[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
FORTHCOMING EXTENSION/MODIFICATION OF THE BUDGET ENFORCEMENT ACT
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 27, 2001
__________
Serial No. 107-12
__________
Printed for the use of the Committee on the Budget
Available on the Internet: http://www.access.gpo.gov/congress/house/
house04.html
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
PETER HOEKSTRA, Michigan Ranking Minority Member
Vice Chairman JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota KEN BENTSEN, Texas
VAN HILLEARY, Tennessee JIM DAVIS, Florida
MAC THORNBERRY, Texas EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia GERALD D. KLECZKA, Wisconsin
ERNIE FLETCHER, Kentucky BOB CLEMENT, Tennessee
GARY G. MILLER, California JAMES P. MORAN, Virginia
PAT TOOMEY, Pennsylvania DARLENE HOOLEY, Oregon
WES WATKINS, Oklahoma TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington CAROLYN McCARTHY, New York
JOHN T. DOOLITTLE, California DENNIS MOORE, Kansas
ROB PORTMAN, Ohio MICHAEL E. CAPUANO, Massachusetts
RAY LaHOOD, Illinois MICHAEL M. HONDA, California
KAY GRANGER, Texas JOSEPH M. HOEFFEL III,
EDWARD SCHROCK, Virginia Pennsylvania
JOHN CULBERSON, Texas RUSH D. HOLT, New Jersey
HENRY E. BROWN, Jr., South Carolina JIM MATHESON, Utah
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, June 27, 2001.................... 1
Statement of:
Mitchell E. Daniels, Jr., Director, Office of Management and
Budget..................................................... 5
Dan L. Crippen, Director, Congressional Budget Office........ 34
Hon. Leon Panetta, former Member of Congress, former
chairman, Committee on the Budget.......................... 51
Carol Cox Wait, president, Committee for a Responsible
Federal Budget............................................. 54
Hon. Martin Olav Sabo, a Representative in Congress from the
State of Minnesota, former chairman, Committee on the
Budget..................................................... 57
Kevin A. Hassett, resident scholar, American Enterprise
Institute.................................................. 59
Prepared statement, extraneous materials requested of:
Mr. Daniels:
Prepared statement....................................... 6
Response to question submitted by Mr. Bentsen............ 18
Mr. Crippen.................................................. 35
Ms. Wait..................................................... 56
Mr. Hassett.................................................. 60
FORTHCOMING EXTENSION/MODIFICATION OF THE BUDGET ENFORCEMENT ACT
----------
WEDNESDAY, JUNE 27, 2001
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:15 a.m. in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Thornberry,
Collins, Watkins, Hoekstra, Gutknecht, Bass, Miller, Moore,
McCarthy, Bentsen, Matheson, Spratt, Holt, Price, Capuano,
Clayton, and Clement.
Chairman Nussle. Good morning. This is a full committee
hearing regarding the Budget Enforcement Act and process. This
hearing concerns questions of extending and revising some of
the fundamental budget disciplines that have been in force
since 1990.
The specific goal of this hearing includes the following
items: understanding the function of these key disciplines, the
caps on appropriations, as an example, the pay-as-you-go, or
PAYGO rule for entitlements and tax legislation and how they
relate to the overall budgetary levels in the budget
resolution.
Appreciating the role of the caps and PAYGO, if played in
controlling spending and eliminating chronic deficits would be
another important function of this hearing.
Determining whether a consensus exists for extending the
caps and PAYGO beyond the year 2002, when they are scheduled to
expire.
Next would be reasserting the role of the Budget Committee
in enforcing the budget resolution, a goal that this committee,
I think in a bipartisan way, announced that it would be playing
as part of this year's budget cycle.
Asserting the Budget Committee's role in matters under its
jurisdiction, such as raising or extending the caps, and
addressing the need to raise discretionary spending caps for
fiscal year 2002 to accommodate the levels agreed to in the
budget resolution so that we preclude massive automatic
sequestration spending cuts.
The hearing will consist of three panels. The first panel,
we have the director of the Office of Management and Budget,
Mitch Daniels. He will be here to discuss the administration's
view on whether to extend the budget disciplines that we have
been enjoying and to what level to establish the cap as an
example for 2002.
The second panel will be the very distinguished director of
the Congressional Budget Office, Dan Crippen, who will present
his views and CBO's views on the effectiveness of these
budgetary disciplines.
And finally, we have the pleasure to invite back, and have
before us a former chairman of the House Budget Committee, both
current Member Marty Sabo from Minnesota and former chairman
and Member, Leon Panetta, as well as Carol Cox Wait, who is the
President for the Committee for a Responsible Federal Budget,
and Kevin Hassett, who is the resident scholar for the American
Enterprise Institute.
Before we begin on this hearing, I wanted to make reference
to one other issue that has come up in the context, to some
extent, of this hearing of budget enforcement and overall
numbers. I have been listening with great interest, all of the
newfound budgeteers to the United States Congress. We have many
Members who have joined our enforcement posse over the last
number of weeks and months, people who have not usually been
quite as interested in whether or not we go over discretionary
accounts and whether or not we dip into HI surpluses and
whether or not we are spending more than we take in, both
Members of the House of Representatives as well as Members of
the other body.
It appears that everybody has a new score on exactly what
the impact of this budget will be. Just about every news
program you turn on, somebody has got a new baseline that they
are promoting or a new assumption of what the budget will do.
All of this, of course, will occur in time, and we have
both OMB and CBO here, who are the scorekeepers, to help us
understand what those reviews will look like and the
ramification of those reviews as we go on through the year. But
let me suggest to you that this committee will hold additional
hearings. This is not the only hearing on budget enforcement,
and we will review, as I indicated earlier in the year, both a
mid-session review as well as a year-end review of exactly
where we are, and throughout the time I'm sure we'll continue
to have back-of-the-napkin reviews of where everyone thinks we
actually are.
But I believe that we have a budget in place. We ought to
enforce that budget. We ought to take into consideration the
constraints that are already in law and are part of that
resolution as we move forward.
In that context, there has been one issue that has come up
that is troubling to me, and that is the proposal that I have
been reading about in the newspaper about defense. Let me
suggest to you that I, along with a number of Members, were
quite moved by what I thought was a very bold statement on the
part of the President when he first came to Congress to make
his priorities known to the country, and he suggested that
strategy should come before funding, that we should make a top-
to-bottom review of the Defense Department and the Pentagon and
our military needs and defense for the future, as opposed to
just submitting yet another budget that defends or funds the
Defense of the past.
What is troubling is that what appears to be the new
submission of $18 billion in authority and $12 billion in
outlays appears to be more of the same--funding the Pentagon of
the past, funding the Defense of the past, as opposed to using
the top-to-bottom review that is apparently not completed yet,
using that review and the retooling and the modernization in
order to be the catalyst for a new budget submission. Instead,
it appears to be yet another supplemental Defense request, and
for that I am troubled.
I would hope that a couple of things follow this request.
Number one is that we need to complete the review by the
Pentagon. That is job one, according to the President. I agree.
I believe that a majority in Congress agrees that the review
needs to be completed by the Pentagon and that the review needs
to precede any request; that that review needs to be submitted
and that needs to be scored and it needs to be clearly
understood, and then it needs to be reviewed by Congress, who
holds the purse strings and makes the decision about what the
spending ought to be.
That includes this committee, and I will just report to you
that I do not intend to move on any request by the Pentagon
until it is reviewed by this committee. I'm not going to pre-
judge it, as much as that's possible to do. I will tell you to
start with I am frustrated by what appears to be funding the
Defense of the past, as opposed to modernization and reviewing
and then funding the Defense of the future. But I will report
to this committee that I don't intend to move until we have the
opportunity to have the Secretary of Defense before this
committee and the opportunity to review the submission and
review the top-to-bottom modernization proposal that is
presented.
If it is possible or if it is true that maybe the Secretary
of Defense can't complete this--is it possible he has been
stymied over the Defense Department? That's not only possible,
it has happened many times in the past, and if that is true we
need to know that. But if it is true that we're not going to
have the review and we're just going to begin to operate with
the Defense Department as we have in the past, then I would
suggest to you that that is an opportunity lost and one that I
felt was a top priority of the President and one that I agreed
with.
With that, the reason that I bring that up is because it is
important as we begin to discuss enforcing the budget, whether
it is in setting new caps, whether it is riding the fences that
we have established in this budget resolution--whether they
were totally agreed to or not, they're fences that we need to
protect, and this chairman intends to do what he can, even if
it is a lonely ride to do just that--to enforce the budget as
much as possible within the context and within the rules that
we have. I look forward to anybody who wants to join in that
effort.
With that, I would be happy to turn it over to my friend
and colleague, Mr. Spratt.
Mr. Spratt. Mr. Chairman, let me pick up where you left off
and say that I wholeheartedly support the idea of bringing
before this committee what we call ``Function 050,'' the full
Defense request. Defense, after all, is half of discretionary
spending, and, frankly, I was a little concerned about the
precedent of the language included in this year's budget
resolution, which gives you unilateral authority to set the 050
number. I felt it was a function at least of the full committee
to review, and I'm glad you believe that the committee should
assert its jurisdiction and exercise some responsibility in
this area. It needs to be done. No question about it.
I congratulate you also for calling the hearing today. I
was here in 1983. I have been here for most of the years we've
fought the battle of the budget and tried to subdue the
deficit. About 1986 we decided that one way to get at the
problem was to change the budget process. Gramm-Rudman-Hollings
didn't work as well as its authors intended, but it,
nevertheless, was a start down that road.
In 1990, when we did the Budget Summit with President Bush,
we finally put into law the Budget Enforcement Act, the PAYGO
rule, and the rules providing for discretionary spending caps
and sequestration enforcement mechanisms.
I think the biggest compliment that anyone could want for
those budget process changes came from one of the witnesses
before our committee just a few weeks ago, Alan Greenspan, who
admitted that he was cynical at the time that these process
rules would come to anything, but he admitted now, acknowledged
now, that they had been remarkably effective.
Indeed, they have helped us move the budget from a deficit
in 1992 of $290 billion to a surplus this year of around $300
billion, a unified surplus, and that is nothing short of
phenomenal. No question about it.
However, the rules that we wrote for an era of deficits
don't necessarily apply in the same manner or have the same
sanction in an era of surpluses; nevertheless, they still have
a lot of utility, and we need to look at them and update them
for the circumstances we find ourselves in now.
A discretionary spending ceiling is the one tool we've got
as a committee to enforce some discipline on the overall amount
of annually appropriated funding, and we should take it
seriously. Our leadership should take it seriously. If they
don't, what we do is almost for naught; because sequestration
in the end gets pulled, it doesn't get enforced, everybody
knows that.
So the first thing we've got to do is be realistic about
the level at which we set discretionary spending. And I had a
problem, frankly, with leaving 050 out of the mix this year
when we passed our budget resolution because that is half of
discretionary spending. I don't think it is a good idea to set
the precedent putting plugs, place-holders, in the budget for
discretionary items of that magnitude. We really should have
tried to put in something that approached reality for that
particular number.
Secondly, we need to look at sequestration. When we have
realistic numbers and the Congress exceeds them, we need to do
something. We need to have something there that will bring the
numbers back to what we said they should be when we were
looking at the budget in the aggregate.
The PAYGO rule has worked remarkably well, in addition to
the discretionary spending caps, but we've gotten away from
PAYGO. And I'd like to suggest that what we consider now is
saying that when you take the calculation of the on-budget
surplus, that should include exclusion of the Medicare HI trust
fund surplus. I know we've got a difference of opinion there,
but I think we ought to get the on-budget surplus down to a
number that excludes the two major trust fund accounts, and
then say that that amount can be allocated in reconciliation
provisions by the Budget Committee, but beyond that, the PAYGO
rule strictly applies. If the Congress seeks to do anything in
the way of increasing entitlement benefits or decreasing taxes
that exceeds the allocations made in the budget resolution, we
should have some enforcement mechanism on the floor, and if it
is somehow flouted or circumvented on the floor, we should have
some sort of end-of-the-year, end-of-the-fiscal-year process
for rectifying the actual budget, entitlements, and tax cuts,
before we decree in the budget resolution.
These rules are good rules, and if we are going to have any
kind of teeth in our budget process we need to take these rules
and make them applicable to our circumstances today.
I look forward to what our witnesses have to testify to as
we both sort of put our hand to the wheel and try to come up
with some budget process rules that are both meaningful and
effective in an era of surpluses.
Chairman Nussle. Thank you, Mr. Spratt.
If there is a difference of opinion on the Medicare HI
trust fund, it is not with this Member and it's not with 400
other House Members or 400-plus House Members who voted for
that lockbox and to make sure that that is set aside. And I
think that needs to be a clear message that is sent to the
other side of the Capitol and downtown, as well, because that
is a fence that we intend to ride probably stronger and more
often than any other fence.
With that, we welcome back to the committee the very
honorable director of the Office of Management and Budget, and
we appreciated all of the help and assistance and good work and
partnership as we worked through the budget resolution time.
Now we've got to make it stick, and that's what we're here to
discuss today.
We welcome you back for your testimony on that subject and
other thoughts that you would like to present, Mr. Daniels.
STATEMENT OF MITCHELL E. DANIELS, JR., DIRECTOR, OFFICE OF
MANAGEMENT AND BUDGET
Mr. Daniels. Thanks, Mr. Chairman and Congressman Spratt
and other Members. I appreciate your hospitality.
Chairman Nussle. Before you begin, let me just ask
unanimous consent that all Members be allowed to put a
statement into the record at this point in time--without
objection, so ordered--if there are those who would like to add
on to what Mr. Spratt and I have been discussing.
Sorry to interrupt.
Mr. Daniels. I'm mindful that we got off to a late start,
and you do have a written submission from me, so in order to
get almost immediately to your questions let me just paraphrase
and summarize what that statement tries to say.
This is a hearing that I've looked forward to and I think
all informed parties have from the beginning of the year. It
has been clear from the outset, of course, that there would
come a time when we'd have to talk about the Budget Enforcement
Act and its caps, that they would need to be modernized.
The fact that they do is not to say that the Act has not
served very well and should not be continued in some amended
fashion. I quite agree with Congressman Spratt in his comments
about that.
It was designed, and designed pretty well for an era of
deficits, like I think almost all budget process mechanisms of
the past. It was something of a blunt instrument, but I think
this one deserves a lot or credit, and those who crafted it
deserve a lot of credit for the successful outcome that
Congressman Spratt reminded us of.
I don't think it would be too difficult to update it and to
reshape it for the era of very large surpluses in which we now
operate, and in my testimony I suggest, first of all, a
starting point for future ceilings at the level of this year's
resolution plus inflation, but probably more importantly would
ask the committee to consider effecting the principle of a
joint budget resolution for future budgets that the President
and many other participants in the process have called for for
a long time. It would afford us the opportunity for an annual,
all-parties agreement about what appropriate levels are, and I
think hence the likelihood of their enforcement without
gymnastics.
I would cite in evidence of the practicality of this idea
the so-called ``summits`` to which Congressman Spratt alluded,
which in effect amounted to, I would say, joint budget
resolutions, although they had at least nominally multi-year
context to them.
So it seems to me an ideal time to put in place whatever
new mechanisms we can agree on is in this season when we must
update the caps to meet this year's budget needs and the new
realities.
I look forward very, very much to working with the
committee to do both those things.
Chairman Nussle. Thank you, Mr. Daniels.
[The prepared statement of Mitchell Daniels follows:]
Prepared Statement of Mitchell E. Daniels, Jr., Director, Office of
Management and Budget
Mr. Chairman, Representative Spratt, Members of the Committee, I am
pleased to be here this morning to discuss the possible extension of
the Budget Enforcement Act of 1990.
I will make a short statement and then I would be pleased to answer
any questions that you might have.
A More Orderly and Responsible Budget Process
I want to compliment the Chairman and the Congress for the progress
we've made this year. You moved quickly to adopt a budget resolution
that funds the nation's priorities and restrains the growth in
spending. Next, the House passed a supplemental appropriations bill
that stays within the BEA's spending cap for 2001. Unlike past
supplementals, this legislation has not become a vehicle for
questionable spending or a method of evading the BEA limits. These
successes demonstrate that the Act does work, and its basic mechanisms
ought to be extended and continued. Together we have demonstrated that
the President's commitment to a more orderly and responsible budget
process can be achieved.
The Budget Enforcement Act
CURRENT STATUS: CAPS AND PAYGO
The Administration believes we must moderate the growth in
discretionary spending by staying within the $661 billion level the
Congress, and the Administration, agreed to, plus the $18 billion in
additional funding the President will request this week for the
Department of Defense. In order to ensure that this absolutely
necessary funding for defense is not diverted to other programs in
2002, we propose to have a separate category for defense with a cap of
$344 billion. This funding would cover all programs within the National
Defense Budget Function.
The current statutory cap for FY 2002, under the BEA, is $552.8
billion. Assuming Congress appropriates funds consistent with the
Budget Resolution and the President's Defense Amendment, the additional
discretionary spending would trigger a sequester of roughly $127
billion.
In addition, OMB's current assessments show that a deficit of
$121.2 billion exists on the ``paygo'' scorecard. This paygo deficit is
due to legislation enacted in previous years, as well the recent
enactment of tax relief. Like the discretionary cap, if the paygo
requirement is not waived or modified, OMB would be required to issue a
sequester of mandatory programs such as Medicare, Agriculture, and the
Student Loan Program.
Clearly, the BEA will have to be amended. In fact, the current
discretionary caps have been obsolete for at least the last 2 years,
and neither the Administration nor the Congress expected to reduce
mandatory programs when we considered the tax bill this Spring, or even
at the beginning of the 107th Congress.
MODERNIZING THE ACT
The need for both of these changes does not mean the BEA is not
working. In fact, I believe the Act has been successful in transforming
the Federal budget process. It has made a significant contribution to
today's large budget surpluses. However, the machinery associated with
the current BEA should be changed to reflect the era of surpluses that
the Act has helped to create.
Currently, the BEA's requirements force us to sequester Federal
spending when legislative provisions lead to a reduction in the size of
the Government's surplus. However, the BEA was developed in order to
constrain increased spending and discourage tax reductions in a time of
deficits. Therefore, the Administration believes that the BEA should be
modernized in order to guide budget decisions in an era of surplus.
The Administration would like to work with the Budget Committees
and the Congress to find a more appropriate basis from which to measure
BEA requirements. One potential position that we believe could be
supported in a broad, bipartisan fashion, would be to set a goal of
ensuring on-budget balance. One could see this approach as ``protecting
the Social Security Trust Fund Surplus.''
Once this minimum threshold is set, new discretionary spending
``caps'' and ``paygo'' requirements could be determined on an annual
basis through the vehicle of a Joint Budget Resolution. In fact, if one
considers the various changes to the BEA since 1990, it could be argued
that the Executive Branch and the Legislative Branch have, from time to
time, entered into agreements that amounted to de facto joint budget
resolutions. I refer here to the Executive Legislative Summit
agreements of 1990, 1993, and 1997. We should consider regularizing
this step as an annual process.
ADVANCE APPROPRIATIONS AND EMERGENCY SPENDING
If we can agree on the need for the discipline and constraint that
the BEA provides, we should agree to also end the practices that have
been used to circumvent the limits it sets. For example, we must stop
using advance appropriations to shift budget authority from 1 year to
the next, just to avoid the cap for the budget year. In addition, we
must work together to limit the illegitimate use of the emergency
designation.
CONCLUSION
I look forward to working with the Committee and Congress to ensure
that we enforce the 2002 and future budgets, and that we fashion new
mechanisms that continue the Congress' recent fiscal success in the new
era of surpluses.
Mr. Chairman, that concludes my statement. I would be happy to
answer any of the Committees' questions.
Chairman Nussle. In the President's budget submission, the
President called for the extension of both the discretionary
caps and the PAYGO requirements, and it appears that that is
consistent with your advice here today and that that continues
to be the position of the administration.
If so, at what level and for how long would be my first
question. At what level would you set the 2002 cap, and for how
long would you advise that we should consider extending the
caps? Would it be a 1-year basis, 5-year basis, etc.?
Mr. Daniels. I would suggest at least as a starting point
that the 2002 caps be set at the level now that reflects the
President's full recommendations, approximately $679 billion.
That's the figure in the budget resolution plus the amendment
that will be submitted later today for Defense.
I would further propose that, at least in this year, the
amount recommended for 050 be treated separately or protected
by so-called ``firewall'' so that the necessary repair work,
which is what that amendment really reflects, can be carried
out and those dollars not siphoned off to other purposes.
Then, going forward, I would suggest that that level
inflated be our--that is to say, at a baseline extension of
that level be our starting point, but that, in view of our
ever-changing need, in view of the projected very, very large
reserve, uncommitted reserve that we see in the 10-year
horizon, that a joint budget resolution and an annual setting
of ceilings, which could be at a level above or below, I
suppose, this baseline extension I talked about would be a good
way to approach it and a good place to start.
