisan agreement, the sort of thing that
happened in 1990, where we are going to need to take
entitlements below the baseline, we are going to need to take
revenues above the baseline, and multiyear discretionary caps.
I think that is where you put the multiyear discretionary caps.
Mr. Ryan. In a reconciliation kind of----
Mr. Greenstein. It is even larger than reconciliation.
Mr. Ryan. Yeah, a budget agreement.
Mr. Greenstein. Yeah, it is a share the pain, everything on
the table, big budget agreement. In such an agreement, I do
think multiyear discretionary caps make sense, a la 1990 and
1993.
Mr. Ryan. I like to point to the 1997 one, but, yeah, sure.
In 1965, when Medicare Part A was created, the projection
for its 1970 cost was $2.86 billion, and it ended coming in at
$4.8 billion. Then its projection for 1985 was $6.8 billion; it
came in at $47.7 billion. Its projection for 1990, $8.7
billion; the costs then came in at $65.7 billion.
Now, obviously, benefits got added to it, but we have
underestimated these programs dramatically. And are you
concerned that we are on the verge of doing the same thing over
again?
My concern is, we are creating this new health care
entitlement. We are going to have a pay-for package like in
1997, where you cobble together some provider cuts, you cobble
together revenue raisers, a mishmash of them, and over the next
handful of years, Congress gives them back. I mean, Congress--
Ways and Means, I can just tell you, these groups come back and
they eat these things back. And what ends up happening is these
pay-for packages evaporate, and you have the program growing
much faster than ever anticipated, and we have on our hands,
then, another huge unfunded liability, new runaway entitlement.
Do you share those concerns? I will just go Bob, Doug, and
then I will be finished.
Mr. Greenstein. In other circumstances, I might. I don't
that much right now, but let me explain why.
I think the notion of having a health care bill that is
fully paid for with hard, scorable savings and then, in
addition to that, you put in a number of things that we think
will save some money over time, we hope they will--CBO is
uncertain, the evidence is not there, and they are not
scorable, so you don't get credit for them. But the goal is you
have scorable savings that are ongoing and then stuff that you
aren't scoring if it turns out it saves you more money.
So I think it tilts things in the right direction if--you
raised the key point--if the savings hold. The single most
important reason why we need statutory PAYGO is we really need
every mechanism we can to lock in the savings that are going to
be in the health care bill, should a health care bill be
enacted.
The other things that gives me some optimism is we have
heard both the President and OMB Director Orszag in the last 5,
6 weeks really toughening the rhetoric, insisting--you know, I
think they have put out a very clear message, they insist that
the bill be fully paid for with scorable savings. I interpret
that to mean, and hope if the bill is signed we will see
further statements by the President, that if there are
subsequent attempts to roll back the savings without paying for
those, that he would veto such legislation.
Mr. Ryan. Well, we just borrowed $104 billion this week. We
are borrowing half of this year's budget. That is the least we
could expect, I think, from the administration.
Doug, just to wrap it up?
Mr. Holtz-Eakin. I am very worried about exactly that
scenario. You mentioned the 1997 agreement. We basically gave
it all back in the end. And that was in an era with PAYGO. So
the notion that upfront you would have these hard, scorable
savings sounds very nice, but no guarantee that you will get
the right result. And so that is a concern to me.
The cost projections are incredibly uncertain. People talk
a lot about how the drug bill came in under the projected
costs. I am familiar with that. One of the things that I would
point out is, you know, it is not all dollars. Incentives
matter. That was a bill that was built on competitive bidding
by private industry, and, you know, Medicare is not. And so, if
you do it Medicare style, we will probably underestimate it and
it will be much bigger than we think, so that will be bad.
So I would just say, having watched since 2001 the
evolution of the budget pretty carefully, all this rhetoric is
quite nice, but it is no substitute for actually doing
something about it. Everything that this President has said the
last President said, and it is time to actually get some
action.
Chairman Spratt. Any further questions? Mr. Schrader?
Mr. Schrader. Thank you, Mr. Chair. Just a few here.
Mr. Eakin, you mentioned or referenced a concern of, you
know, the discretionary to mandatory. And I appreciate both the
comments on the year-to-year piece. So is there an opportunity
for a specific language, perhaps, to be developed to prevent
the gaming year to year, as you have alluded to?
Because, certainly, there is adequate, I think, protections
in the bill to keep an ongoing discretionary program from just
being added, if you will, to the mandatory category and
increasing it from there. I think we covered that little piece.
Is there specific language?