Chairman Nussle. So, in other words, just so I understand
what is happening here, the administration is going to submit
this $18 billion as the request, as the Defense request, as the
amendment to the budget for 2002?
Mr. Daniels. Yes, sir.
Chairman Nussle. And that's going to be done today?
Mr. Daniels. I anticipate this afternoon.
Chairman Nussle. And that's through the OMB is going to be
submitting that?
Mr. Daniels. Yes, working with the Defense Department.
Chairman Nussle. Are they done with the review?
Mr. Daniels. No, sir.
Chairman Nussle. When will the review be completed?
Mr. Daniels. It's a question for Secretary Rumsfeld, but it
is certainly progressing. He has reported at great length on an
interim basis to the President, and in recent weeks begun to
discuss this, of course, with Members of Congress and in public
forums, but he has not announced, as far as I know, a
completion date yet.
Chairman Nussle. Is it imminent? I mean, do we have any
clue at all? We're talking a month? Six months? A year? Is
there any time frame? I mean, he said 6 months, and I
understand this is a big job. Six months may have been very
unrealistic. Maybe he needs an extension. If he needs an
extension, he needs an extension. It is obviously very
complicated. I'm amazed he said he could do it in 6 months.
But, having said that, that's what he said, and if, in
fact, it is going to be more than 6 months, we need to know
that.
I appreciate the fact that you would turn me over to
Secretary Rumsfeld, but he has been kind of hard to find, and I
would hope that he makes himself a little bit more available to
Capitol Hill to answer some of those questions, because these
are important questions.
Do you anticipate, based on what you know, that there will
be an additional submission for Defense at the time the review
is done, in addition to the $18 billion that is being requested
as part of this amendment?
Mr. Daniels. Mr. Chairman, first of all, I don't purport to
speak for the Secretary. I'll try to reflect what I understand
the situation to be, but I would refer you to him for
definitive answers.
First of all, I think we should all understand the
immensity of the job he has been given--I truly believe the
hardest job the President has given anyone. I'm sure all
Members understand how completely absorbed he has been, with
very little help, incidentally--that is to say, almost no other
appointed officers in place until the last two or 3 weeks--to
come to grips with this task.
It is my understanding that he does plan to complete the
necessary long-term review, to discuss it very openly with
Congress and the public, and to embody its principle
implications in the 2003 submission, which is just a few months
ahead of us.
Chairman Nussle. Well, I have to say I am extremely
disappointed by this. Last October we passed an appropriation
for Defense. It was obviously wrong because it was complained
about and rebudgeted in February. We passed a supplemental, I
don't know, 3 weeks ago, and now all of the sudden there is a
new supplemental request of $18 billion to next year's budget.
And then, on top of that, after the review is completed,
whenever that is completed, there will be yet another request.
We're going to have a very difficult time--forget PAYGO,
forget caps, forget everything else--we're going to have a very
difficult time holding anybody back within any fences if this
is the way that the requests are going to come down with regard
to Defense.
I am very sympathetic and understanding, as I said, that it
may have been an unrealistic and an implausible task to
complete a review of the Pentagon within 6 months when your own
appointees have not even been allowed to go through the Senate
for confirmation. It may be an unbelievable task. But then I
think a different understanding has to come out of the
administration as exactly what the timeline is, because as it
stands right now I can't support amending the budget for $18
billion without the review being completed or without a
timeline to understand when the review will be completed and an
understanding of what the impact will be on the out years of
the budget.
Based on the requests we have right now--and here I am
going to the very back of the napkin I was talking about just a
little bit ago that I complained other people do, but, based on
the back of my napkin, that doesn't fit. And if that's the
case, then I think it is going to have a very difficult time
gaining any kind of support on Capitol Hill.
We are very willing to support our young men and women in
uniform and make sure that we are ready to defend this country,
and we put a lot of money into that, and there isn't a person
who stands unwilling or unready to do that in any party of any
stripe, I don't care what ideology they call them or where they
come from, but there is also a responsible way to do it, and I
would just suggest to you that, as I see it right now, this is
not only not the ideal way to do it, but this is getting very
close to an irresponsible way to do it, and I would hope that
the Secretary of the Defense Department would be willing to
come up here and explain what exactly is going on here.
Mr. Spratt.
Mr. Daniels. If I may, Mr. Chairman, just quickly, and
without taking issue with your very legitimate concerns, let me
just say a word about responsibility and the process, because I
do think it explains in part the approach that has been taken
here.
The supplemental that was offered was limited very strictly
to the needs of this year, the remaining months of this year.
Many were surprised it was as small as it was, but that's the
reason. We tried very scrupulously not to exceed what we
thought were the appropriate bounds of a supplemental for the
year 2001.
With regard to the amendment for 2002, I would simply say
that the Secretary, when you see him, will, I think, explain to
you in detail that the needs and the damage after years of
neglect were even more severe than probably the Nation
understood, and I think he will be prepared to defend every
penny of that submission--probably more if he had the
opportunity--in terms of catching up just the basics of
defense.
The vast majority of this amendment does go to people,
quality of life issues, pay, health care, housing, right behind
that simple readiness--basic readiness that will be necessary
regardless of strategy or regardless of what the review might
say. That's the vast majority of this request.
And I would simply conclude by saying that there's a very
sincere effort here to get to an honest plateau, an honest
level of defense and break out finally of the cycle of sort of
conscious under-funding necessitating an annual supplemental in
the spring with the attendant excesses that sometimes went
along with that.
So I do appreciate what you're saying, but I just want to
explain from the administration's side and perspective that it
is an attempt to get sort of an honest budgeting level for
Defense, and I hope you can see it as a one-time item in that
way.
Chairman Nussle. Well, all I would report to you is that in
my 10 years of being here I have been told that there were one-
time items just about every one of those years, number one.
Number two, at a time of relative peace, I believe it is a
valuable motivation to say no to this Pentagon and say, ``Get
back there and get your work done. Do the top-to-bottom review.
And if all these guys with stars and bars want to stand in the
way of that motivation, they're standing in the way of making
sure that the funding gets done.''
I think we've got to start clamping down. The President
took the lead. I support his lead. And that lead was, ``No more
money until we get a strategy.''
That's my opinion.
Mr. Spratt.
Mr. Spratt. Mr. Daniels, I think the chairman's problem
starts with the beginning of this year. We decided between us
that we would try to reestablish the institutional role of this
committee and at least have hearings on major elements of the
budget from major departments of the Executive Branch.
We were partly thwarted because your budget was late, for
understandable reasons. I'm not criticizing you. You are a new
administration. It always comes late in those circumstances.
But we at least wanted to hear from DOD for a couple of
reasons. It is half of discretionary spending. And we knew
there was a big plus upcoming in addition to this review. They
were unwilling to come over here and testify at all.
Consequently, we had a place-holder, a plug number in the
budget for defense--$321 billion, I think it was. And we all
knew that was not a real number, but we went out there and
passed the budget resolution with that place-holder in the
budget, and then we adopted substantial tax cuts that basically
take the discretionary spending number as an established number
when, in truth, it is only half complete. We don't have the
defense number yet.
Now we've got a number that kind of springs up from almost
nowhere. I'm not quite sure where it comes from.
But what I'm surprised about is that it is $18 billion. I
thought it was going to be more.
We had breakfast with Secretary Rumsfeld. He asked the
Budget principles to have breakfast with him, and Senator
Domenici and Senator Conrad and I--Mr. Nussle was unable to
go--had breakfast with him I believe last Wednesday morning. At
that breakfast I showed him my cocktail napkin. [Laughter.]
And I said, ``We change these numbers every 3 days, and
here's the latest version of it. I gave you one before, and
this one is 10 days out of date.'' So I said, ``Show me how you
are going to fit what I have been hearing is your Defense
number into this budget after the tax cuts.''
In particular, I said, ``Look at the line down there where
we have assumed that what you'll be requesting is $20 billion
the first year, and it will staircase upwards $5 billion each
year until it reaches $50 billion, and after that it will
increase with inflation.''
As I was explaining that, he started shaking his head
pretty vigorously and saying, ``Oh, no, you are too low. You
are too low.''
So our assumption, hypothesis, that he'd come in at $20
billion, he was vigorously telling us as recently as a week ago
was way too low.
Did the Pentagon ask for substantially more? We've heard it
was close to $40 billion, which you shaved to $18.4 billion.
Has there been a tug-of-war between OMB and the Pentagon over
the number for next year?
Mr. Daniels. No, sir. There has been an ongoing dialogue,
and----
[Laughter.]
Mr. Spratt. At least you didn't invoke Executive privilege.
[Laughter.]
Mr. Daniels. Well, give me a minute.
No, these are very tough decisions, and I think back to the
chairman's comments, too. There are very legitimate questions
about the timing at which any increases ought to be asked for
and which ought to await a strategic rationale and which can be
characterized as immediate and necessary regardless of
strategy, and I guess this is the way finally. The President,
of course, makes all such decisions, and this is finally where
he saw the right breakpoint.
As I indicated before, the request for the supplemental
this year, we think every penny clearly is needed for basic
operations of this year, and, likewise, with the amendment, the
details of which are coming today, that these are basic needs
of the Defense Department.
Subsequent requests will be justified by a strategic
outlook that will be fully vetted with experts like you.
Mr. Spratt. Well, we really won't have that until 2003,
until the budget request for 2003, as I understand Mr.
Rumsfeld.
Mr. Daniels. Well, I do believe there will be a full airing
of the concepts and rationales that he wants to advocate for
well in advance and in the run-up to the actual submission,
which I assure you will be on time in the next budget year.
Mr. Spratt. In the next budget year for 2003. Isn't that
February of----
Mr. Daniels. Well, that's right, but, of course, this fall
there is the quadrennial review.
Mr. Spratt. Yes.
Mr. Daniels. Which will also shed, I think, a lot of light
on the Secretary's thinking and on his proposal.
Mr. Spratt. Let me ask you this: have you read the
language--I'm sure you have--in the budget resolution which
gives the chairman the authority to set the 050 function
allocation?
Mr. Daniels. Yes, sir.
Mr. Spratt. As I recall that language, it says that he can
set it up to the amount of the on-budget surplus less the HI
trust fund surplus. And as I look at the bottom line that comes
out of our analysis, because of the timing shift in payment,
tax payments, corporate tax payments from September 15th to
October 1, 2002, we may be able to support the $18.4 billion
request; but there's an outlay tail equal probably to at least
two-thirds of that, at least $6 or $7 billion or more of that.
And in the next year, 2003, the outlays are already negative by
our calculation if you back out the HI trust fund.
Consequently, I'm not sure that he can fit it into the budget
if he has to make it fit with 2003 and 2004, as well.
Have you taken note of that? Could you furnish for the
record the outlay implications of the $18.4 billion, please,
sir?
Mr. Daniels. Yes. They will be part of the submission this
afternoon. But I think you have it on the right order of
magnitude.
And I think we all can look forward to a spirited set of
discussions and negotiations about the kind of spending or
restraint that will be necessary to preserve the large
surpluses that we enjoy today. It can be done. It's going to be
difficult, as it always is.
Mr. Spratt. Let me turn to what we had the hearing about,
and that is--all of this is relevant to it, because we're
talking about fixing a realistic number for discretionary
spending. Once you fit Defense in, if you assume it is
recurring, what is your rate of increase for discretionary
spending this year, in 2002, and in the next 10 years?
Mr. Daniels. About 7 percent for this year, and we simply
for the moment use the baseline increase beyond. It would be
about 7 percent.
Mr. Spratt. Well, it would be more than baseline, wouldn't
it, because----
Mr. Daniels. I'm sorry, 7 percent for 2002.
Mr. Spratt. OK. Let me ask you about the PAYGO rule.
Suppose for PAYGO purposes only, just to avoid a broader
controversy, we define the available surplus to mean the
unified surplus less the HI trust fund and less the Social
Security trust fund, and we then provided that this committee,
the Budget Committee, can allocate up to that full amount for
tax cuts or for entitlement benefit increases, and then
anything beyond that would have to be offset, strict PAYGO
application, and if a bill with tax cuts exceeding that amount
came to the floor or if a bill with entitlement benefit
increases exceeding that amount came to the floor it would be
subject to a rule of order--which doesn't mean much in the
House. It does in the Senate--and if it wasn't resolved by the
end of the fiscal year there would be sequestration, common
pattern. Would you have a problem with that at OMB if we
defined it--for PAYGO purposes, alone, if we defined the
available surplus in that manner?
Mr. Daniels. Well, we would be happy to work with you on a
mechanism like that. I should remind the committee, just for
the record, that the administration has never taken the view
that HI runs a surplus. This year the all-end facts of life in
Medicare are that in 2002 will spend $50 billion more than it
takes in, and close to $650 billion more over the 10-year
period. That's just the difference in perspective we recognize
that many do not share.
But I wouldn't let that point of view, which we hold to
very strongly, necessarily foreclose a system like the one
you're talking about.
Mr. Spratt. Let me ask you this: when we wrote these rules
some time ago, we tried to give ourselves a few breaks. We were
desperate for daylight. The deficit never got better. It rose,
it rose, it rose. We had Gramm-Rudman-Hollings. It went down
for a year and then went back up again. And so we put a few
``gimmes'' in the package. We said, ``If a tax concession--
exemption, deduction, preference, credit, whatever--expires, it
is time limited and expires, then you are to assume that it
won't be renewed, CBO. At least it is assumed for forecasting
purposes that it won't be renewed.''
This helped us a little bit, even though we all knew that
these were very popular tax concessions. They had big
constituencies behind them, and historically they had always
been renewed. We said you can assume they won't be renewed.
Do you think we ought to take a look at that in light of
the fact that we're in a different era now and they are likely
to be renewed when they come up?
And, in particular, the sunsets in this bill--when you put
a sunset in the tax bill like the sunsets that we are looking
at today in the last tax bill we passed, which are
unrealistic--we all know that when those sunset dates approach
they will be disposed of--don't you think we ought to have some
sort of reality built into the budget process where we can say
to our forecasters, ``Tax cuts that are manifestly going to be
renewed ought to be calculated as renewed upon the date of
expiration''?
Mr. Daniels. In general, Congressman, I do agree that it
would be well to eliminate wherever, and we have suggested many
places in the current budget process where there are incentives
or mechanisms designed for evasions, and I think it would be
better to move toward full transparency.
I'm not sure how one decides that a given tax provision
certainly will be extended as opposed to probably will be or
manifestly. There will be some definitional issues around that,
I suppose. But I share your view that we ought to, from top to
bottom of the budget process, strive for transparency and
credibility and accuracy.
Mr. Spratt. Let me ask you one other question that
addresses a budget process change that we've not even
considered before, and that is the treatment of interest.
Right now, if interest is paid out of the general fund to a
trust fund, if it is an on-budget trust fund, it is booked as
an outlay and then booked as a receipt and so it is a wash.
When you have a unified budget surplus which treats the Social
Security Administration's trust fund as part of the unified
budget, you have the same phenomenon. As a consequence, you can
look at CBO's charts that run you way out in time and you see
the statutory debt mostly held by the trust funds rising to
about $7 trillion, but net interest payable dropping from $220-
something billion to $20 or $30 billion--a nominal number.
But, outside of looking at those numbers, they must ask,
``How can you have $7 trillion in statutory debt and only $25
billion, $30 billion, $40 billion in interest payable on it?''
We're taking money out of the general fund, which means it
belongs to everybody, and putting it in a trust fund, which
means it now belongs to a select, defined group--less than
everybody. Don't you think we ought to be reconsidering,
particularly as these interest payments become a bigger and
bigger item, how we treat interest payments in the calculation
of the budget?
Mr. Daniels. Well, perhaps so. I think the confusion you
talk about is a common and understandable one, and many Members
I know feel as you do--that we ought to emphasize simply the
total outstanding debt.
I think both calculations have very important value.
Mr. Spratt. I would agree with you about that.
Mr. Daniels. Yes.
Mr. Spratt. The reason for doing it the way we do it now is
not just that we were cutting ourselves a special concession,
but this shows the Federal Government on the one hand and the
rest of the world on the other hand. It shows the budget how it
interacts with the rest of the world, and the rest of it is
treated as an internal transaction.
Mr. Daniels. Right.
Mr. Spratt. And we need to know that, as well. But at the
same time the mounting interest for this statutory debt is an
indication of our liabilities that are coming due just beyond
the horizon of this budget, and we're sort of lulled into
complacency because we haven't factored into our budget the
debts that are coming due for Social Security and Medicare when
the Baby Boomers retire.
Mr. Daniels. I quite agree. The statutory debt is probably
the single most powerful reminder, as long as we don't lose
sight of it, of the need for reform and the extent of the
liabilities that await us.
Mr. Spratt. Well, if we get into the drafting of the
legislation, we might want to look at that, at least of an
alternative way of stating the budget so that you can see truly
what the debt obligations of the country are.
Mr. Daniels. All right, sir.
Mr. Spratt. Thank you very much for your testimony.
Mr. Daniels. Sure.
Mr. Thornberry [assuming Chair]. Mr. Daniels, as you know,
we have a vote underway. The chairman went to vote and is
coming back, and since I was next in line he asked me to sit in
for a few moments.
I'm tempted to get back into the discussion about Defense.
I'll just say that I think we all have to remember that it is
very, very difficult to break out of the rut which we had been
in of just doing more of the same thing. And, as a practical
matter, it is going to be the 2003 budget before we can do
that, and we have a chance to discuss the best ways to do it
between here and there.
But I think the other key point is that a key part of the
problem in breaking out of the rut is on this side of the
Potomac, and we can see that by looking at the newspapers any
day.
I want to change to a little different topic. We talk about
budget discipline, and there are a couple of bills that have a
lot of support up here, and I would like to get your views on
how they might affect budget discipline.
One is the co-called ``CARA Bill,'' which would take
royalty interest that the United States gets, primarily from
oil and gas production, and turn it into an entitlement for
land acquisition and other conservation programs.
The other one, of course, is a railroad retirement bill,
which passed by an overwhelming vote last year.
Those are two bills, it seems to me, that have a pretty
significant impact as we look ahead to budgets, and I'd like to
get your thoughts on how they affect budget discipline.
Mr. Daniels. My thoughts are that each of these bills
suffers from substantive defects and that each would have an
unacceptable impact on budget discipline in the short term.
In the case of CARA, I think it needs to be rethought
whether we should create yet another entitlement or expand one
for this particular purpose.
In the case of railroad retirement, the bill, as
constructed, offers, I think, the unwise, unacceptable prospect
of the Federal Government investing in private securities,
which is, I think, a constant temptation that should be
resisted wherever it arises.
And in both cases the budget impact, budget implications of
the proposals, as they stand, I think will be found to be by
the Congress and all of us as simply untenable, especially
given the narrowness of the straits that this discussion this
morning has pointed out we're headed into as we seek to protect
the on-budget surplus and perhaps more.
Mr. Thornberry. Well, particularly on CARA, one of the
arguments one hears is that, after all, we appropriated $540
million, I think, for land acquisition in the current fiscal
year, and that the President's request includes essentially
full funding of the land and water conservation fund, and
conservation is such an important issue that we're talking
roughly the same amount of money. Why not turn it into an
entitlement?
Mr. Daniels. I'll express a personal view here, but one I
don't think I am unique in holding, Congressman Thornberry,
that one of the problems we ought to all be wrestling with in
general is the steady, I would say, downhill slide of dollars
from the discretionary to the so-called ``mandatory side'' of
the Federal budget--two-thirds of the budget now on auto pilot,
and safe and secure from annual scrutiny and from the ability
of the Nation to make updated decisions about priorities. And I
think a starting point for an issue like this is to challenge
it on that basis.
Mr. Thornberry. Thank you.
The gentleman from Texas, Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Daniels, I have a number of questions for you on the
topic before us, but I have some local issues I have interest
in, and since you are up here I think I will take advantage of
your time right now----
Mr. Daniels. All right.
Mr. Bentsen [continuing]. and if I get another chance I'll
try and get to the BEA questions.
As you know, we've had this storm in Texas and it has
affected Louisiana and a number of other States, and I first of
all wanted to thank you for your letter to the House
Appropriations Committee opposing the rescission, the proposed
rescission, and I hope the administration will hold firm on
that position.
Beyond that, we are becoming increasingly convinced, and I
think FEMA is becoming increasingly convinced that the damage
in the greater Houston area will far exceed the amount of
dollars that FEMA has on hand, rescission or no rescission, and
will require some supplemental funding for the current fiscal
year and perhaps beyond that.
I know you have had some pretty distinct views with respect
to emergency spending and its use or abuse, but I would like to
get your position or what the administration's position will
be, what you think it will be with respect to supplemental
spending for disaster relief and reconstruction as it might
relate to Allison.
We look at the Northridge as perhaps the closest
comparison, where billions of dollars have had to be spent, and
we think that will be the case here, because the damages are
looking like $4 or $5 billion.
In addition, I would like to ask what will be the
administration's position, do you think, or what steps will you
take to review to the cost share between the Federal Government
and the State government or the pass-through to the local
nonprofit entity of the public disaster assistance? It's a 75/
25 split. The President has the authority to waive to a 90/10.
I think a very strong case can be made for waiver, and, in
fact, I sent a letter to the President last week that the per
capita disaster level meets the ratio used by FEMA to allow for
such a waiver, and have you all considered what your procedure
will be to look at that?
Finally, with respect to OMB's policy toward water
projects, I know, as you know, the President's budget proposed
a 14 percent cut in Corps of Engineers construction projects.
Whether Congress abides by that or not we shall see. But in
that the administration proposed defining some projects as new
starts and other projects as ongoing, and thus pushing new
starts back.
Has the administration determined what projects they
consider new starts, or is that left up with the Corps?
Mr. Daniels. Well, thank you, Congressman Bentsen.
Mr. Bentsen. First, let me say that at the President's
direction we are trying to stay in very close touch with the
events in Texas and elsewhere in the aftermath of the storm. I
talk to the FEMA administrator on a daily basis. I talked to
him this morning right before I came over here.
It is very important, and we welcome your support, for
preserving the full amount of FEMA funding that was proposed
for dealing with such emergencies, and $389 million that some
had suggested for rescission we think was a bad idea and we
will resist it and I trust prevail on that.
Mr. Daniels. As you know, we released $500 million Monday
morning when the President signed that release. That leaves
$583 million available to Administrator Albaugh. He believes
this is enough, the combined total is enough for the next
several weeks, at least, but he does think it is highly
possible that more will be needed, and he and I have been
talking about that, as I say, as early as this morning.
It is certainly true that we do seek to preserve emergency
funding for true emergencies but this is one by anybody's
definition, and if the needs outrun the already-appropriated
amount of money, then we will certainly seek, perhaps sooner
rather than later, authority for more.
I don't have an answer for you this morning on the degree
of the match. There is a good argument to be made and we'll
have a look at it, but these are large dollars available and
we've got to be very careful before we make these definitions
too elastic.
And on the Corps projects, you say ``OMB policy.'' OMB
doesn't have a policy. I always say I put my personal opinions
in a blind trust along with my assets when I took this job. The
President's policy is to pause in what has been extremely rapid
increase in new starts by the Corps. We have a gigantic backlog
of over $20 billion simply to complete the projects already
ongoing, and if you count the ones on the drawing board, all of
which have been announced, I guess, as new starts already,
we're in the $40 billion range.
So we do think it is appropriate to be cautious about
starting yet new ones when there is enormous backlog to work
on, but we recognize that many in Congress have a different
view, and the bill that we are probably going to see this year
will take a very different view than the one that the President
proposed.
Mr. Bentsen. Well, I know my time is up, but I just want to
say--and you might have to provide this for the record on
behalf of the administration--is new start determined by
authorization or is it determined by a funding stream, because
you have projects like the Brays project in Houston, the Clear
Creek project--both scenes of a great deal of flooding--that
have been authorized for 20, 30, 40 years, that have been going
through the planning and design stage. Some are just at the
front end, but there is a question as to whether or not they
might be deemed as new start.
Mr. Daniels. I see. I'd like to go back and check. I want
to make sure. We'll give you a precise answer for the record.
There's a good chance that those are part of what we would
think of as the backlog that we would like to accelerate by
limiting spending on totally new projects, but let me go back
and ascertain which category those fit into.
Mr. Bentsen. Thank you.
[The information referred to follows:]
Director Daniels' Response to Question Posed by Mr. Bentsen
I want to take this opportunity to respond to some of the issues
you raised during my appearance before the Budget Committee this past
week. In particular, I would like to outline the administration's views
on the Corps of Engineers Budget for Fiscal Year 2002.
As the OMB developed the President's Budget for Fiscal Year 2002,
we worked to give a very subjective determination the most objective
standard possible. Specifically, we attempted to propose funding for
Corps' projects based upon their benefits and by focusing primarily on
the large number of authorized projects that are already in progress.
We believe it is important to focus funding in this way because ``new
starts,'' particularly new construction starts, usually involve a
commitment of hundreds of millions, and can significantly affect the
resources available for other projects within the Corps.
The administration considers a reconnaissance study, pre-
construction engineering and design work receiving study appropriations
for the first time, or a new project receiving construction
appropriations for the first time to be a ``new start.'' In addition,
the administration treats study and project resumption, newly funded
separable elements of a project, deficiency correction projects, major
rehabilitation projects, and reconstruction projects as ``new starts.''
With respect to specific construction projects in the Houston area,
and the Harris County Flood Control District, the President's budget
requested funds for Bray's Bayou, Clear Creek, and Sims Bayou. We do
not consider any of these projects to be ``new starts.''
If you have questions or concerns about any other specific
projects, please do not hesitate to contact my office, or the OMB
Legislative Affairs office.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Nussle [resuming Chair]. Mr. Bass.
Mr. Bass. Thank you, Mr. Chairman.
Thank you, Mr. Daniels, for being here today.
Perhaps I am following up on a more general basis on what
Mr. Spratt was discussing. I'm concerned about the overall
budget picture for the next two or 3 years. Our budget which we
passed incorporates a 4 percent spending increase in this
fiscal year, and then in subsequent fiscal years a reduction to
3 percent. The Congress is looking, I believe, at the
possibility of considering at least four more tax bills--
energy, charitable contributions, business tax cuts tied to a
minimum wage increase, and the extenders.
There are at least three different major--getting beyond
Medicare, prescription drug, but others--I think there is an
issue involving concurrent pay for veterans, which is coming
down whether we like it or not; special ed funding increases,
which are already incorporated in the Senate education bill,
which will come to the House. You talked about an $18 billion
increase in Defense spending in--I believe you were talking
about fiscal year 2002, the budget cycle we are working on now.
And, as we discussed, tails go out beyond that.
Even taking the HI trust fund out of the picture, are we
going to have an operating deficit to consider for fiscal year
2003?
Mr. Daniels. No, sir. I think that we have to start by
reminding ourselves that, even in a time of economic slow-down,
the Nation is running a very, very large surplus. We're here
and we will be back here repeatedly talking about how big a
surplus, but it starts with this year $150 to $160 billion of
Social Security surplus, and that will rise more like $170
billion next year, and then we're talking about how much on top
of that, how much in the on-budget category--will it be as much
as the part A or how much more, and so forth.
Now, I think that your cautions are all very well placed.
We need to, on the one hand, recognize that over the 10-year
time horizon we have hundreds of billions of dollars
uncommitted at this point, and I think even after some
modulation in the spring forecast I would guess that both CBO
and OMB will project some reduction in the 5.6 trillion that we
saw at that time, but not dramatic.
Even after that, there will be hundreds of billions of
dollars left for decision, and it is certainly possible to--I
can draw you a napkin where the Nation runs through all that
money, but it is hardly likely that will happen, and I remain
fully convinced that we can make wise choices, add the spending
where it is essential, and yet preserve the record of success
that this committee has had so much to do with in keeping an
on-budget balance, and therefore a very large surplus year on
year.
Mr. Bass. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Chairman, I really don't have any questions, but I
guess I want to add my voice to the concerns of the current and
future budgeting issues.
I'm new to this committee but I'm not new to budgeting, and
it is a legitimate thing at all times for bodies who are
elected officials and appointed officials to debate how much we
should raise, who should pay for that, and how that money
should be spent once it's raised. Those are legitimate issues
of debate that this committee has gone through, the
administration has participated in, and we have drawn some
conclusions, many of which I disagree with, but so be it. It is
a fair process.
But I was under the conclusion--and I'm glad to hear what
I'm hearing today at this committee, from the chairman and from
everybody else--that none of us want to go back into a
situation where we are producing deficits in this time.
I'm glad to hear that you don't think we're going to hit
it, but I know you are hearing the voices and the concerns of
not just members of your own party but also neutral observers
across the board, and I wouldn't even try to put you in a
position of somehow changing what you just said. I'll accept it
and I believe that you believe it, but pretty much no one else
does. We all think that we are heading toward spending too much
money, considering the choices we already made.
Now, I make no bones about it, no apologies for it--I
thought the tax cut was too big, and that's why I thought it
was too big. I think we have spending priorities that we need
to meet. But I lost, fair point.
I guess I would also like to make a real clear commentary,
as far as I am concerned, that people like me, we've lost more
than we have won, and we will probably continue to do that. But
when the time comes and the crunch comes and we start talking
about sequestering funds and we start talking about making cuts
to appropriations we've already made, I guess I want to scream
right now, begin screaming that those cuts don't come at the
expense of the most vulnerable members of our community. We've
already slashed those funds dramatically, as far as I am
concerned.
I am not sitting here--I do not want to pick and target
yet, who should be hurt. At the same time, when times get
tough, which they're not tough yet, but we're hitting a little
bump, and pretty much I think even you acknowledge that. When
times get tough, you don't turn on the weakest members of
society and take it out of their hide.
I think we've already done that, and I'm deeply concerned
that we will do it again in the fall if these numbers continue
the way they're going, as I think they will. I happen to
disagree with you, and so be it. I actually hope you are right.
I want to be wrong, because if I am right we're all in trouble.
You're in trouble at the job because then you have to make
numbers meet, and you're in political trouble, and you know it
as well as I do.
Now, granted, politically it might be good for my side if
you are wrong, but it's not good for the country, it's not good
for my constituents, and I'd rather have arguments on different
levels.
So, again, I apologize. I have no questions, but I just
want to add my voice right now to the debate that I fear we
will have in the fall about where those cuts should come, and I
would like to caution you as best I can. Please, don't divide
this country any more than it is already divided. It won't be
good or healthy for anybody.
Chairman Nussle. Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman.
Mr. Daniels, I am pleased to hear the chairman of this
committee make the comments that he made in the opening of this
session--that many of us have encouraged him to be strong,
considerate, and tight with the taxpayers' money.
We just went through the supplemental for this year. Just
yesterday I believe there was a measure passed. And then you
show up today telling us you are going to want $18 billion
more. That bothers me, sir.
You know, I have taken a lot of pride in the last few
months at home telling folks that, you know, ``We have an
administration who is going to limit the growth of Government.
They're wanting to give you the maximum tax relief possible,
and they're wanting local control of local affairs.'' We have
passed a tax bill that gives the maximum we could get out of
this Congress, and unfortunately it does reinstate in 10 years,
based on some rules over in the Senate, that 51 people over
there can raise your taxes permanently, but it takes 60 to
reduce them past 10 years.
We're working on the education bill that returns local
affairs to the local level.
But when you show up wanting $18 billion more it just blows
a hole in the first of limiting the growth of Government.
I don't want to go back home and say, ``You know, I was
wrong, folks. I misread the administration on this particular
issue.'' So I suggest you go back down the other end of the
street, and you come back, and you want $18 billion, well $18
billion of rescission. And I know the President well enough to
know he's not going to take it out on the poor because when we
tried to do something about the EITC on the reimbursement basis
or at the place of employment--I think he misunderstood what we
were doing, but he said, ``We're not going to balance the
budget on the backs of the poor.''
We've got a balanced budget, no deficits. Let's continue
with a positive cash flow. I don't tell folks at home we have a
surplus. We have a positive cash flow.
I have been in small business for going on 39 years, and
for 39 years I have been in debt. I have had cash flow most of
those years that enabled me to meet my obligations, but I never
had enough money to retire all of my debt so I never had a
surplus. We don't have one today, sir. We have a positive cash
flow.
Let's keep it positive. Let's come back with some measures
we can live with. I don't like this one.
Mr. Daniels. I take your point, Congressman.
Chairman Nussle. Mr. Price.
Mr. Price. Thank you, Mr. Chairman.
Mr. Director, welcome to the committee.
Mr. Daniels. Thank you, sir.
Mr. Price. Glad to have you back.
If you touched on this in response to prior questions, I
apologize. Please just adjust your answer accordingly.
Mr. Daniels. All right.
Mr. Price. I had to be in and out of here because of
another meeting and votes.
I am basically looking for your reaction to Mr. Spratt's
proposal at the beginning of the hearing as to the way our
budget rules for the future might fence off the Social Security
and Medicare surpluses and let any surplus over those amounts
be allocated by the budget resolution, but that the PAYGO
rules, the necessity of an offset either in terms of tax
increases or entitlement reductions, that those kinds of rules
that we've lived with now since the 1990 budget agreement, that
those would apply to anything beyond that on-budget surplus.
The administration hasn't been entirely clear, at least in
my understanding, as to how it proposes that we go in this
area. You've said, I believe, that you want to extend caps and
PAYGO, but that the caps may not apply to its spending programs
fully, such as defense, and PAYGO doesn't apply to the tax cut
program.
I wonder if you could clarify exactly what kind of lines
you would want to draw in terms of what is and is not subject
to PAYGO and how this pertains to our professed desire in both
parties to protect the Medicare and Social Security surplus.
Mr. Daniels. My suggestion in the testimony I have dropped
off this morning was that we start at the on-budget line. The
administration has not recommended redefining the on-budget
line to include Medicare, but we know there is sentiment for
that in the Congress and we can talk about that.
You know, our position, of course, at a minimum is the
President has argued for modernization of Medicare, which would
cost money, and that at a minimum we hope would be taken care
of within--we can all agree to take care of that within what
the Congress views as an HI surplus.
Mr. Price. I'm not sure I understand what you're saying.
You're saying that we do or do not treat the part A surplus in
the same way that we treat the Social Security surplus.
Mr. Daniels. Well, we don't today formally, and we would
not propose to do that, but I'm acknowledging the sentiment
that exists for doing so.
Mr. Price. You're acknowledging the sentiment, but are you
agreeing with it or----
Mr. Daniels. No, sir. I----
Mr. Price [continuing]. Willing to accommodate it, or not?
Mr. Daniels. No, sir. The President believes that Medicare
surpluses ought to be unified, and thereby recognize the true
financial condition of Medicare. I think perhaps while you were
voting I pointed out that over the 10-year horizon Medicare
will cost the taxpayers $643 billion more than it takes in in
premiums and payroll taxes, so we did not feel that it is a
fair and accurate reflection of the situation to take that off
budget, as well. But in setting caps and limits, you know, we
can agree on what we want to agree on.
Mr. Price. Well, the net effect of treating the Medicare
trust fund surplus the way you do the rest of the surplus would
be, would it not, to open up that surplus or funds borrowed
from the Medicare trust fund to the uses that go well beyond
shoring up Medicare or adding benefits to Medicare or anything
related to Medicare?
Mr. Daniels. Well, it wouldn't need to.
Mr. Price. But it could?
Mr. Daniels. If the Congress chose to spend money down to
that or up to that level--now, again, we think it is an
illusory way to think about Medicare, given the all-in deficit
nature of the system, but the simplest way, as we pointed out
on some other occasions, if we don't take that conceptual view
of Medicare, the simplest way to avoid it is simply to spend
less money.
Mr. Price. Well, you say ``if.'' It appears, with the
budget we've adopted this year, that we are heading in that
direction very definitely; that we will be into that Medicare
surplus, if not this year, then very soon.
The argument we've made--and both parties have made--in
justifying the fencing off of the Social Security surplus is
that in doing so we are paying down publicly-held debt in a
disciplined and systematic way, and that therefore we are
preparing ourselves to meet the obligations of Social Security
when that cash flow reverses around the middle of the next
decade.
Now, I really fail to see why that same argument precisely
would not apply to Medicare part A and anything that diverts
those funds, it seems to me, would weaken rather than
strengthen our ability to meet our basic Medicare obligations,
to say nothing of adding benefits.
Mr. Daniels. I think you put your finger on the
distinction, Congressman. it is a matter of how much surplus
the Nation chooses to run, how much debt it chooses to retire
in a given year.
To me, the very obvious difference between the two is that
Social Security trust fund does run a true surplus. It takes
in, in this year, something like $156 billion more than it pays
out in Social Security, whereas Medicare is in the opposite
situation.
That doesn't mean, quite apart from those definitions, that
the Congress and the administration cannot agree to run an even
larger surplus than whatever Social Security creates, as large
as that plus the surplus part of Medicare, and more than that,
for that matter, and we could agree to do that, and we could
agree, at least theoretically, to set caps and limits in the
BEA context that required that.
Mr. Price. All right. Thank you.
Thank you, Mr. Chairman.
Chairman Nussle. Thank you.
Mr. Miller.
Mr. Miller. I want to applaud my colleague for his concern
about Medicare and Social Security in the surplus. I think a
great lesson was learned in 1994 when the American people got
tired of spending all that money for all those years, and we
have now become prudent and decided we're not going to spend it
any longer.
I kind of feel sorry for the President right now. I mean,
most of us get pulled in two directions, but he would need 20
arms to get pulled in all the directions he's getting pulled
in.
We were talking about spending more money. My colleague
just expressed the concerns he has about increasing it without
offsets, and I'm very concerned about that, too, and I know
that the President is not going to do this on the back of the
poor and he's going to look at reasonable programs to see how
we can trim some of the fat out of this Government.
One thing I really applaud him for is when he looked at the
budget he said, ``We're going to eliminate all one-time
spending programs, such as pork, and we're going to look at the
Government from that perspective and then determine where money
needs to be spent.'' And he made a valiant effort, I believe,
and a gallant effort to create less dependency by government on
the American people.
I also applaud him because he has created a situation where
the American people are also less dependent on Government. He
has made a movement to empower people and to create opportunity
and less reliance on others, namely Government, and us less
reliant on them in the same fashion.
He's got a formidable job ahead of him--I mean, first to
crank out this spending process we are going through and end up
remaining within the intent of the budget caps.
I just encourage you to take the message back that many of
us want to support him, but we don't want to start spending on
the frenzy we had last year before he was elected. I mean, what
we increased in spending last year, alone, cost the American
people about $570 billion over the next 10 years. We're not
interested in that. I mean, nobody seemed to have a problem
complaining about taxes. They didn't have a problem about
spending that kind of money last year, which is increasing our
spending $570 billion over 10 years, but they had a complaint
about giving hard-working people $570 billion back in tax cuts.
You've got a tough job ahead of you, and I just hope that
the right decisions are made and the course is stayed that you
have endeavored to take from the beginning at the President's
direction, and I hope you get us to this point.
I don't disagree with the need for the funds that are being
requested; I just have a concern that appropriate offsets are
not taken.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Moore.
Mr. Moore. Thank you, Mr. Chairman.
I want to say I commend the chairman and the ranking member
for their statements about enforcing the budget resolution. I
very much appreciate that, and I think there is a growing
consensus of Members on both sides of the aisle in Congress who
want to see that happen, and I hope that's the case, and I hope
the White House and the administration will work with us to
make sure that happens.
With that in mind, I guess I do have some concerns.
I was at the White House in February at the request or at
the invitation of the President, along with 24 other House
Members and Senators, I believe. At that time I told the
President I didn't think his proposed tax cut was or should be
a partisan issue, and I told him I voted for tax cuts prior to
his coming to office, and that I would certainly favor portions
of his. I was concerned about the number.
He assured me that the projections by Congressional Budget
Office he thought were correct and that the surpluses would, in
fact, materialize.
Since that time, of course, we've heard talk from the
President and others about this $18 billion in additional
funding for Defense; a national missile defense system, which
estimates range somewhere between $100 billion and $200-plus
billion--there's no firm number yet; about a prescription drug
benefit, somewhere between $180 billion and $320 billion are
the numbers I hear.
You said a few minutes ago, before we went to vote, I
think, that we want to preserve the large surpluses we have
today. I guess I'm becoming increasingly concerned that we are
not, in fact, going to have large surpluses, and that the
surpluses may become the incredible shrinking surpluses.
I would refer you to an article which was on the front page
of ``USA Today.'' I didn't see similar articles in ``The Post''
or ``The Times,'' but I suppose at some point in the near
future we will. This was the front page of ``USA Today,'' and
it says this--just two paragraphs--``The new tax cut, coupled
with falling corporate tax revenue, has gobbled up three-
quarters of the projected Federal budget surplus through 2004,
a revised Congressional Budget Office estimate reveals.
``As the surplus shrinks, budget experts from both parties
now say Congress and President Bush will have to tap funds
reserved for Medicare to pay for the spending increases they
want for the fiscal year that begins in October. Dipping into
Medicare is something lawmakers and the White House have vowed
not to do.''
That's just the first two paragraphs of this article, but I
would commend everybody here to get a hold of that paper and
take a look at it, because I think we have to be concerned
about that.