Mr. Holtz-Eakin. I don't have some. But if that is
something you would be interested in, I could certainly work on
it.
Mr. Greenstein. I would just add, I don't think you want to
be so rigid as to say that every single year has to balance
exactly, or you end up contorting your policies in ways that
may not be good policies. So we need to figure out the balance
between avoiding gaming but having requirements that are so
rigid that they become the enemy of sensible policy
development.
I don't have specific language, but we would be happy to
think about it more and make some suggestions.
Mr. Schrader. We probably don't have a lot of time, but if
you all could think about it, that would be very helpful.
Also, to talk to you about--you know, I think it is a
little disingenuous by some of my colleagues to talk about the
exemptions that are in this bill when, indeed, they have been
exempted and not paid for since their inception under the Bush
administration. So I take that criticism with a big grain of
salt, quite frankly. However, I think the good news is that
Congress and this current administration seems to be wanting to
get a handle on those.
I am confused about why we would want to immediately raise
taxes on the middle class and lower-income Americans by dealing
with them immediately in the midst of the worst recession in
history, Mr. Eakin, rather than put it off for a couple years
and then, frankly, deal with those things, would be a less
detrimental effect to folks in this economy.
Mr. Holtz-Eakin. I am not advocating doing that. I am
simply saying that there is this judgment call in writing the
legislation about including a specific carveout for those
policies. As a matter of the political reality and good
economic policy, you are not going to want to raise taxes on
people in the middle of a terrible recession. I don't think
there is any disagreement about that. And the question is----
Mr. Schrader. Some of my colleagues on the other side of
the aisle would disagree with that, I think, based on their
comments.
Mr. Holtz-Eakin. So the question is, how do you write PAYGO
legislation which serves the purpose of broadly enforcing the
fiscal discipline--and, I think, including all policies in that
is the right way to go--knowing that, ultimately, they have to
be waived in certain circumstances?
Mr. Schrader. Thank you.
It would seem to me that, while I agree with the comment
that a process or a piece of legislation is no substitute for
political will, it would be my observation that, prior to PAYGO
being instituted in the 1990s in a serious way, along with
political will, that things increased dramatically, and we
didn't have any control.
So would you say PAYGO is of no use at all, particularly
looking at the Bush years when that was abrogated entirely and
we ended up with a war off-budget, we ended up with disasters
off-budget? Part D may have come in under cost but still was
off-budget. It would seem that, by not dealing with it at all,
we went back to the merrily-spend-as-you-go thing.
So could both of you comment on that?
Mr. Greenstein. As I said, I think pay-as-you-go is very
valuable. I would just--it is not the panacea, as Peter Orszag
said. It doesn't itself make the hard choices to start to fill
the hole, but it is critically important to help keeping the
hole from getting even bigger. And, as you have just noted, in
recent years we have just been making the hole even bigger.
Mr. Schrader. You know, one of the great trivia games among
budgeteers is to try to figure out how much PAYGO contributed
to balancing the budget in the 1990s. How much does it deserve
credit, versus a big revenue boom, versus everything else that
went on? And I think the answer can't be zero, but I really
believe that the fundamental impetus was the recognition in the
late 1980s that large deficits were a financial threat, the
failure of Gramm-Rudman-Hollings because it targeted the wrong
thing, which was the deficit, instead of what Congress
controlled, which was spending patterns, and that political
will turned out to be very important, and the PAYGO rules
supported it.
So it had a role, but it is not everything.
Mr. Schrader. Last comment.
Mr. Greenstein. Congress made big deficit-reduction
actions, took them in 1990 and 1993, and PAYGO locked that in.
It prevented the backsliding.
And it is similar to the point I made a few minutes ago in
response to Mr. Ryan, that if we get a health care bill that is
fully paid for, which would be a major accomplishment, PAYGO
can help us lock in the pay-fors and reduce the chances--it is
no guarantee--but it reduces the chances of backsliding in
subsequent years.
Mr. Schrader. Thank you.
I yield back my time, Mr. Chair.
Chairman Spratt. Bob Greenstein, Doug Holtz-Eakin, thank
you, as always, for excellent insights and answers to our
questions and for the help you continually give this committee.
We very much appreciate your coming today.
One final housekeeping detail. I would like to ask
unanimous consent that members who didn't have the opportunity
to ask questions be given 7 days to submit questions for the
record.
Without objection, so ordered.
The meeting stands adjourned.
[Whereupon, at 12:20 p.m., the committee was adjourned.]