With that in mind, I guess, Mr. Daniels, my question to you
is: with the missile defense system the President is proposing,
with the prescription drug benefit which the President has one
proposal and there are various other proposals out there that
range again between $180 and $300 billion, with the IDEA
funding, which I know our House did not adopt but certainly the
Senate did and it is important to a lot of Members of the
House, are we going to have the funds necessary to do those
things and pay down the debt and take care of these programs
the President is proposing, a lot of House Members support, and
still enjoy the tax cut that the House and the Senate and the
President signed into law?
Mr. Daniels. Congressman, the way I want to think one
should think about this is that we certainly can meet the
Nation's needs, including address each of the subject matter
areas you just mentioned.
Now, if on your personal napkin you take the high-ball
estimate for each and every item, it is possible to construct a
way--I'm sure we could all do it--in which you do use up the
enormous surpluses which will exist under virtually any set of
conditions, but those, of course, are choices for us all to
make, and that's what trade-offs are about and that's what
leadership is about and that's why I'm convinced that Congress
will find ways to make headway on these fronts, each of them,
maybe not as much on every one as its most ardent advocates
would hope.
It is important, and I think it is very useful that we are
so focused on protecting the strong fiscal position which the
Nation finds itself. We shouldn't overlook the stunning good
news here--and I take you back again to the point that even at
a time of a very weak economy--it is now clear that the economy
has weakened much more than most understood--we are here
talking about whether the surplus will be closer to $160 or
$170 billion versus something over $200 billion. That's just
not the worst conditions we could be facing.
Mr. Moore. Thank you.
Mr. Chairman, I guess I would ask you to consider--Mr.
Spratt indicated that he was invited to breakfast last week.
You were not able to attend. I wasn't invited and didn't
attend. I guess I would ask you to consider issuing on behalf
of this committee a formal invitation to Secretary Rumsfeld to
appear here and at least give us a status report about where he
is and where the Department of Defense is in trying to conduct
this review--again, which you said you support and I certainly
support, as well, but I think we have to, if we are going to be
responsible here, have some indication of when we might expect
to hear some final word and a report back from the Department
of Defense and Secretary Rumsfeld. I'd ask you to consider
issuing a formal invitation to him to appear here to discuss
that.
Chairman Nussle. I appreciate that. I'm considering
something even stronger than that.
And, by the way, I'm on a diet. That's why I missed
breakfast.
Mr. Hoekstra.
Mr. Hoekstra. Thank you, Mr. Chairman.
Welcome, Mr. Daniels. It is good to have you back.
Mr. Daniels. Thank you, sir.
Mr. Hoekstra. And it is great to see all of the bipartisan
concern about making sure that we maintain our surpluses.
One of the things that this committee has spent a
considerable amount of time on and has been a pet project of
our chairman, who has really done a lot of good work on this
effort, is the whole area of budget process reform.
Have you had an opportunity to take a look at some of the
budget process reform initiatives, and has the administration
or you taken a look at some of the things that you might be
willing to support and embrace?
Mr. Daniels. Yes, sir. The President has announced as a
candidate and as President his support for a number. One of
them, as part of my testimony this morning, the suggestion of a
joint budget resolution. This is a potential way to address the
question before us today about the future of budget
enforcement. But he has also indicated support for a biennial
budget process and for enhanced rescission powers and for a
continuing resolution reform, just to name three others, which,
if there is interest in the Congress, we would be happy to try
to move forward.
Mr. Hoekstra. Good. Thank you.
The other thing that I think sometimes gets frustrating to
those of us in the House--and I guess OMB does it differently--
do you use dynamic scoring in your modeling?
Mr. Daniels. No, we don't.
Mr. Hoekstra. You don't?
Mr. Daniels. No. The governing conventions do not permit
it.
Mr. Hoekstra. OK. How do you feel about using dynamic
scoring, recognizing that some of the decisions that we might
make here might actually impact behavior in the future? And do
you think that dynamic scoring might give us better models of
future financial performance versus the static modeling that we
currently have in place?
Mr. Daniels. Yes, I do. I think it has to be approached
with great caution, but the difficulties and the uncertainties
of it should not prevent us from moving at all.
The tax cut that Congress just passed was estimated by Dr.
Feldstein from Harvard, for example, to have an economic
feedback effect of at least $500 or $600 billion. I don't know
if that's right or wrong. All I know is the answer is not zero.
But that's the assumption we make today--that, for instance,
that any tax cut that is enacted will have absolutely no effect
on behavior, no effect on economic activity, no effect on
revenue.
Now, we all know that's not the right answer. I think it
would be very important to address this, and I'd say very
cautiously. It would be a big mistake to overshoot and to begin
assuming revenues that did not arrive. We wouldn't want to
mislead ourselves in that way.
Right now we take, I think, a sort of undeniably artificial
view in the other direction.
Mr. Hoekstra. I mean, the modeling in the business
community will go into scenario modeling where you could lay
out a static model if there is no change, a conservative model
which would say, you know, on a conservative basis you might
see ``X'' amount of economic activity or growth, and a more
optimistic end, which--I mean, have you guys taken a look at an
approach like that that would give us a better scenario of some
of the impact of some of the decisions that we would have?
Mr. Daniels. I used to commission and review exactly those
kind of submissions routinely during my years in business,
Congressman.
I guess I would say this--I am an advocate of movement
toward dynamic scoring for the reasons I gave. I do think it
ought to be approached very, very cautiously. There are
differences in the public context, and it would be a mistake to
find ourselves in an over-estimation because, unlike in
business, where spending can be switched off rather quickly by
decisions of business management, we don't switch off spending
in the public context. And if we committed to a level of
spending, banking on some level of revenue that turned out to
be too optimistic, we would be stuck with the consequences, in
all likelihood.
So mark me down as favorable, but, as in I hope most other
matters of budgetary assumptions and estimates, tending to
conservatism.
Mr. Hoekstra. OK. Good. Thank you very much.
Mr. Daniels. You're welcome.
Chairman Nussle. Ms. Clayton.
Ms. Clayton. Thank you, Mr. Chairman.
Mr. Daniels, in your testimony you gave some space to the
subject called advanced appropriation, emergency spending. But,
when we examined it there wasn't very much there. I assume that
it was in your challenge to us that to be fiscally disciplined
we shouldn't have advanced appropriation and emergency
spending.
In light of that, and particularly in the last conversation
about dynamic scoring or modeling the impact of actions we
take, I just want to speak to the issue of emergency spending.
The 2002 budget conference agreement failed to set aside
any money for disasters, while the President's budget did
request it. If you have answered this, please forgive the
question.
Is this omission or does this absence of funds from the
conference agreement make the decision that we made on point
three, including that the budget appears to be more or less
affordable?
Mr. Daniels. I don't think it has any effect on that
decision, but we do regret that Congress did not agree to, in
essence, pre-fund emergencies, which is what I think prudent
and cautious budgeting would call for, and we may suggest that
again in the future. It is quite true that in the compromise
that finally led to the budget resolution, essentially the
emergency reserve we had requested was declined and those
funds, in essence, were made available for other discretionary
spending, and that's what is occurring right now in the
appropriations process.
We do have, of course, money appropriated for emergencies,
but it may well not be enough. Congressman Bentsen's questions
reminded us of that earlier. So if it turns out it is not, we
will seek and support necessary funds. We'll simply have to
guard against abuses of the emergency process through the
President's own ability to not designate or not sign bills that
attempt to misuse that opportunity.
Ms. Clayton. How does that coincide with the Budget
Enforcement Act if we don't have enough monies for the
emergencies?
Mr. Daniels. This is an allowable exception to the Budget
Enforcement Act. In fact, that's why it has been used so
aggressively in the past, because it was one of the--and it is
a legitimate concept, certainly, that in a case of true
emergency that an arbitrary cap ought not prevent the Nation
from responding to a flood or to a storm like Allison, etc.
What we have sought to call attention to is that past
supplementals, if you look at the last three, they cost the
Nation an aggregate of $8 or $9 billion more than was
requested, and this was because people took the opportunity to
add non-emergency items to hitch that to the vehicle as it
moved ahead.
Ms. Clayton. Our agricultural supplemental is emergency or
is it just in the emergency reserve?
Mr. Daniels. Are you referring to the agricultural bill
that just passed yesterday?
Ms. Clayton. Yes.
Mr. Daniels. Well, I think that is in a different category.
That is not technically a supplemental bill, but it is within
the allowable limits for 2001. We are very pleased that the
Congress--House, I should say--passed it without exceeding the
limit established for 2001.
Ms. Clayton. So am I, but the question is: how would you
classify that? As an emergency, or as a supplemental?
Mr. Daniels. Well, I think we'd classify it as neither.
Ms. Clayton. OK. How can you do that? How do you describe
it? Where does it go? Is it out in cyberspace? Now, I'm on the
Agricultural Committee and I voted for it because I thought it
was a good thing.
Mr. Daniels. Yes.
Ms. Clayton. But how do you classify it?
Mr. Daniels. Well, with the supplemental of this year, we
are within the discretionary cap still for the year if the
Senate follows the House's lead, and the agricultural spending
is simply an amendment of the existing authority under the
mandatory aspects of the farm bill.
Ms. Clayton. Would you classify it as neither supplemental
or emergency? What is it?
Mr. Daniels. Well, someone with a better dictionary than I
have can tell you exactly what nomenclature should apply.
Ms. Clayton. Well, if you can't, I can't. If you are the
expert in the----
Mr. Daniels. Yes. Can I give you an answer by letter this
afternoon?
Ms. Clayton. You can. That's acceptable.
Mr. Daniels. OK.
[The requested information was unavailable at press time.]
Chairman Nussle. Just to follow up quickly, would the
administration support the inclusion in a cap extension vehicle
of some sort or PAYGO extension vehicle another run at this
emergency provision that, as you know, the committee supported
and the House supported? Would that be something the
administration may consider supporting, as well?
Mr. Daniels. Yes, Mr. Chairman. We would like to keep that
concept alive. We do think that, again, it is a more-
responsible and transparent way to go about planning for the
spending we know is going to happen.
Chairman Nussle. Thank you.
Mr. Gutknecht.
Mr. Gutknecht. Thank you, Mr. Chairman.
Welcome, Mr. Daniels. You've got a tough job, and I think
you are starting to realize how tough it really is going to be.
I want to sort of piggyback a little bit on what the
chairman talked about in terms of what we are going to do with
Defense.
Now, from the outset I have to say I support strategic
defense. I think the notion of protecting the United States and
ultimately our allies from attacks from potentially rogue
nations I think is as important to us today as radar was to the
British in 1939, so I do believe that we have to move forward,
and I think the idea that we have to have a perfect system in
some respects I think we have to step back. I mean, we don't
have any system in our arsenal today that is absolutely
perfect, and I don't think we have to set that standard in
order to move forward with it.
But I do have to say, on the whole issue of Defense, we
have to back up a bit and look at how much we spend and what we
get for it in return, and I think there are two issues that, if
Mr. Rumsfeld doesn't deal with this, he's going to have an
awful lot of heartaches when he gets up here to Capitol Hill.
One is burden sharing, because we in the United States are
currently spending almost 3 percent of our gross domestic
product on national security. Our European allies, where their
gross domestic product in the European Union is almost as large
as ours, they are only spending about 1.5 percent.
It seems to me, until we deal with that disparity, because
they are more than happy to allow the United States to
literally shoulder most of the cost of policing the shipping
lanes and making certain we live in a peaceful world, at some
point we have to deal with that, and if we don't deal with it
in the Rumsfeld report I don't know where we will do it.
The second thing is that it is my understanding--and I
believe this is correct--that we currently have more admirals
and generals in the military today than we had at the peak of
World War II when we had over 15 million Americans in uniform,
and at some point we have to deal with this top-heavy
bureaucracy that we see developing down at the Pentagon.
Finally--and I just want you to comment on a few of these
things if you care to--but it seems to me the discussion we're
having today ultimately leads to some kind of conclusion we've
got to deal with in this committee and the Congress and we need
help from the administration, and that is: what kind of
spending caps will we set? Because I believe and have believed
for a long time--and this debate started with Mark Neumann, who
sat on this committee--that there is no way that the Federal
budget should grow any faster than the average faster budget,
and if the Bureau of Labor Statistics is correct--and you have
better economists, perhaps, than we do, or maybe even BLS does,
but we are told that this year the average family budget will
grow by about 4.2 percent. I my opinion, there is no reason
that the Federal budget should grow at a rate faster than that.
I mean, if we can't figure out ways to prioritize our
spending and live within the same kind of budget caps that the
average family does, then shame on us. And we need your help
and we need help from the administration both in dealing with
how do we adequately fund our military--we all want our kids to
be properly trained and we want to have the latest technology
if we have to send them into a place where they can get shot at
and killed, but, on the other hand, we also have to deal with
this growing problem, as I see it, of a top-heavy bureaucracy
at the Pentagon and with the fact that our allies are more than
willing to allow us to shoulder a disproportionate share of the
cost of policing the world.
If you want to comment on any of that, we'd love to hear
from you.
Mr. Daniels. Just quickly on two points.
I think the general rule of thumb that the Government ought
not grow faster than the economy or the American family budget
is not a bad one to operate in, and the President's proposal,
which many, of course, castigated as too slow a rate of growth,
was just at about that level, many observed, of what the
American family can expect this year.
Now, the additional request for Defense we very openly say
is a matter of catching up and also a matter of getting to an
honest budget in the first place so that you are not presented
with a little piece of it this year and the rest of it next
spring, which has been the case for several years in a row
until President Bush got here.
I think that suggestion is a pretty good watch word for us
all.
The only thing I would say about the Defense spending--and
it was a point that I believe Congressman Thornberry perhaps
raised earlier--Congress will have such a large role in this
process, not only in terms of making the decisions but in terms
of sharing in the statesmanship, and if you doubt that
Secretary Rumsfeld has got an enormous job ahead, just note
that today, when he announced the first very modest reduction
associated with consolidation of the B-1 bases, there was quite
a lot of noise about that.
There is going to have to be, I think, a large degree of
statesmanship and forbearance on the part of all actors if we
are going to make the kind of changes that it is clear both
sides of the aisle in this committee support.
Mr. Gutknecht. But that's part of the problem. If you have
a moving target at the overall dollar limit you are going to
have, you're going to have those kinds of debates. If we can
all agree at the beginning how big the pie will be, then there
will be legitimate debates about how much will go to strategic
defense, how much will go to B-2 bases, you know, whatever you
want to have that debate.
But the problem is we have sort of a moving target in terms
of how big the pie will be. As long as you have that
uncertainty out there, you are going to have a whole lot of
bickering going on up here in Capitol Hill.
Chairman Nussle. Mr. Clement.
Mr. Clement. Mr. Chairman, I have some amendments at the
desk. Should they be considered at this time? [Laughter.]
Director Daniels, good to have you here today.
Mr. Daniels. Thank you, Congressman.
Mr. Clement. You heard Mr. Collins a while ago say he
doesn't call it ``surplus'' in his Congressional District. He
likes to refer to it as a ``positive cash flow.'' And he may be
right. And I just wanted to ask you, as the new director, and
knowing that you haven't been on the job for that long yet, do
you still foresee surpluses or positive cash flow as far as the
eye can see?
Mr. Daniels. Yes, I do. And I think that they will and can,
even in the context of other decisions the Congress may make,
be of the on-budget as well as the unified variety.
Mr. Clement. Do you think firewalls are effective? And, if
so, what are your recommendations for firewalls if caps are
extended beyond 2002?
As you know, currently the discretionary caps include
categories for overall discretionary spending--mass transit and
highways and conservation funding. In the past, caps have been
established for Defense and non-Defense programs, violent crime
programs, and international.
Mr. Daniels. Yes, sir.
Mr. Clement. But what about after 2002?
Mr. Daniels. I think we ought to look skeptically, in
general, at, in essence, reducing the discretion of Congress or
an administration to shift dollars to address shifting
priorities. That isn't to say there aren't ever appropriate
uses, some which relate directly to trust funds, for example,
as I guess a stronger case can be made. Some I think have been
necessary in the past, and sometimes this was the case around
Defense. But I think we should be careful about fencing off too
much of the budget.
As I mentioned earlier, I'd like to see the overall field
get larger, as opposed to ever smaller, by re-examining some of
those things that have gone over the fence to the mandatory
side of the budget and kind of outside, therefore, the
authority of decision-makers in the budget appropriation
process.
Mr. Clement. Tell me about--I know you commented a while
ago about biennial budgeting, that the administration thinks
that's a good idea. Could you expand on that, why you think it
is a good idea?
Mr. Daniels. Many of the needs with which the Nation deals
are multi-year, more than two but certainly more than 1 year in
character. I think that there is an argument that it would
leave the Congress more time for other matters.
We have tried to make an emphasis, even without the tool of
a biennial budget, to try to make some emphasis really to try
to ally with the Budget Committees and have an orderly process
this year. So far, by the way, I think it has gone very well,
thanks to this committee for its leadership, and the
Appropriations Committee, even with a late start that was
forced on them, are moving swiftly. And so I think there is
some hope that we will have an on-time arrival or something
like it. We ought to all try. But a biennial budget would make
that even more practical, some believe, and might leave the
Congress time it doesn't have today to step back and look at
broader policy issues, and if so that would be a good outcome.
Mr. Clement. Such as oversight----
Mr. Daniels. Yes, sir.
Mr. Clement [continuing]. Of various programs?
Mr. Daniels. Absolutely.
Mr. Clement. What about changing the budget resolution to a
joint resolution requiring the President's signature?
Mr. Daniels. The President favors this and I think it is a
very relevant question in the context of today's hearing,
because this is at least one idea we wanted to offer into the
mix--that this might be--the updating of the caps and the
renewal of a Budget Enforcement Act might be an ideal time to
institute, in essence, on an annual basis what has happened
occasionally in the past. There have been these occasions where
circumstances have led to Presidents coming together with the
Congress and, in essence, through BEA amendments, having what I
would look at as kind of a joint budget resolution. I think it
is a great vehicle.
Mr. Clement. Thank you.
Chairman Nussle. Thank you.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Very briefly, on the question of firewalls, it seems from
your testimony you are saying that this year, with the Defense
supplemental, the $18 billion which is going to be added onto
over time, apparently, that you do want a firewall, and, in
fact, you would add on top of the 661 figure that is in the
budget resolution.
I would argue that we may want to have firewalls going
forward, because the concern I've got is that DOD is going to
nickel and dime the Congress to death and we're not going to
have the debate about where we should fund our priorities.
Now, I understand my colleague saying, ``Well, we ought to
spend no more than what the American household spends every
year,'' but the fact is every once in a while the American
household has a hole in the roof or their boiler goes out or
something else that is an extraordinary expenditure, and I
think you can make the case or you're trying to make the case
that the DOD plus-up is an extraordinary expenditure, but at
the same time I'm worried that you want to come and take it out
of the non-Defense discretionary side of the budget that has
already been squeezed, and at the same time that you want to
plus up the education side, so I have that concern.
The other concern is, with respect to going to a 1-year
resolution, I would say you might be right about that. At the
same time, I think you can show some empirical evidence that
having a 5-year cap window gives you something to work against,
and Congress until recently has abided by those multi-year
caps, so if you go to a 1-year cap I'm worried that we could
just adjust it every year when we decided we didn't have enough
money, so you might think about that.
Finally, it seems to me what you are saying with respect to
the Medicare part A is that the administration continues to
hold to the theory that part A and part B are, in effect, one,
there is no trust fund, and thus, for purposes of whether we
are spending the off-budget surplus or not because of a
tightening surplus, that the administration intends to use the
part A surplus if we dip below it and make the political
argument that we are not in deficit so long as we are not using
the Social Security surplus. Is that a correct assumption?
Mr. Daniels. Well, you do state our conceptual view of
Medicare correctly.
Mr. Bentsen. So that, to the extent that the increase in
Defense spending, the lessening of revenues due to the tax cut,
and whatever happens with the surplus vis-a-vis the economy,
that, to the extent that we dip below the on-budget surplus
figure, the administration's position will be that as long as
it is not going in the Social Security trust then we are still
running a surplus.
Mr. Bentsen. I think the technical definition of ``on-
budget`` is at the Social Security line. We recognize there are
Congressional enactments that seek to hold or to maintain
surpluses even higher.
Mr. Daniels. I grant you that. You're correct about the on-
budget. But the political line has been that Medicare be
included in that. The administration does not agree with that
at this point.
Mr. Bentsen. We have not subscribed to that.
Mr. Daniels. Thank you.
Mr. Bentsen. Thank you, Mr. Chairman.
Chairman Nussle. Thank you very much.
Mr. Daniels, thank you very much for your testimony today.
I will report to you that the committee is considering holding
a markup in the very near future on this issue with regard to
the caps and PAYGO and possibly some other Budget Enforcement
Act issues, and we would welcome any additional comments or
suggestions as we go down the path.
One final word on the Defense issue, since it appears that
it is going to be submitted today. I would just suggest to you
that, after listening to the other Members' inquiries today and
your response to it, it is obvious that the pentagon went
through a 6-month review in order to decide how much they
needed for a catch-up, and it would have been nice if they
would have spent that 6 months deciding what the modernization
would be.
I know that there may be others who share that concern, and
maybe even including you, and I don't mean to pile this all on
your desk. That's why we both get the big bucks, so to speak.
And it is also because Mr. Rumsfeld hasn't been before the
committee that we pile it at your table.
Those are our observations, and we appreciate the chance to
report them to you and to get your feedback on budget
enforcement issues.
Mr. Daniels. I read you loud and clear, Mr. Chairman, and I
will take the sentiments of the committee back.
If I may, as I leave I would like to point out to the
committee members how healthy a person looks after he leaves
the job of budget director. I hope you notice the contrast
between my emaciated condition and Congressman Panetta's
vibrant health. [Laughter.]
Chairman Nussle. Thank you very much.
Mr. Daniels. Sure enough.
Chairman Nussle. Thank you.
Our next panel is the director of the Congressional Budget
Office, Dan Crippen.
Mr. Crippen, this is the first time we've had the
opportunity to have you before the committee. We not only
welcome you to the committee, let me just make a couple of
comments. Number one, you were very ably served in your absence
before the committee. We had very good testimony and
information from the Congressional Budget Office, and we're
glad you are back and getting around better, and we were
thinking about you during that period of time, so we just
wanted to let you know that we are happy that you are back at
the helm and interested in your testimony here today.
Welcome.
STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Crippen. Thank you, Mr. Chairman.
Mr. Chairman, Mr. Spratt, as always we have submitted
written testimony, which I will not spend time on here. I would
like to make a couple of introductory comments, however, in
brief.
We essentially think that the BEA and even its
predecessor's attempts at budget enforcement were salutary and
should be extended in some form as the Congress sees fit. A
budget without enforcement is probably honored only in the
breach. The Budget Committee and the Congress need the ability
to have some enforcement mechanisms, and the BEA has proved
useful in that regard.
Second, I think we need to keep in mind how we got here
today and remember that we have only recently looked forward to
at least a period of some surpluses and away from significant
deficits.
The path of how we got here also is instructive on some of
the debates today. While fiscal policy played a clear role--
indeed the last administration would argue that fiscal policy
changed the economics dramatically--it is the performance of
the economy in many ways that has produced the surpluses that
we now enjoy, and it could be the performance of the economy
that we need to worry about most of all in keeping this kind of
surplus together.
Third, our discussions today about firewalls around the
Social Security and Medicare trust funds are something my
friend and mentor Senator--now Ambassador--Baker used to call a
``high-class problem.'' In the past we didn't have much
discussion about on-budget and off-budget, or worrying about
protecting the Social Security trust fund. We now have the
ability to protect the fund and it is probably a good thing to
do so, but at this point we have no real enforcement mechanism.
It is a political firewall, if you will, and that's important--
probably more important than a procedural firewall.
But, nonetheless, it is a relatively new phenomenon. All of
us remember many years in which these trust fund balances were
absorbed into totals of the budget and utilized that way.
Let me say, Mr. Chairman, two things in addition. One is I
didn't bring any napkins, nor did I bring any envelopes, which
I think is a higher standard of estimation. But as other
Members have cited, it has been reported as recently as this
morning that somehow we have new estimates. Frankly, we don't.
We are in the process, as all of you, I think, know, of
producing a mid-year assessment, which will come out in August
or thereabouts.
A couple of weeks ago our economic advisors were in. We
reviewed a forecast with them. We're working on revising that
forecast now based on their comments and other data, so it
won't be until that time--end of July and into August--that we
know what the future or near future may look like.
I would also like to point out that we made a few
adjustments in the analysis of the President's budget. We took
the opportunity then to make a couple of adjustments in our
baseline--not so much in the forecast, but in terms of reducing
slightly the revenue take for this year. That was our last look
at where we think we are. At that time, also, outlays were
running below what we would have expected. There are always two
sides to this equation, and if outlays are running below, even
though revenues are running below, then it may not dramatically
affect the outlook for the surplus.
Likewise, neither we nor our economic advisors have seen
anything at this juncture that would change the long-term
outlook a great deal. I think things are not going to change
dramatically, especially over the long term.
And, speaking of the long term, I think it is important to
keep in mind that although we are only looking in this process
to the next 10 years, it is very important to look beyond that.
I have my age-old chart that I carry around with me that we
can put up again. What it shows is something we all know but we
still have to keep in mind. When our generation retires, we--
that is, retirees--are going to consume a significant amount of
the existing Federal budget and the economy. Whether we need
budget discipline today and a precise line upon which we don't
tread, the time is soon coming when the budget will be consumed
by these programs in our current outlook or we will have to
significantly increase debt or taxes or cut other spending.
So the longer-term outlook, Mr. Chairman, is not certainly
as rosy and as full of surpluses as is the 10-year outlook.
With that, I'll quit and invite your questions.
Chairman Nussle. Thank you very much.
[The prepared statement of Dan Crippen follows:]
Prepared Statement of Dan L. Crippen, Director, Congressional Budget
Office
This document is embargoed until 10 a.m. (EDT), Wednesday, June 27,
2001. The contents may not be published, transmitted, or otherwise
communicated by any print, broadcast, or electronic media before that
time.
Chairman Nussle, Congressman Spratt, and Members of the Committee,
thank you for the opportunity to testify today on extending the Budget
Enforcement Act of 1990 (BEA). The major provisions of the BEA expire
at the end of fiscal year 2002. The basic framework of enforcement
procedures established by that law the annual limits on discretionary
appropriations and the pay-as-you-go (PAYGO) requirement for new
mandatory spending and revenue laws has generally helped to improve
budgetary discipline over the past decade. However, issues and concerns
about the law have arisen, especially in recent years.
My testimony today will make the following major points:
The key budget enforcement provisions of the BEA, which
cover the statutory sequestration procedures enforced by the executive
branch, will expire on September 30, 2002. In contrast, the
Congressional budget process, which centers on the adoption and
enforcement of the Congressional budget resolution, generally does not
expire (with the exception of certain Senate procedures).
On the whole, the BEA has been salutary. It promoted
budget constraint that helped to produce the surpluses that have
emerged since 1998. However, those surpluses and other factors have
also put increasing pressure on lawmakers to circumvent the
discretionary spending caps and the PAYGO requirement, making them less
effective recently.
Possible improvements in the BEA's framework include
enhancing flexibility within the discretionary caps and clarifying how
to classify certain budget transactions for the purposes of enforcing
the BEA.
Broader changes, such as those in the Nussle-Cardin budget
reform legislation of the 106th Congress (H.R. 853), could help to
improve the budget process. Ultimately, however, that process has only
a limited influence on the formation of a political consensus; no
procedural change can guarantee agreement on budget policies.
A BRIEF OVERVIEW OF THE BEA AND EXPIRING PROVISIONS
The BEA built on an existing framework of budget enforcement
procedures. The Balanced Budget and Emergency Deficit Control Act of
1985 established a schedule of fixed, declining deficit targets for
each of six fiscal years beginning in 1986, leading to a target of zero
in 1991. The Deficit Control Act also created a procedure known as
sequestration in which spending for many Federal programs would be
automatically cut if the deficit for a fiscal year was estimated to
exceed the target level. A sequestration, if necessary, would be
carried out by an executive order that the President would issue under
the terms of a sequestration report from the Comptroller General. That
report was to be based on a joint report by the Office of Management
and Budget (OMB) and the Congressional Budget Office (CBO).
In 1986, the Supreme Court ruled in Bowsher v. Synar that it was
unconstitutional for the President's sequestration order, an executive
action, to be determined by a report from the Comptroller General, an
official accountable to the Congress. Consequently, the Deficit Control
Act was modified in 1987 to give OMB the authority to prepare the
estimates and calculations used to trigger a sequestration order. As
part of that change, CBO was required to issue advisory sequestration
reports to OMB.
Although deficits shrank somewhat in the late 1980's, they failed
to meet the statutory targets in some years by substantial margins. As
a result of that failure, the BEA was enacted in the fall of 1990 (as
an amendment to the Deficit Control Act) to establish new procedures
for deficit control. Its controls included annual caps on budget
authority and outlays in appropriation acts and a pay-as-you-go
procedure to prevent new mandatory spending or revenue laws from
increasing the deficit. Both of those controls were to be enforced by
sequestration. However, under the BEA, a breach of the discretionary
spending caps would lead to reductions only in discretionary programs,
and a breach of the PAYGO control would trigger cuts only in certain
mandatory programs. The Deficit Control Act's concept of deficit
targets was retained, but it essentially became moot.
The BEA's procedures were originally supposed to expire at the end
of fiscal year 1995. The Congress has periodically extended their life,
most recently in the Balanced Budget Act of 1997. Currently, most of
the provisions of the BEA are set to end on September 30, 2002. Those
provisions include the discretionary spending limits and related
sequestration procedures (set forth in section 251 of the BEA) and the
process for tracking the costs of legislation covered by the PAYGO
requirement. (A brief description of the provisions that expire at the
end of fiscal year 2002 is included in the appendix to this testimony.)
Section 252, which sets out the PAYGO procedure, does not expire at
the end of 2002. After that time, however, OMB would no longer be
required to track the budgetary effects of new mandatory spending and
revenue laws for the purpose of PAYGO enforcement. That tracking known
as the ``PAYGO scorecard'' records the 5-year budgetary effects of all
laws covered by the PAYGO requirement. The termination of that tracking
will effectively shut down the PAYGO system for new laws. However,
because section 252 itself does not expire, the possibility of a
sequestration of mandatory spending would continue through fiscal year
2006 (the year that section 252 and other remaining provisions of Part
C of the Deficit Control Act will expire) for PAYGO legislation enacted
before the end of fiscal year 2002. Thus, any sequestrations after 2002
would occur solely on the basis of the net costs from legislation
enacted before the end of 2002.
In addition to those statutory budget procedures, the Congress has
a budget process that centers on the adoption and enforcement of the
annual Congressional budget resolution. That process laid out in the
Congressional Budget Act of 1974 generally does not expire. However,
certain provisions of the 1974 law that require a three-fifths vote in
the Senate to waive various enforcement procedures (points of order)
will expire at the end of fiscal year 2002.
EVALUATING THE BEA
The Budget Enforcement Act helped to provide budgetary discipline
for most of the 1990's. From 1991 to 1997, the growth of total
discretionary outlays was well below the rate of inflation (principally
because of significant cuts in defense spending after the end of the
Cold War). New mandatory spending and revenue laws enacted during that
period were consistent with the deficit-neutral PAYGO requirement.
Since the BEA's enactment, only two small sequestrations of
discretionary spending have been ordered, both of which occurred in
1991.
Beginning in 1998, however, the fiscal environment changed. The
large and growing surpluses that began to emerge in that year
eliminated the essential purpose of the BEA disciplines to reduce and
control deficits. In a time of surpluses, the discretionary spending
caps and PAYGO requirement (when enforced) generally bar legislative
actions that would make projected surpluses smaller. As surpluses have
grown to record-setting levels, those procedures, as extended in 1997,
have been circumvented.
For example, in 1999 and 2000, lawmakers enacted record levels of
emergency appropriations which are effectively exempt from budget
enforcement procedures and used other funding devices to boost
discretionary spending well above the caps set in 1997. For 2001,
lawmakers set new, higher statutory caps to accommodate increases in
discretionary spending (the new outlay cap is about $60 billion higher
than the one for 2001 set in 1997). They also reset the PAYGO balance
for the year at zero. That action prevented the need to offset an
estimated $10.5 billion drop in the surplus caused by new mandatory
spending and tax laws enacted during the last session of the 106th
Congress. For 2002, the adjusted cap on total discretionary outlays
($572 billion), which lawmakers have not reset, is about $100 billion
below the baseline level of discretionary outlays projected for that
year ($678 billion). Moreover, OMB's sequestration preview report for
2002 shows a $16 billion net reduction in the surplus for the year from
the estimated costs of mandatory spending and revenue laws enacted in
earlier years.
Lawmakers' goal of using the off-budget (Social Security) portion
of surpluses to reduce public debt has added an informal but important
new component to budgetary discipline. In general, paying down Federal
debt provides economic benefits that would give lawmakers more
flexibility to deal with long-term budget problems linked to the aging
of the baby-boom generation. Many lawmakers support establishing a
``lockbox'' procedure in law that would make the goal of preserving
off-budget surpluses a statutory requirement, on a par with the
discretionary spending caps and PAYGO discipline. Many would also
extend the lockbox concept to the annual surpluses from the Medicare
Hospital Insurance trust fund.
In 2000 and 2001, relatively large on-budget surpluses and
projections of growing surpluses in the future may have weakened
overall budgetary discipline and further intensified the pressures on
the discretionary spending limits and PAYGO requirement. If future on-
budget surpluses fall below current projections because of shifting
economic conditions, the estimated costs of the recently enacted tax
cuts, additional new spending or revenue laws, or other factors, the
informal commitment to preserve Social Security and Medicare surpluses
could impose significant budgetary constraint.
SELECTED ISSUES IN EXTENDING THE BEA
Despite recent experience, the underlying philosophy of the Budget
Enforcement Act that appropriations should be enacted within
enforceable limits and that the estimated costs of new mandatory
spending and tax legislation should generally be offset has proved to
be effective in the past. Even in an era of surpluses, the
discretionary caps and PAYGO requirement could be important components
of overall budgetary discipline. However, lawmakers may want to
consider certain issues as they decide whether or how to extend those
procedures.
The most glaring difficulties with the BEA's framework have
centered on enforcement of the discretionary spending limits. In 1999
and 2000, lawmakers were criticized for enacting record amounts of
emergency spending and for excessively using advance appropriations,
obligation delays, and timing shifts to appropriate more funds than the
caps for those years permitted. The root of the problem, however, was
the base levels of discretionary appropriations allowed under those
caps. Those levels were not supported by a consensus of lawmakers.
In addition, at whatever level lawmakers decide to set
discretionary caps, it is important that they retain flexibility to
adjust spending priorities within those caps. The discretionary
spending limits have often included sublimits for certain categories of
spending. Currently, there are sublimits for spending on highways, mass
transit, and conservation. At various times in the past, separate
limits have existed for defense, domestic, international, and crime-
fighting appropriations.
Separate sublimits within overall caps may serve important policy
goals. But law-makers give up flexibility to meet other needs within
those caps when they carve out separate limits for certain programs,
especially if the sublimits also act as floors on spending. In
addition, spending priorities may shift from year to year. If the
overall caps are extended for a 5-year period as they have been in the
past establishing subcaps might make it difficult to shift priorities
or, conversely, might prompt lawmakers to again employ the spending
devices for which they have been criticized in recent years.
Another issue that lawmakers may want to consider as they review
the BEA is budgetary classifications under the law. In the conference
report accompanying the BEA and its subsequent extensions, the Congress
included scorekeeping guidelines that help OMB, CBO, and the House and
Senate Budget Committees treat the budgetary effects of legislation
consistently. However, the treatment of certain policy actions needs to
be clarified. For example, CBO and OMB treat governmental receipts that
result from provisions in appropriation laws differently: CBO places
those receipts on the PAYGO ledger, whereas OMB counts them under the
discretionary spending caps. That difference creates confusion in
budget scorekeeping and can complicate final Congressional action on
annual appropriation acts.
BROADER CHANGES IN THE BUDGET PROCESS
Because the context for the coming debate about extending the BEA
is likely to be quite different from the context in earlier years, it
may prompt a wider look at the budget process and related issues.
Indeed, last year, the House considered legislation that would have
changed the budget process in ways that could help to improve budgetary
decisionmaking. That legislation (H.R. 853) was developed by the Task
Force on Budget Process (the Nussle-Cardin task force) of the House
Budget and Rules Committees.
The subject of budget accounting may well receive greater
examination in coming years. One major accounting issue is the role and
status of trust funds and other earmarking devices in the Federal
budget and whether they ease or complicate law-makers' efforts to set
overall budget priorities each year. Another important issue is
determining the optimal accounting procedures for the Federal
Government's long-term liabilities. One proposal, which was included in
H.R. 853, would phase in present-value credit accounting for Federal
insurance programs and certain other long-term liabilities. Such
accounting might improve the information available to lawmakers and
help to control costs, but the conversion from cash accounting to
present-value accounting for insurance programs would be difficult,
time-consuming, and potentially confusing (at least initially). If the
Congress decides to make such a change, it may want to do so carefully
and incrementally.
Another area of concern to some observers is the annual budget
process. A number of lawmakers worry that the process is too complex
and confusing; they would like to make it simpler, easier to
understand, and more efficient. For example, some lawmakers contend
that excessive complexity in the budget process and other factors have
led to delays in enacting budget legislation especially appropriation
laws. To help ease those delays, they favor converting the annual
budget cycle to a 2-year timetable, providing for automatic continuing
appropriations, and turning the Congressional budget resolution into a
joint resolution signed by the President (proposals that were
considered during the debate on H.R. 853).
Regardless of such changes, the budget process tends to function
more smoothly when a political consensus exists on spending and revenue
policies. In particular, during a period of divided government, no
modification to the budget process can guarantee timely agreement on
budget legislation.
CONCLUSIONS
Lawmakers are considering whether to extend the BEA in a vastly
different budgetary and fiscal environment than the time of high
deficits that existed when the law was put in place. The current period
of large surpluses is unprecedented and has led some people to question
the need for a BEA-type framework of budget constraints.
Yet even during a time of surpluses, budget constraint is
important. Budgeting is a process for setting priorities and allocating
resources. Large surpluses do not make those tasks unnecessary.
Moreover, baseline projections of surpluses depend largely on continued
economic growth and assumptions of continued fiscal constraint, which
may or may not come to pass. In addition, long-term budget problems
linked to the aging and retirement of the baby-boom generation loom
just beyond the current 10-year budget horizon. Even substantial
surpluses over the next several years cannot eliminate the budgetary
tensions that those coming demographic changes and other factors will
bring.
Despite recent problems, the BEA framework of discretionary
spending limits and PAYGO enforcement has generally promoted budgetary
discipline. It can continue to be an important component of budgetary
policymaking and help lawmakers to confront future budgetary pressures.
APPENDIX: BUDGET PROVISIONS EXPIRING ON SEPTEMBER 30, 2002
Part I. Section 275(b) of the Balanced Budget and Emergency Deficit
Control Act of 1985, as amended by section 10212(b) of the Balanced
Budget Act of 1997, provides that:
``Sections 251, 253, 258B 2 U.S.C. [Sec. Sec. 901, 903, and 907C],
and section 271(b) [2 U.S.C. Sec. 900] note of this Act, and sections
1105(f) and 1106(c) of title 31, United States Code, shall expire
September 30, 2002. The remaining sections of part C of this title [2
U.S.C. Sec. Sec. 900-909] shall expire September 30, 2006.''
The majority of those expiring provisions constitute the
enforcement provisions of the Deficit Control Act of 1985.
Section 251 sets forth the discretionary spending limits
and provides the procedures to enforce those limits through
sequestration of existing funding for discretionary programs.
Section 253 provides for sequestration of funding for
Federal programs to enforce ``maximum deficit amounts.'' However, no
such amounts have been defined since 1995. In addition, the amounts
defined for fiscal years 1992 through 1995, as adjusted under law, were
consistent with the discretionary spending limits and pay-as-you-go
requirement and provided no additional constraint.
Section 258B authorizes the President to propose changes
in which dis-cretionary defense programs are affected by a
sequestration order. The section also contains expedited legislative
procedures for Congressional consideration of a joint resolution
affirming the President's proposed changes.
Section 271(b) constitutes a rule of the Senate requiring
a three-fifths vote to waive (or sustain on appeal) several sections of
the Congressional Budget Act of 1974 [sections 301(i), 302(c), 302(f),
304(b), 310(d), 310(g), and 311(a)].
The expiring provisions of Title 31 of the U.S. Code
concern the President's obligation to submit budgets and supplemental
budget estimates (and changes thereto) in a manner consistent with the
requirements of the Deficit Control Act (and the Budget Enforcement
Act).
Section 252 of the Deficit Control Act does not expire on September
30, 2002. However, the language of the section requires tracking of the
budgetary effects of direct spending and revenue laws enacted before
October 1, 2002. No tracking would occur for legislation enacted after
that date. By operation of this section, the budgetary effects of
direct spending and receipt legislation enacted before October 1, 2002,
could trigger a sequestration in any fiscal year through 2006, when the
remaining provisions of Part C of the Deficit Control Act expire.
Part II. Section 904(e) of the Congressional Budget and Impoundment
Control Act of 1974, as amended by section 10119 of the Balanced Budget
Act of 1997, provides that ``Subsections (c)(2) and (d)(3) shall expire
on September 30, 2002.''
Those provisions constitute a rule of the Senate requiring a three-
fifths vote to waive (or to sustain an appeal of a ruling of the Chair
on) a point of order raised under the sections of the Congressional
Budget Act and the Deficit Control Act of 1985 listed below.
Congressional Budget Act:
Section 301(i) Social Security surplus reduction in budget
resolution
Section 302(c) consideration of appropriations before
suballocation
Section 302(f) legislation exceeds allocation level
Section 310(g) Social Security change in reconciliation
Section 311(a) legislation exceeds aggregate level
Section 312(b) legislation exceeds discretionary spending
level
Section 312(c) maximum deficit amount exceeded
Deficit Control Act:
Section 258(a)(4)(C) amendments to joint resolution
suspending certain provisions in case of war or low-growth report
Section 258A(b)(3)(C)(i) amendment to joint resolution
modifying the sequestration order
Sections 258B(f)(1), 258B(h)(1), and 258(h)(3) amendments
regarding joint resolution approving President's decision on defense
programs
Section 258C(a)(5) special reconciliation bill exceeds
maximum deficit amount
Section 258C(b)(1) restrictions during consideration of
special reconciliation bill
Chairman Nussle. My first question is basically this: as
many times as the Congress waives the rules--we waived it on
the tax bill, we'll waive it on the prescription drug bill,
we'll waive it on every bill just about that we can think of to
move through here--it doesn't mean that we don't respect it,
but we'll waive it in order to make sure that everything fits
as all the parts are moving through the process. As often as we
waive them, why have them? I mean, have they really been
effective as often as we have waived the rules?
Mr. Crippen. I think certainly with large legislative
efforts, whether it is a tax bill of some size or a minimum
wage increase, the rules are there to remind you of the
effects, but rarely are the rules a strong enough impediment to
overcome the majority of the Congress.
Someone recently said they felt like their job was to be
bumps in the road, speed bumps, and in some ways that's what
this process is like, as well. It at least forces you to
reflect more than 30 seconds on the budgetary consequences.
It is not unlike what we do when we try to assess the cost
of mandates applied to State and local governments or other
businesses. Those rules in the House never get waived--those
points of order, I should say, in rule--so there is a
willingness to enforce, or at least observe, that procedure,
and it does bring to everyone's attention what the consequences
are.
Beyond that is probably asking more than any process can
deliver to deter the majority will of the Congress. There are
times when we'd like to slow things down, and the Senate is
supposed to do some of that, but a process, alone, is not going
to overcome political will, as you well know.
Chairman Nussle. You said the Senate was supposed to slow
things down?
Mr. Crippen. They are.
Chairman Nussle. Just checking with your----
Mr. Crippen. Yes.
Chairman Nussle. I wanted to make sure that was your
testimony.
Then let me ask you it in a little bit different way.
Because we are obviously these bumps in the road, these rules
were developed during a time of deficits, and chronic deficits,
at that, is there a better way, in your opinion, to construct
these caps and PAYGO provisions during an era of surplus? Not
only should they be extended--you've testified that that's what
you would suggest--but is there a new way or a better way to
construct this mousetrap during a time of surpluses as opposed
to deficits?
Mr. Crippen. I don't know that it makes a difference.
Obviously, the political willingness of the House and the
Senate changes with the fiscal outlook. I'm assuming that there
is more willingness now to spend because it is easier to use
surpluses than to overcome deficits. But, as far as a process,
I'm not sure that there's a great distinction. A budget is a
process in which one sets priorities, so you have to somehow
set a limit and set priorities under it.
The emergence of the Social Security Trust Fund as a
firewall, political or procedural, is a substitute for what we
used to do in terms of trying to reduce deficits. Most of our
deficit targets were based on unified budgets, so we tried to
reduce 200 to 150 to 100 to zero. Well, we've gone beyond
that--well beyond that now--so preserving at least some portion
of that surplus by having a Social Security line or some other
line you choose to establish seems to be important. You would
want to then pay attention to your legislative activities, as
you do--appropriations and mandatories--to make sure that in
the future those lines aren't dramatically crossed.
I wouldn't want to say these are walls in effect that could
never be crossed, because our estimates are uncertain, as you
well know, and the economic and budgetary effects of being a
few dollars on one side or the other of an artificial line are
inconsequential. But as a target, a goal, or a new way of
enforcing a budget, it seems to me to be the emerging and
probably quite successful replacement.
Chairman Nussle. Do you have an opinion as to the length of
time that we should establish caps? I understand there is a
political and practical decision that has to be made, but, from
your standpoint, just from budget management and what is
doable, what is predictable, what's reasonable, what length of
time would you suggest?
Mr. Crippen. As long as the Congress wants.
Chairman Nussle. I knew that was the answer.
Mr. Crippen. Yes. I would suggest a few years. I don't know
whether that is 3 or 5. I think we have deluded ourselves in
thinking that the long term--looking at longer and longer terms
very precisely--is important or useful. We went during the
first years of the Budget Act from a budget horizon of a few
years, when Mr. Panetta and I worked together in 1981/1982/
1983, to 4 years and then 5 years and then, of course, with the
Senate's codification, 10. And the extensions became necessary,
at least in the review of your committees, because people could
figure out how to game the time horizon and go beyond 5 years
or 4 years, but now we have, of course, the ability to go
beyond 10 years.
And so the extensions of the time frames we work in haven't
necessarily been helpful to preclude out-of-timeframe budget
changes. I think they also contribute to a precision that is
certainly not there, or an apparent precision, and I think that
going back to a 5-year budget would probably be salutary.
In that regard, I'm not sure that a long timeframe for any
extension of caps would be useful.
Chairman Nussle. One other question, just in light of Mr.
Daniels' testimony. Does CBO anticipate any change in its
estimates based on the stimulus effect of the tax cut that was
just passed?
Mr. Crippen. Not explicitly. We do not do what they were
referring to or Mr. Daniels was referring to as ``dynamic
scoring'' in that context, either, nor does the Joint
Committee. I would say, however, there is a fair amount of
dynamic scoring going on--that is, behavioral changes are
assumed on both the spending and revenue side. The one thing
that has not changed explicitly is the macroeconomic forecast
because of differences in fiscal policy.
As Mitch said, there is a broad spectrum of folks who
believe that fiscal policy has an effect. Again, I'd suggest
that the last administration certainly thought that the change
in fiscal policy in the early 1990's had a dramatic effect on
the economy, and rightfully so.
So everyone knows there is an effect or agrees there is an
effect, but there are a couple of important caveats to that.
One, we don't know how large. I mean, it would be purely a
guess. And, two, it depends on future political actions as to
what the exact effect might be.
For example, the current tax bill could stimulate the
economy, depending on how it is financed. If it just has to be
replaced by future taxes, then it might actually hurt economic
growth. If it is, as some would argue, paid for by a diminution
of future Government spending, it could help economic growth in
some models. So a lot of it depends on the assumptions one has
to make about future political activity, what the Congress and
the administration 10 and 20 years from now will do with fiscal
policy, in order to even know the direction of the effect, let
alone the precise number.
But certainly, as we do with everything else, baselines
assume current policy. The stimulus effect of this tax cut or
the rebates this fall will get built into a baseline, but not
as an explicit result of this legislation.
Chairman Nussle. So what Mr. Daniels reported is correct,
that even though there seems to be some general agreement, even
though not agreement on how much, even though there is some
agreement that there will be a stimulus, basically it is
factored in now at zero?
Mr. Crippen. Yes.
Chairman Nussle. OK. One other thing I would just report to
you, since we have not had the opportunity--you may have caught
this from my earlier statement, but Mr. Spratt and I intend to
hold a hearing at mid-session as well as at the end of the year
to review the progress of the budget. We believe it is
important for us to review our role as a Budget Committee in
this enforcement process. The news may not always be good, but
we think it is important for us to get that news and to react
to it. So, just for your purposes, we'd enjoy the opportunity
to visit with you on exactly how we can construct that, since
these are new items that have not been attempted before,
evidently.
Mr. Crippen. I look forward to that. It's a very good idea.
Chairman Nussle. Thank you.
Mr. Spratt.
Mr. Spratt. Mr. Crippen, thank you for your testimony. It
is good to see you ambulatory again.
Mr. Crippen. Thank you. I'll try to stay that way.
Mr. Spratt. I raised a question about the renewal of tax
cuts. I think we probably knew--maybe Leon appreciated what we
were doing when we said, ``When you have the expiration of a
popular tax cut, assume it will stay expired and not be
renewed,'' but that leads to some overstatements of revenue and
some distortion of projections at a fairly significant level.
Right now the amount of renewals over the next 10 years of
popular concessions in the code, I think, amounts to maybe $110
or $120 billion.
Can you think of a better way of doing that so that, if it
were a popular tax concession that everybody would concede was
likely to be renewed, you would factor in the renewal as
opposed to an expiration?
Mr. Crippen. I don't know of a better way. Obviously,
whatever you tell us to do we'll do it however you'd like to
see it, but it does take on the necessity of predicting future
political action. Even if you think it is 99 percent certain,
there is a possibility, albeit it very small, that it will not
happen. There have been some hiatuses in the R&D tax credit,
for example, where it actually did lapse for a number of
months, 6 or 9 months at a time, but was ultimately enacted.
The AMT is a classic example. It is not going to go on the
way it is, but when you decide to change it and how you decide
to change it and how much you decide to change it are all up in
the air.
Mr. Spratt. The AMT is judgmental as to----
Mr. Crippen. Yes, very much so.
Mr. Spratt [continuing]. How it would be prepared or fixed.
Mr. Crippen. Yes. But I would suggest to you that, while it
is fairly certain some of these things will be renewed, just
like the new tax bill, I don't know that you would want CBO in
the position of trying to second-guess what you are going to do
in the future on any of these.
Most of the differences, as you know, between any numbers
that you've done on the back of a napkin versus others
elsewhere downtown are mostly on assumptions about, indeed,
what the Congress is going to do in the future.
As Mr. Daniels said, it may be kind of trite but true, if
you don't spend all the monies in the budget resolution, then
you will have a better fiscal outlook. But it still nonetheless
begs the question of exactly what you do. As I think you and I
were discussing a couple of weeks ago, there's close to $500
billion in the resolution 10-year numbers for reserves of one
kind or another, for legislation that may well be enacted--
pharmaceuticals, agriculture, health care, and other things.
But when and how and how quickly it will go into effect, all of
those things we don't know, and I'd hate to have us in the
business of making those kinds of political predictions.
Again, you can and should distinguish some of the things
that happen over and over, and maybe the time comes when you
say, ``Hey, we do assume excise taxes are extended. Maybe, but
maybe it's time we did that with tax credits.'' But I think you
need to tell us that. I don't think we are in a position to
start making those judgments.
Mr. Spratt. One of the aspects of your testimony that's
useful is you point out that the BEA provisions are largely
expiring in the near future, 2002, and I had been under the
impression that PAYGO remained effective until 2006, but you
point out that the PAYGO scorecard will be repealed or will
expire, so the principal enforcement mechanism will be gone
unless we renew it.
Mr. Crippen. Yes. The extension or the life through 2006 is
for legislation that would have passed prior to the expiration
in 2002 so that there is the ability to look back, and if it
wasn't actually paid for, then you have another potential look
at legislation or the effects of legislation. But it is for any
legislation that passed prior to the end of 2002, so, as you
just said, the strength of the mechanism really expires in
2002.
Mr. Spratt. Well, if we want to have a PAYGO rule at all,
we have to renew it----
Mr. Crippen. Yes.
Mr. Spratt [continuing]. In the near future. In addition,
you offered up the thought that in the renewal we might deal
with some discrepancies in the way OMB and CBO book entries on
the PAYGO scorecard. In your case, I believe you--where we have
Government receipts, you book that as an entry on the
scorecard, but OMB treats it as an offset and includes it under
discretionary spending.
Do you have a preference for how that discrepancy would be
worked out?
Mr. Crippen. Well, we think we have it right, of course,
but more importantly than being right is more conformity. Let
me take the opportunity, if I could with this question, just to
tell the committee that I believe and have for some time that
it may be time for another Budget Concepts Commission. We
haven't had one, as you know, since 1967, and there are a lot
of new issues, not only around the surplus but Social Security
privatization and trust funds and a whole range of issues that
weren't addressed very explicitly in 1967 because they hadn't
developed. So I would urge the committee to think about--and
this is one small example that I cited in my testimony as the
kinds of things the commission might look like.
Mr. Spratt. Well, this has major implications, and Richard
Kogan, whom you know, was our corporate memory and authority on
budget authority for the budget process for a long time, used
to make the persuasive argument that, while this gave the
appropriators some additional capacity, it was also an
inducement to them to look for ways to find offsetting
receipts. You're telling them, ``If you can find them within
your purview of your programs, we'll let you keep it, or we'll
at lest consider that. It will be an offset to the gross amount
of spending you've got.'' And so the folks that knew the
programs best would be down there looking for ways to save the
Government money with offsetting receipts.
Mr. Crippen. But increasingly those offsetting receipts
have less to do with the programs under the jurisdiction and
more to do with opportunities, if you will, of where revenues
can be raised. I think--and if Barry Anderson is here he can
tell me, because he was there during that time--I think the OMB
treatment is one of the rules that were established that said
the committee who takes the action effectively gets the credit.
It is not so much that the rule acknowledges that the
appropriators are raising revenues in their jurisdiction or
with their programs, but simply that the appropriators took
action, so they get credit for raising the revenues.
Mr. Spratt. Yes.
Mr. Crippen. So it is less a user fee than it used to be
and more a revenue-generating source, so that's why we think
we're doing it right.
Mr. Spratt. Well, thanks for your testimony. We look
forward to working with you as we deal with these problems in
the near future.
Mr. Crippen. Thank you.
Chairman Nussle. Are there other Members who wish to
inquire of the CBO director? Mr. Bass.
Mr. Bass. Thank you, Mr. Chairman.
Mr. Crippen, I just read here that you are expected to
reduce your estimates of the 10-year surplus by as much as $200
billion; is that correct?
Mr. Crippen. I don't know. As I was trying to say earlier,
we have just started the process that produces our midyear
review, which will be out in August, and until we have done
that I can't tell you what the effect of any of this is going
to be. My guess is the 10-year surplus will be slightly
smaller, given the current slowdown in the economy. Remember,
however, that our long-term projections include the assumption
of some cyclicality.
Mr. Bass. What kind of a factor did you build into the
long-term assumptions?
Mr. Crippen. There is, in fact, a very explicit example in
our January report.
Mr. Bass. Can you recall what that is? I can't.
Mr. Crippen. I don't.
Mr. Bass. Was it 100 or 150 billion, something like that?
Mr. Crippen. Sounds probably about right.
Mr. Bass. So it is possible--and I don't want you to answer
hypotheticals since we haven't reached August yet--that it
could go up by $50 billion. It could. There's a possibility of
that?
Mr. Crippen. Sure. I think that right now everything would
suggest that the previous estimate of $5.6 trillion would be
slightly less, and there's not much chance it would go higher.
But how much less I don't know.
Mr. Bass. And your August estimates obviously will include
the impact of the tax relief package----
Mr. Crippen. Yes.
Mr. Bass [continuing]. Signed into law?
Mr. Crippen. Yes.
Mr. Bass. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Crippen, I will say if it is 200 billion--I appreciate
the fact you all don't know--it is a little startling, because
I remember I guess late this winter when we met with your
staff--and I think you were out--we asked about the concept if
you had a slight recession--and we don't know whether we've had
a recession or not, but we know we have been growing slowly--
that I seem to recall the figure that you all assumed was about
$100 billion over 10 years, and now you're talking about $200
billion or $150 billion, so a 50 to 100 percent increase. So I
guess that just underscores the volatility of these numbers and
the margin of error in long-term projections.
Mr. Crippen. The 200 is not our number, I think, Mr.
Bentsen, but be that as it may, it does underscore the
uncertainty. We have tried each year, particularly again this
year in our January report, to show the uncertainty that
surrounds any of these numbers.
This process requires that we give you an estimate that has
a specific number.
Mr. Bentsen. Right.
Mr. Crippen. And it is that number, plus or minus
something, and the longer or further out you go the more
uncertain it is.
I would say, too, that in our long-term projections we
don't assume exactly when a recession might occur. The fact
that it is occurring at the beginning of the current 10-year
period has a little more impact----
Mr. Bentsen. Right.
Mr. Crippen [continuing]. Than if it were the ninth year,
as you well know.
Mr. Bentsen. Right. You talk about the surpluses to
Medicare and Social Security surplus as a high-class problem,
and you're right as compared to the 1980's and early 1990's,
and I guess my question is, you know, the previous witness, Mr.
Daniels, and the White House take issue with the political
concept of treating the Medicare trust funds as de facto off
budget, or at least the part A as de facto off budget and being
pledged--and I would argue it is pledged--and you talk about
the long-term projections with your chart of growing demand on
the entitlement programs, and at the same time we hear
discussion about both Medicare reform, whatever that may be, as
well as Social Security privatization, both of which would
indicate without substantial reductions in outlays would
require greater expenditures.
I guess my question is: if we take the administration's
concept of coupling part A and part B and then talk about
reforms and use monies out of part A that are otherwise
obligated for debt payments, do we worsen the situation going
forward with your chart that you are carrying around because
we, in effect, are spending now and leveraging against the
future? And does that exacerbate your chart?
Mr. Crippen. In the interest of full disclosure, as many of
your colleagues know, I am a trust fund skeptic. That is, the
trust funds serve a very useful purpose, but they don't tell us
a lot necessarily about budgetary or economic consequences.
The part A trust fund is kind of a classic example. It is
currently in surplus in part because the Congress chose a few
years ago to change the classification of the payments, taking
home health care out of part A and putting it in part B for
whatever reason. I mean, there may be good reasons for it. But
the point is these are accounting devices, as one of my
predecessors called them, so they have some import, but this
chart essentially wouldn't change whether you had a trust fund
or not.
We assume, I guess as a matter of law, that benefits will
be paid no matter what the trust fund balances are, both for
Social Security and Medicare.
Mr. Bentsen. Well, I guess----
Mr. Crippen. So under current program definitions, this is
roughly what the future might look like, and what you do with
the HI trust fund won't change this picture.
Mr. Bentsen. Then perhaps we would look at a different
chart. If we decided not to use ``trust fund'' monies now, Part
A surplus is now receipts for paying down debt. Would that
change your debt chart and your outlay chart to comport with
this chart here?
Mr. Crippen. Yes.
Mr. Bentsen. To the worse or to the better?
Mr. Crippen. Well, it's $350 or $400 billion over 10 years.
It might change it slightly, but not much.
Clearly, we believe--CBO as an institution believes--that
paying down debt in the main is helpful for this problem,
primarily because it might help economic growth. That's one of
the two numbers for this chart, so the more debt that is paid
down in that sense the better.
However, there is a limit, as we've also testified
repeatedly, to how much debt we think you can pay down in
absolute terms. Whether or not the HI trust fund is necessary
or can pay down debt is another question.
But the general statement is true that we believe
institutionally that paying down debt helps this problem in the
future.
Mr. Bentsen. Thank you.
Thank you, Mr. Chairman.
Chairman Nussle. Thank you.
Mr. Price.
Mr. Price. Thank you, Mr. Chairman.
Mr. Crippen, let me add my welcome and go back to the
statement with which you began your testimony, namely, that a
budget without budget enforcement is honored only in the
breach.
I want to ask you a couple of questions by way of
elaborating on the relation of that statement to our present
situation.
Mr. Crippen. Yes.
Mr. Price. First of all, there must be a point at which
waiver after waiver after waiver does add up to a breach, and
my basic question is: are we near or over that line at present?
And are we at risk of going over that line if the menu of tax
cuts that seem to be on the way to Capitol Hill, in fact, are
enacted by the Congress?
Assuming that some kind of light ought to go off if we are
using the Medicare or Social Security surplus, are we about to
cross that line?
Would and should PAYGO apply to undoing the sunsets in the
tax bill, for example, to extending the R&D tax credit, to
providing tax incentives for health insurance coverage, for
providing tax incentives for energy savings, for providing tax
breaks for small businesses? All of these things are very live
agenda items here and I think raise this basic question.
Secondly, is there a problem with regard to the PAYGO time
frame? Mr. Spratt began to get into this. Let me just ask a
little more precisely. Should the budget process require that
legislation be phased in well before the end of a budget
window--for example, maybe in a 10-year window phasing in at
least within a 5-year period?
Should the budget process perhaps prohibit the enactment of
tax reductions that are effectively only several years into the
future? What about the PAYGO time frame, and how should we be
thinking about this if we don't want to have so many gimmicks
and so many phase-ins and phase-outs that actually these
constraints don't amount to much?
Mr. Crippen. Mr. Price, you may have to remind me of the
first question, but let me start with the second.
As I said a little earlier, and I have been saying, I
think, fairly consistently, I think a shorter budget window
like the 5-year window that we used to have is probably more
meaningful in many ways than a 10-year window, so I would urge
you to think about at least trying to bring us back to that.
For estimates beyond year five, while there is some
demographic information we can incorporate--such as the number
of people retiring--our economic assumptions are pretty much
straight lines. We don't know anything about what is going to
happen. We have a hard time with the next quarter, let alone
the next decade.
So I would encourage us to think about a budget process as
we currently envision it as a shorter timeframe.
Mr. Price. But whatever the timeframe is, though----
Mr. Crippen. Whatever the timeframe is----
Mr. Price [continuing]. What about the phase-in problem?
Mr. Crippen. The phase-ins are not little. In fact, that's
why the timeframe got extended, and it works on both sides of
the budget, frankly. Mr. Waxman is a terrific legislator and
keeps coming back at things that he thinks needs to be done.
One of the things in the 1987 package, for example, the budget
package that was put together after the crash, had increasing
the eligibility age for children for Medicaid from 6 years to
18 years 1 year at a time, so every year it went up 1 year. I'm
assuming we are now pretty well phased in. But it was not, you
know, probably terrific policy that justified the phasing in
just like these tax cuts are, but the phase-in was due to
trying to spread out the impact in the future.
There is always going to be an incentive to do that, no
matter what the length of the window. You might want to try
prohibiting or somehow making a stronger point of order against
provisions that aren't fully phased in by whatever the window
is, as you suggested.
Clearly, you want to know that, and the further out these
things become effective the less we know about how to estimate
them.
All in all, we are in better shape.
Mr. Price. Could you quickly address my first question
having to do with how closely that----
Mr. Crippen. PAYGO is still on the books. It is up to you
to enforce it effectively. I mean, the first tax cut is on the
PAYGO scorecard now and likely will be waived at the end of the
year, I'm assuming, because they are pretty big numbers and you
wouldn't want a sequester of that size. PAYGO is still in
effect, and whether you enforce it one bill at a time or at the
end of the year, you have the tool in place but it will be up
to the Congress to use it.
Mr. Price. A tool that surely isn't being used at present.
Mr. Crippen. Well, we'll see at the end of the year. I
mean, I'm predicting--I shouldn't--that the scorecard will be
cleaned, but right now there is a substantial balance on that
PAYGO scorecard that if the Congress takes no further action
would require OMB to issue a sequester this fall.
Mr. Price. Thank you.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Clement.
Mr. Clement. Thank you, Mr. Chairman.
Mr. Crippen, I know you said we'll have some new numbers as
of August.
Mr. Crippen. Yes.
Mr. Clement. What economic forces and technical
developments have we seen since January that would influence
the level of the budget surplus or deficit, and which of those
developments are positive and which are negative?
Mr. Crippen. Mostly what we've seen is a slower-growing
economy than we anticipated in January for this current fiscal
year. Some of that, much of that in fact, is coming on the
capital sector side. Business investment has not kept pace with
what it has been in the past. But consumers are still doing
their usual bit and generally keeping the economy going.
Housing starts and the housing market, for example, are fairly
robust. So there are pieces of the economy that look fine; the
weakness, however, is enough to bring economic growth below
what we thought it would be at this time come January.
There is also, our advisors think, some possibility of a
slight increase in inflation over what we had predicted in the
short run--again, just foreseeable for a year or two. In an odd
way that increase would be positive for revenues because we
collect revenues on the basis of nominal incomes, not real
incomes. So in that sense that increase could help the budget
outlook, even though it may not be good, in the long run, for
the economy.
So the weakness in the economy is the primary negative
thing that has changed. We haven't seen, as I suggested
earlier, anything yet to make us think that productivity, which
has been up the past 3 or 4 years, is going to be dramatically
affected here. Productivity measures always go down in a
recession, but we expect them to jump back up as the economy
grows.
So it is short term at this point. It is weakness in
economic growth primarily and will therefore show up in
revenues, not in spending as much.
Mr. Clement. Now, were you going to come out with these
numbers anyway in all this, or is this something you've added?
Mr. Crippen. No. It's something we've done traditionally
every year. OMB does something called a ``Mid-Session Review.''
This is the parallel to that. We have traditionally done it in
August, finalized the report and issued it in August. The last
couple of years the Budget Committees have asked us to produce
it earlier, so we produced it in July, but this year we are
back on the normal schedule, so come August we will issue it.
But it is very traditional. I can't tell you if we've done it
all 25 years of our existence, but certainly----
Mr. Clement. And the Federal Reserve Board is expected to
cut interest rates again today.
Mr. Crippen. Yes.
Mr. Clement. This would be the sixth time this year. What
effect do you anticipate this having on the economic forecast
and what effect have the past rate cuts had on your projection?
Mr. Crippen. We assume that the Federal Reserve has fixed
targets in mind for unemployment and the economy, so we assume
that it is taking these actions to try and get back to those
targets. We're probably in a very similar ballpark in terms of
what we think potential GDP, and what we think the economy can
do, how it can grow. So in that sense the Fed is trying to get
back to its forecast, which would be similar to ours, so we
believe that its change in monetary policy will be helpful but
get us back to where we were, not more or less than that.
Mr. Clement. I was going to also follow up--and it you've
really already answered the question anyway--about the 10-year
forecast versus the 5-year, and so you feel very strongly that
when you get beyond 5 years then those numbers get to be rather
unreliable?
Mr. Crippen. Yes. I might not choose ``unreliable,'' but
you're right. There is some more information we can factor in
in years 5 to 10--the number of people retiring, children who
have already been born who will be in need of education, those
kinds of things, demographic factors. But as far as economic
performance, we, as I said, take essentially a straight line
from years 5 through 10 of what we think the economy is going
to do.
Mr. Clement. As you know, I asked the question do you
foresee surpluses as far as the eye can see?
Mr. Crippen. Well, it depends on how good your vision is.
We foresee them for this 10 years, depending, of course, on
what the Congress does in terms of future action. I mean, you
could pass legislation that could clearly dissipate the
surpluses. But if your eye can see as far as this chart, which
includes the retirement of the Baby Boomers, clearly there are
no surpluses in that future. In fact, there are hard decisions
on spending for retirees, spending for the rest of the
Government, tax increases, or debt increases.
And so it won't take too long before--just beyond this 10-
year window--things start to go the other way and surpluses
become once again deficits. It all depends on how far you can
see, but I would suggest we ought to begin looking at the
retirement between 2010 and 2030.
Mr. Clement. Thank you.
Chairman Nussle. Mr. Crippen, thank you for your service
and the service of all of the folks down at the Congressional
Budget Office. In particular, I want to thank Mr. Anderson, who
is here today, too. He did, as I said, a fine job of testifying
up here while you were not able to be here, and I want to thank
him as well and welcome him back. We appreciate your testimony
today and any advice that you'll continue to give us, I'm sure,
as we work through these issues.
Mr. Crippen. You always hate to have it proved that you're
really not necessary. [Laughter.]
Thank you, Mr. Chairman.
Chairman Nussle. Thank you.
The next panel that we have here today is a very
distinguished panel of former chairmen of the Budget Committees
and people from the private sector who have some interest in
these issues and have demonstrated their expertise in the past
before the committee. I want to welcome back to the committee
former Chairman Leon Panetta.
I've always appreciated your work, but I have to tell you
that I have a much deeper respect for your work and the job
that you did, now having had the opportunity to sit in your
chair up here during the process of one cycle. You have been
through many more cycles than I have been, so I don't presume
to understand all that you went through and have the experience
that you have. But I can tell you from my brief tenure here as
chairman that I have a new, much deeper respect for the job
that you did not only here in Congress but also at the Office
of Management and Budget. They are difficult roles to play, and
even though no one possibly can agree on every single issue,
you did them well and we welcome you back. We welcome Carol Cox
Wait back to the committee. Thank you very much for coming
today to visit with us on these issues, as well as Kevin
Hassett from the American Enterprise Institute. We welcome you
back. When Mr. Sabo gets here, we'll give him a special
welcome, as well.
Why don't we begin, Mr. Panetta.
STATEMENT OF HON. LEON PANETTA, FORMER MEMBER OF CONGRESS,
FORMER CHAIRMAN, COMMITTEE ON THE BUDGET; CAROL COX WAIT,
PRESIDENT, COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET; HON.
MARTIN OLAV SABO (D-MN), FORMER CHAIRMAN, COMMITTEE ON THE
BUDGET; AND KEVIN A. HASSETT, RESIDENT SCHOLAR, AMERICAN
ENTERPRISE INSTITUTE
STATEMENT OF LEON PANETTA
Mr. Panetta. Thank you very much, Mr. Chairman.
Chairman Nussle. Mr. Panetta, thank you so much for coming
back. Give us your testimony, please.
Mr. Panetta. Thank you. I apologize for not having written
testimony, but I'm working off of notes and, very frankly, the
notes are pretty simple and clear.
Chairman Nussle. Well, you know the rules of the committee.
All right. Next? [Laughter.]
Mr. Panetta. It is good to be back in this hearing room and
it is good to be back before this committee. I spent something
like 25 years of my life in one capacity or another, either as
a member of this committee or as chairman of this committee or
as director of OMB testifying in front of this committee, and
even as chief of staff working with many members of this
committee.
I want to commend all of you. It is not an easy job, but I
really do appreciate those that carry the banner forward,
because it is extremely important that we hopefully maintain
some kind of economic and fiscal integrity for this country.
My hope is always that, in facing the difficult choices
that we had to face and difficult battles during what were
called ``the deficit years,'' that you might have it a little
easier in the so-called ``surplus years,'' but it is obvious
that I think you're facing some very tough decisions, very
difficult decisions, very similar to what we faced over the
last 25 years.
I guess my hope is that you are wise enough to learn from
the lessons of the past and hopefully not repeat the mistakes
that were made.
I think the most fundamental decision that you have to make
is a decision that goes to the core of how we govern our
democracy. We can either govern it through crisis or we can
govern it through leadership. One or the other things get done
either through crisis or through leadership.
The last 4 years the budget process, at least in my
estimate, has been largely determined by crisis. Budget
resolutions have, for whatever reason, not been enforceable.
Appropriations bills have been vetoed or delayed beyond the end
of the fiscal year, and with the threat of a Government
shutdown ultimately what happens is there is a negotiated deal
between the President and the Congress.
You can decide whether that kind of crisis scenario is what
will happen this year, as well, in which event, very frankly,
there's probably very little you can do on caps or PAYGO or any
kind of budget enforcement. Essentially, crisis will dominate
it and crisis will ultimately cut the deal.
If, on the other hand, this committee, the leadership of
this committee, with the support, hopefully, of the bipartisan
leadership of the Congress, decides that it is important to
have a budget process that maintains fiscal discipline, and
that you want that discipline to be realistic and relevant and
enforceable, then I think the goal can be achieved of restoring
the credibility of the budget process and making it effective
in trying to protect the Nation's fiscal integrity.
But I realize that will not be easy. These are tough
decisions. It was not easy to deal with $300 billion annual
deficits.
It demands some sense of sacrifice from both parties.
Budget discipline cannot be based on the approach that one
party gets to be able to spend everything it wants to spend on
its priorities and the other party gets nothing, because
ultimately that just doesn't work. Both parties have to be
willing to compromise if limited resources are to be protected
for the future--pay down the debt to protect Social Security
and the Medicare trust fund and to promote national savings for
this country.
You cannot enforce caps--I know this is a hearing about
caps and PAYGO, but let me say something right off. You cannot
enforce caps and you can't enforce any kind of PAYGO
requirement--they simply do not work--unless there is
bipartisan agreement as to the numbers and the process, unless
there are realistic numbers that try too, at the very least,
meet national priorities that are out there, and if there isn't
a strong commitment by the leadership and by this committee to
enforce a set of ground rules that protect budget discipline.
You have to be able to allow priorities. Obviously, there
will always be competing priorities, but the competing
priorities for limited resources have to take place within a
structure. That's the lesson of the budget process. It's the
lesson of history.
Budget resolutions, frankly, in the 1970's had very little
enforcement but there was an awful lot of bipartisanship that
helped make those budget resolutions effective. The first
reconciliation bill that was done in 1981 was done on a
bipartisan basis--myself, Pete Domenici, Howard Baker, Tom
Foley, and many others worked on that, and that's the way it
was put into use.
The first use of caps and the PAYGO were part of an
agreement between President Bush and the Congress, and they
were drafted, incidentally, by the bipartisan staffs, both
Republicans and Democrats helped work on the draft for both
caps and PAYGO, and they were obviously supported not only by
President Bush but by Bob Dole, George Mitchell, Tom Foley, Bob
Michael, and if it wasn't for that consensus they simply would
not have worked.
I have to tell you they are extremely important enforcement
tools. We would not have a balanced budget today were it not
for those enforcement tools, and I think it is fair to say that
you cannot maintain a balanced budget in the future without
those enforcement tools, as well.
As I said, they have to be realistic and they have to
obviously reflect the priorities that both parties are trying
to seek for the Nation.
What you don't want to do is to go back to a borrow and
spend kind of approach and with competing priorities. And there
are a lot of competing priorities this year. You know them all,
from tax cuts to prescription drugs to education, etc.
What will happen is, in order to try to meet those
responsibilities, you're going to have to do either one of two
things. You're going to have to try to push deep cuts in
spending, which are tough to do. You're going to have to either
raise taxes or revise the tax cut, which is going to be also
equally difficult to do. Or you're going to wind up borrowing
from the Medicare trust fund, which is the easy approach, and
that's what happened in the past. It's tough to cut spending,
it's tough to raise taxes, so what happened was that there was
a borrow and spend approach. You've got to avoid that at all
costs.
You obviously are facing some tough numbers this year. You
know them better than I do, but I think, from the indications
that I can see, we are headed toward deep trouble, or certainly
a slippery slope that will take you back to either invading the
Medicare trust fund or to going back ultimately to deficit
spending, and I would hope that this committee would do
everything possible to ensure that that does not happen.
If you're going to do it, let me just suggest there are
three steps that are important.
One, you have to protect Social Security and the Medicare
trust fund. I think that is important not only to reducing the
debt but meeting those unfunded liabilities that are out there
in the future.
Secondly, you should establish realistic caps on
discretionary spending for the next 5 years. I wouldn't go
beyond that. I would do 5 years. You might even want to do
three. But at least make those caps realistic, both in terms of
Defense and non-Defense needs.
And, thirdly, you ought to establish the PAYGO principle. I
think the best way to implement it in a surplus world is to try
to set aside a portion of that surplus to try to be able to pay
for priorities that you identify as a committee, but anything
beyond that ought to be required PAYGO, which means that if you
want to do tax cuts or you want to do additional spending you
have to find ways to pay for it.
Let me tell you, the PAYGO requirement saved us because
there were efforts to obviously implement huge tax cuts, there
were efforts to try to implement new entitlement programs. If
we didn't have a PAYGO requirement, we would not have been able
to maintain discipline.
As I said, the importance is to try to establish some kind
of common ground rules. I think the purpose here of this
committee is to try to ensure that you do what is important to
restore the credibility of the budget process. This is an
important process. This is about the only discipline that you
have in the Congress to try to ensure that Members and
committees try to adhere to some kind of guidelines.
But, more importantly, you've got to restore credibility to
our democracy, as well.
Let me just conclude by telling you in our Institute for
Public Policy, we do polls of students' attitudes toward
Government, and we've just completed a poll. Of those polled,
73 percent said they would never choose a career in public
life. The reason they said they would never choose a career in
public life--there were a lot of reasons, but they also said
that what happens here in Washington is simply not relevant to
their lives, that there is a partisan game that goes on here
that doesn't really relate to their lives.
I think you've got to change that. We all have a
responsibility to change those attitudes, because they are our
future. In trying to restore the process here, you can make it
relevant to their lives, but, more importantly, you can ensure
that our democracy is guided by leadership, not crisis.
Chairman Nussle. Thank you very much for your testimony.
Carol Cox Wait is the president of the Committee for a
Responsible Federal Budget and, as I've said, has testified
here often, on many occasions. We appreciate the fact that you
would come today to share your ideas on budget discipline and
on the caps and PAYGO.
Welcome, and we will accept your testimony.
STATEMENT OF CAROL COX WAIT
Ms. Wait. Thank you, Mr. Chairman, Mr. Spratt, members of
the committee.
It should surprise nobody that I want to associate myself
with the remarks of Mr. Panetta. He's on my board. I need to
stay out of trouble if I possibly can.
I'm, frankly, astonished at the questions asked at this
hearing. As I say in my written testimony, the budget process
is like a policeman on the beat, and the only way you'll ever
really know how effective it is is to get rid of the cops. But
I don't think, no matter how bad the murder and mayhem, no
matter how many points of order you waive, or whatever, that we
want to try living in a lawless society, a society without
rules, without budget enforcement. I think it is a preposterous
suggestion.
And so my first and most important message to you is of
course you have to extend the enforcement provisions in BEA.
And I'll talk a little bit about some things I think you need
to do to make them work better in the current circumstances.
I'm not trying to turn this into a hearing on systemic
reform. I know you are going to have one on that later on. I
hope we'll be back to talk to you about it. As you know, we are
deeply interested in the topic. We do believe that the budget
process, itself, ought to be outcomes neutral. We think there's
at least one important step you can take in that direction as
you extend the caps and the PAYGO provisions in the BEA.
With respect to PAYGO, the current act is ambiguous, to say
the least. We think that the budget resolution ought to specify
each year the amount is to be available for tax cuts or
entitlement increases or whatever. You can bifurcate, i.e.,
separate spending increases and tax cuts, if you want.
Any amounts over that, any bills that would use up
surpluses beyond those amounts should be subject to old-
fashioned PAYGO enforcement. Congress and the President should
be required to raise the money or cut other entitlements to
offset those amounts. If you don't do that you ought to have
sequesters.
One thing you ought to do is that you ought to live in a
more realistic world. Once you do, you ought to let the
sequesters happen if you don't stay within the limits that you
impose.
This would work better if you had a joint budget resolution
because it would formally bring the President into the process.
It should surprise nobody here that a joint budget resolution
is our top priority in terms of budget process reform. We
continue to believe that, so long as the two policy branches of
Government fail to agree on one budget, the country really
doesn't have a budget at all.
The approach we suggest offers an acceptable short-term
fix--that it is a mechanism for you to resolve the dilemma that
exists under the PAYGO rules today. Under current rules either
all of the on-budget surplus is available or none is available,
and it is a political issue.
Frankly, Mr. Spratt, this approach could deal with your
concern about expiring tax provisions, as well. These are
political issues. The politicians settle them. You ought to
spell out, when you adopt the budget resolution, what is going
to count for PAYGO and what isn't and how much you've got
available for tax cuts and/or entitlement increases. Anything
beyond that ought to be subject to PAYGO provisions.
I can't think of a better way to do that than to give the
politicians the job. You guys and gals have the election
certificates on the wall. It is not only your job, it is the
only practical way to enforce the budget.
Writing arbitrary rules, trying to determine outcomes in
your process, only makes your burden in enforcing the budget
much more difficult than it needs to be.
That also brings me to the issue of caps. Unlike much of
what you've read recently, that the discretionary caps have
proven to be surprisingly effective so long as they have been
reasonable--that is to say, viewed as reasonable--and within
the first few years after they are enacted. The longer you go
or the more unrealistic they are viewed as being, the less
effective that they are.
You should amend and extend the discretionary caps as soon
as possible. One of the most important messages we have for you
today is that we would strongly urge you, Mr. Nussle and Mr.
Spratt, Mr. Domenici, Mr. Conrad, and whomever else you need to
get in a room to get there as quick as you can and agree on
what you think are the right caps, at least for the balance of
this Congress--I would like to see it the caps at least a year
beyond that--and write them into law.
It probably doesn't surprise anybody here: I think the
Government somehow, some way, probably could get by on $661
billion in new budget authority next year. But it isn't for me
to say. It is important that you arrive at numbers that you can
live with.
You might as well get together, get on the floor of the
House and Senate, have a debate about how much is too much. The
sooner you do it, the less money we are going to spend.
I haven't talked to anybody in the budget community who
doesn't believe that.
Mr. Nussle, to those on your side who say they won't vote
for any more than 661, it is going to cost them every day they
delay putting those new caps in place.
I don't have much else other than my prepared testimony,
and the red light is on, anyway, so I'll stop there and defer
to you and any questions that you may have.
Chairman Nussle. Thank you very much.
[The prepared statement of Carol Cox Wait follows:]
Prepared Statement of Carol Cox Wait, President, Committee for a
Responsible Federal Budget
Mr. Chairman, Mr. Spratt, members of the committee, thank you for
the opportunity to testify before you today.
The Budget process is like a cop on the corner. You cannot truly
measure the patrolman's effectiveness until and unless you are willing
to terminate his services. We all get angry when folks break the law;
but I for one am not ready for life in a lawless society. Thus it seems
clear to me that you must extend the Budget Enforcement Act (BEA).
Most of you know that the Committee for a Responsible Federal
Budget and I personally believe that it is past time for systemic
budget process reform. But it is late in the year to launch a major
reform effort.
The caps, PAYGO rules and sequester provisions in BEA expire next
year. If you do not extend those provisions there will be no
enforcement rules at all. That could be the functional equivalent of
laying off the entire police force. It is a very bad idea.
BEA was written as part of an effort to reduce deficits and balance
the budget. Today you are managing fiscal policy in a surplus
environment. Even as part of simple BEA extension, you should make at
least one change to recognize this dramatically changed reality.
I am not trying to turn this into systemic process reform but some
changes will not wait.
Do/Should PAYGO rules apply to on-budget surpluses? The law is
ambiguous.
The Clinton administration first said no then they changed their
minds and said yes. The Bush administration has not articulated a
position-but the budget treats on-budget surpluses as available and
allocates them to a variety of purposes including tax cuts and new/
increased direct spending programs.
Our committee believes that the budget process should be outcomes
neutral. The controversy over PAYGO and on-budget surpluses may offer
an opportunity to move in that direction.
We suggest that you extend PAYGO but make a modest change. We think
the budget resolution should specify the amount of on-budget surplus to
be available each year for tax cuts and for direct spending increases.
We think that PAYGO rules and sequestration should apply to any tax
cuts and/or direct spending increases in excess of the amounts
specified in the most recent version of the budget resolution. This
might work better if the budget resolution were intended to become law-
requiring a presidential signature and subject to veto.
But this strikes us as an acceptable short-term fix.
We don't think you should write into process legislation specific
amounts or percentages of surpluses to be available without triggering
PAYGO and sequestration.
If you try to do so, we predict that your efforts will fail. The
question of how much surplus should be available to offset current
legislative change is a political problem. We advise you to establish
systems to settle it politically.
And that brings me to the issue of caps. Discretionary spending
caps have proven to be surprisingly effective, except when they are
several years old and viewed as unrealistic.
You should amend and extend the discretionary caps and
sequestration rules as quickly as possible. Indeed, we think that you
should write into law new caps for the balance of this Congress just as
quickly as possible.
Personally, think that the country ought to be able to get by on
the $661 billion provided for discretionary spending in FY 2002 in the
budget resolution.
You all can argue about whether that is enough. You can figure out
whether and how much more is needed for defense. That is your job. You
have election certificates on your walls.
I can predict with certainty, however, that the sooner you enact
new caps the lower total appropriations will be when all is said and
done.
Indeed, we believe this to be so urgent that would recommend to
your Chairman and Ranking Member that they get together and try to add
new caps for FY 2002 and FY 2003 to the supplemental that currently is
in conference.
Some will say you cannot add caps to the supplemental, because that
strategy would require 60 votes in the Senate. But it is going to take
60 votes to enact new caps no matter when the Senate acts. And let me
repeat early action on new caps will save money in the long run.
I have not talked about fundamental budget process reform. I
understand that you will take up the broader issues in the near future.
When you do, we hope to work with you. We believe that this may be one
of the most important tasks facing your committee.
In the meantime, we confess to some confusion and dismay. Surely
there can be no doubt about BEA extension. Simply to allow BEA to
expire is a terrible idea. Of course you must extend the enforcement
provisions in BEA. We cannot live without rules. How can this be an
issue? We urge you to act quickly and lay it to rest.
Chairman Nussle. Next I'd like to call on a former chairman
of the Budget Committee.
As I said to Chairman Panetta, Mr. Sabo, I said that I
always appreciated the job that the chairman of the Budget
Committee did, but now I have a much deeper respect for that
job, having had the chance to sit in your chair, as well, for
the brief time that I have been here.
We welcome you back, and we are very interested in what you
would like to present to us as far as budget enforcement
issues. We know you have been involved in this in the past, as
well, and now that we are at this unique opportunity we wanted
to get your advice, so please provide us with your ideas.
STATEMENT OF HON. MARTIN OLAV SABO (D-MN), FORMER CHAIRMAN,
COMMITTEE ON THE BUDGET
Mr. Sabo. Well, thank you, Mr. Chairman, Mr. Spratt, Mr.
Clement, and fellow panelists.
When Tom called a couple of days ago and asked me to come,
I, frankly, had not thought much about these issues, and I have
a limited amount since, so, whatever I say today, I might
change my mind in a couple of days. [Laughter.]
Chairman Nussle. We'll give you permission to revise and
extend your remarks. How about that?
Mr. Sabo. I do not have precise answers, so I'm musing, I'm
thinking out loud.
Clearly, the caps and PAYGO worked very well through the
1990's in most cases. I think the PAYGO worked generally
throughout the 1990's. The caps worked when they were close to
reality, and they were an important ingredient of the 1990 act
and the 1993 act and for the first couple of years of the 1997
act.
I am not sure how you put it back together today. We are so
far away from PAYGO this year that--both on the tax side and on
the spending side--it's hard to put back in. It's gone for now.
I suppose to the degree that you assume that, whatever you
say in the budget resolution is fine and anybody who wants to
go beyond that, is subject to PAYGO may have some merit, but
that is a very limited version of PAYGO.
Caps worked, but clearly when they become unrealistic they
don't work. It is my judgment that over the last couple of
years, with some significant revision of the caps early on, we
would have spent less money than we did getting the caps in
place and then totally ignoring them at the end, and operating
with what I thought were totally unrealistic budget
resolutions. When budget resolutions are unrealistic, the caps
don't work. That was the history of Gramm-Rudman-Hollings. You
know, it maybe worked for a year or two and then it was totally
removed from reality, and it totally fell apart.
In that relationship between caps and pay-as-you-go, I
think if you have caps that are unrealistic you build the
pressure for creation of more entitlements to get around the
caps which have been exploding in the latter years, or for
programs that, if not entitlements, are exempt from the caps,
like our transportation program. A major effort on CARA a year
ago, which ended up not passing, looked like that. But all of
those attempts were to get around the effect of overly-tight
caps where there was significant support for a program to, in
effect, adopt a mandatory program.
We have been going to mandatory programs significantly in
recent years. We all have talked about modifying entitlements
and then, instead of modifying or scaling backwards, expanding
the number of programs that exist. I don't think that's a plus.
I think you also have to think through the years of budget.
What upset me more than anything about this year has been the
10-year budget. I don't know how we got to that except both
Presidential candidates, in both primary and general, had
competing 10-year plans. That is atrocious.
There's one thing I know for certain about those long-term
surplus projections, expenditure projections, and revenue
estimates--they are wrong, and wrong by billions and billions
and billions of dollars.
I don't know what directs them. They may be high. They may
be low. But experience tells us we aren't even going to be
close to on target, and we start writing in law, whether
spending or tax, that we phase in over a 10-year period of
time. To me, that's about the worst thing we can do in terms of
responsible budgeting.
We went, I think, a significant way toward responsible
budgeting with the 5-year budget to avoid people writing in
things at the end of a 1-year budget. Instead, it has just
gotten worse and worse. The longer we make the budget term, the
more people write in provisions toward the end which have
greater impact on long-term expenditures. And now we are at a
10-year budget and phasing things in for the 11th year. That
just simply has to stop.
I see the red light is on. Those are some of my random
thoughts at this point in time.
Chairman Nussle. I appreciate that. Thank you very much.
Last but certainly not least, Mr. Kevin Hassett. Dr.
Hassett is the resident scholar from the American Enterprise
Institute.
Welcome to the committee, and we appreciate hearing your
testimony.
STATEMENT OF KEVIN A. HASSETT
Mr. Hassett. Thank you very much, Mr. Chairman and
Congressman Spratt. I'd have to say that--first I was going to
say I was batting clean-up, but, given the distinguished set of
speakers I'm following, I guess I'm batting ninth. I'll not
bother you with every detail of my written testimony.
I think that the important long-run perspective that this
committee has taken in the past and needs to take is that there
is this very strong and powerful force out there in the world
to make Government grow.
For example, an economist from the National Bureau of
Economic Research studied the growth of government across all
developed countries and found that, since 1960, the average
country in the world saw the ratio of government spending to
GDP increase by 8 percentage points. And, indeed, if you look
at the chart for just about any country on earth, including our
own, although we've had a pretty tame increase compared to
some, basically government gets bigger, and that's the rule
rather than the exception.
It is interesting to see why government gets bigger.
Government gets bigger because, one, we usually see big
spending increases in election years, and, two, we see big
spending increases when surpluses come. And, since economies
are cyclical natural, then sometime we have surpluses,
sometimes we don't. The interesting thing is that the spending
increases you see when you have surpluses or when you have more
money coming in, they don't go back down when we hit hard
times, and that's why the government grows over time.
So we have to think about ways as we meet our urgent needs
each year to keep an eye on the long run and make sure that
we're not eating into a long-run path that is not sustainable
or desirable, and so I think it is clear--and I agree with the
other members of this panel, those that preceded me, that we
need to have some kind of realistic caps and PAYGO. Certainly
those worked very well until recently, but, you know, starting
around 1998, that stopped happening.
It is an interesting academic question. Why did the cap
stop working? Was it because they became unrealistic, or was it
because suddenly we had money to spend? Or did they become
unrealistic because we had money to spend?
I think that the speed limit analogy is--we've been using
lots of analogies on this panel today--is the appropriate one--
that if you set a speed limit on a big, nice highway at 40
miles an hour, then everyone is just going to ignore it, and
who knows how fast they are going to drive. But if you set a
speed limit at, say, 65 and say that you are going to enforce
it, then maybe you can get people to drive 70, or even 65 if
you are in Singapore and you can really hit them hard if they
go a little too fast.
But I think that it is a difficult problem deciding what
the right speed limit is, and I would urge Mr. Chairman and Mr.
Spratt to work together to find caps that are that--that are
caps. They are the upper end of the range that you think is
reasonable that anyone could possibly reasonably spend going
forward, and then I think that you should try to conceive of
ways to make sure that those caps stick, because I think that
if you don't accomplish that then we are likely to be just
another one of the many, many countries on earth that see the
ratio of government to GDP just grow year after year after
year.
With that, I'll stop.
Chairman Nussle. Thank you very much.
[The prepared statement of Kevin Hassett follows:]
Prepared Statement of Kevin A. Hassett, Resident Scholar, American
Enterprise Institute
Mr. Chairman, Congressman Spratt, and members of the committee, it
is a great honor to be afforded the opportunity to speak with you today
about important Budget Enforcement Act provisions and about the
possible extension of the Act beyond Fiscal Year 2002.
In 1998, fiscal discipline set in motion years earlier began to pay
tangible dividends. After running budget deficits for many decades,
budget surpluses emerged. Many observers, myself included, feared at
the time that budget surpluses would be short lived. In particular, in
previous years deficits constrained the growth of government spending.
It is difficult, but not impossible, to spend money that is not there.
With cash piling up in Washington, the temptation to spend might be too
much to resist.
Subsequently, we received good news and bad news. The good news was
that the blossoming new economy outpaced even the most optimistic
economist's expectations, and accordingly revenue surged. On the other
hand, fears that spending would find a way to outpace expectations
turned out to be well placed. Over the past 3 years, spending has
surpassed the statutory limits that Congress and President Clinton
agreed upon in 1997, by $199 billion. To put that number in
perspective, it is more money than we spent on defense in a typical
year at the height of the cold war, and more than total Medicare
spending in 2000 (which was about $197 billion). Despite these spending
increases, the revenue surge was significant enough that surpluses, and
the temptation to spend them, remain.
Of course, not all spending is bad. Our elected officials are
charged with the task of shepherding our resources wisely, and often
they are up to the task. I am confident that no member of this august
body intentionally wastes a penny. But over the longer term, the good
intentions of our government officials pile up into astonishing
liabilities for current and future taxpayers. Spending programs, once
started, seldom end, and a thousand worthy projects cumulate into an
economically unwise spending binge.
As a student of the interactions between the political and economic
processes, I find the low frequency or longer term patterns of spending
most astonishing. For example, Torsten Persson, a distinguished
economist, recently wrote a paper for the National Bureau of Economic
Research that documented the steady growth of government spending
worldwide. For the average country, government spending increased over
the past 40 years by about 8 percent of GDP. Clearly, there is an
overwhelming force driving spending upward. Even in the U.S., where
deficits for many years constrained the growth of government, spending
ticked up over that time by about 1/2 percent of GDP.
How does spending advance? There are two forces that appear most
powerful. First, when the economy booms and revenues surge, spending
tends to ratchet upwards. Second, politicians tend to increase spending
aggressively in election years. Outside of election years, and during
downturns, these tendencies abate, but not enough to halt the
inexorable rise of government.
Against this backdrop, it is clear that one of the most important
duties of this body is to take a longer term perspective. To pursue new
spending programs when they are worthy, but also to keep an eye on the
long term growth of government. Deficits forced Congress to do this,
but in an age of surpluses, self discipline must replace the power of
necessity. If our experience of the past 3 years is any guide, self
discipline alone is not enough.
This is why I support the extension of spending caps past 2002. If
negotiated wisely with members of both parties, spending caps can allow
for ample funds to support our priorities, but also draw a line in the
sand limiting the growth of government. Spending caps can serve an
important function. In particular, when unanticipated new challenges
require action---the broadband situation today comes to mind---we must
cut an older program that has outlived its usefulness to cover the cost
of the new program. It is always difficult to eliminate a program, no
matter how ineffective it may be. Spending caps can, in principle,
force us to make the tough decisions.
Of course, the latest run-up in spending occurred while caps were
present. Congress decided to ignore them. There is no guarantee that
caps will work. But even in this climate of largesse, I believe that
caps have served a useful purpose. By establishing what both parties
thought a reasonable limit to spending might be ex ante, the caps have
and will continue to allow voters to evaluate the performance of their
elected officials against a clear marker. Voters in recent years have
seen spending increase in programs that are often popular. On the
downside, the spending caps were exceeded. Was the trade-off worth it?
Voters will clearly decide, but even busted caps frame the debate in a
way that is useful in our democracy. They remind everyone that trade-
offs must be made.
Finally, I urge you to consider the uncertainty that results from
our inability to commit to a long term spending plan. Currently, the
CBO provides baseline projections under a predetermined set of rules:
The capped baseline, the freeze baseline, and the inflated baseline.
The differences between these projections can be large. The inflated
baseline, for example, has a lower surplus than the others by more than
a trillion dollars over the next 10 years. Nobody can possibly say
which baseline will prove to be most reasonable, in part because there
is so much uncertainty about government spending. As we begin to get
our house in order in anticipation of long-run fiscal challenges facing
our nation, knowing whether we will have that trillion dollars to work
with is material. Instead, we do not know. If we were to extend caps,
and amend them so that they are more effective, we could eliminate that
uncertainty, and make the policy planning job significantly easier.
For these reasons, I urge this body to consider extending caps that
are reasonable and safely at the top of the range of spending that you
believe proper.
Chairman Nussle. Questions for this panel, Mr. Spratt.
Mr. Spratt. Just a remark to Dr. Hassett. I'm curious about
your reference to GDP percentages, because if you look back to
the mid-1980's--I think it was 1984 or 1985--we were spending
23.5 percent of our GDP. That was the peak of the Reagan
buildup in the military and a point when the GDP was somewhat
subdued just coming out of recession. But if you look at this
year's 18.5 percent, that's a huge decrease, and it has been
partly attributable to the budget disciplines we've had with
Gramm-Rudman-Hollings and then particularly the caps. They've
worked to that extent.
In 1997 we plugged a few numbers into the BBA--the balanced
budget agreement--just to get the balance in 2002. We had an
estimate, for example, of spectrum sales that nobody in the
room thought would ever be obtained. We plugged it in there
anyway, and we had an unrealistic number. We followed Senator
Domenici's number for Defense. Domenici had a Defense curb that
went up, up, up at a very gradual rate, much less gradual than
the 1980's, and then tapered off in 2001 and 2002, actually
came down. Nobody thought that would happen, but we kind of
bought into it and flattened out that tail a little bit and
said, ``If things don't get better, we may just have to crack
down and adhere to these numbers.''
But tacitly we also understood if things did get better, if
the numbers did get better, we wouldn't try to track those
draconian numbers. That's really what happened. In the meantime
the caps lost their credibility because of that.
By 1998, when the picture looked much better, indeed, the
budget situation was projected to be better in July 1997 as we
were closing the agreement. We knew that if we didn't get it
closed in a hurry that would undermine the glue that was
holding things politically together, so we needed to go ahead
and put it to bed as quickly as possible. Then, when the
numbers not only got better, they got better and better and
better. For God's sake, the estimators have been back every 6
months for the last 2 years and raised the estimate of the
cumulative estimate of the surplus by nearly a trillion
dollars. Gee whiz. Leon Panetta would have looked brilliant if
he had had that kind of good luck, and Sabo, but they had to
deal with a much, much more bleak forecast.
In any event, that's what has happened. These, though, have
been very useful devices, and we've got to find out a way that
we can still put them to good use for the future in an era when
we hope we will continue to have surpluses.
Chairman Nussle. Mr. Clement.
Mr. Clement. Mr. Chairman, thank you, and Mr. Spratt.
This is an excellent panel today, and I wish every member
of the Budget Committee could have heard what was said today,
and I sure wish you will share their testimony with the other
members because I think this is information that they need to
know in decisions that need to be made.
I wanted to ask Mr. Panetta and Carol real quick--I know
you are long-time supporters of budget reform proposals, and I
know you are for biennial budgeting. Do you still feel strongly
about that, because that's something we're going to be bringing
up shortly and I know not every member of this committee
supports that but I do.
Mr. Panetta. No. Actually, one of the first bills I
introduced when I came into the Congress in the 1970's was to
establish a biennial budget. I remember having long discussions
with Bob Chimo and a lot of the Appropriations Committee about
whether or not to do that.
I am a believer in that because I think that you need
greater stability in the budget process. The year-to-year
process I think creates just a tremendous confrontation that
ultimately results in the kind of crisis management that I
talked about. I think, you know, while I can't say it wouldn't
happen in a 2-year budget, I think the chances are if you could
set a path for a 2-year budget and try to establish numbers for
that period of time, certainly I think we can do that now.
I just think that it would help implement not only the
budget process, but, frankly, would give greater guidance to
the Appropriations Committee, as well.
Mr. Clement. And, Carol, how do you feel?
Ms. Wait. I support biennial budgeting. The committee
supports it. I would reiterate what I said earlier--if we had
to choose one budget process reform over another, it would be a
joint budget resolution. We think that the accountability that
would come from having an agreed-on budget is perhaps the most
important change you can make. But yes, I think movement toward
a longer budget cycle that doesn't reopen decisions quite so
frequently and leaves some time for oversight is a good thing.
It's just not my number one priority.
Mr. Clement. Now I need to ask Mr. Baseball over there a
question. By the way, I got caught in that traffic jam and
never made it there the other night, but I darned well tried.
Mr. Sabo. I got caught in the jam and got there the time
the game was starting, practically. An hour-and-a-half to get
there.
Mr. Clement. What I wanted to say to you, Mr. Sabo, just
real quick, I wanted to ask you--I know Mr. Panetta said a
while ago about PAYGO and caps, that we've got to do it on a
bipartisan basis or it won't work at all. How can we do it now
on a bipartisan basis?
Mr. Sabo. I don't know. Whether they're bipartisan or
whatever they are, they have to be real or they don't work.
To your first question on biennial budgets, I'm
apprehensive. If they're done, they should--at times I start
getting sympathetic toward the biennial budget by retaining
annual appropriations, but then I'm reminded again this year
new Presidents have terrible times putting budgets together the
first year. You know, we're still waiting for the President's
Defense budget, and everything has been late, and part of it
was because of the late election, but that's not unusual. We
find at least every fourth year it takes a while for the new
President to get a budget together, and I'm not sure we'd want
to have them hurried through a 2-year budget in that first
year. But I think that's a reality the first year of most
administrations.
Chairman Nussle. Thank you very much. Thank you to this
panel. I have some questions that I'd love to ask, but we'll
save that. I want to ask about joint resolution, particular to
Mr. Panetta because of your very unique position, but we'll
visit about that at some other point.
I thank this panel for their testimony. We have a vote on
that we need to get to, so with that the committee hearing is
adjourned.
[Whereupon, at 1:18 p.m., the committee was adjourned, to
reconvene at the call of the Chair.]