[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL BUDGET OFFICE PROJECTIONS
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JANUARY 23, 2002
__________
Serial No. 107-20
__________
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, January 23, 2002................. 1
Statement of:
Dan Crippen, Director, Congressional Budget Office........... 7
Prepared statement, and additional submissions of:
Mr. Crippen:
Prepared statement....................................... 13
Reply to Hon. Ken Bentsen's question regarding deficit-
financed tax cuts...................................... 34
CONGRESSIONAL BUDGET OFFICE PROJECTIONS
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WEDNESDAY, JANUARY 23, 2002
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 2:34 p.m. in room
2318, Rayburn House Office Building, Hon. Jim Nussle (chairman
of the committee) presiding.
Members present: Representatives Nussle, Sununu, Bass,
Gutknecht, Thornberry, Ryun, Toomey, Hastings, Schrock, Brown,
Crenshaw, Putnam, Kirk, Spratt, McDermott, Bentsen, Davis,
Clayton, Price, Clement, Moran, Moore, Capuano, Hoeffel, Holt,
and Matheson.
Chairman Nussle. The committee on the budget will come to
order. First of all, out of order for just a moment just by way
of explanation, we are in the Science Committee. We appreciate
the Committee on Science for lending us their room for the time
being. Our committee hearing room continues to proceed with
renovations. It should be completed, hopefully soon, so that
the next hearings that we hold, we will be back in home field
advantage. We look forward to that, but we appreciate the
Science Committee for the use of their room. Today's hearing is
intended to review the budget and economic projections for the
coming decade as estimated by the Congressional Budget Office.
The projections, which will be published next week in CBO's
report of the budget and economic outlook fiscal years 2003 to
2012, will serve as a backdrop or context, as it typically
does, for Congress's budgetary decisions in the coming year.
The CBO figures also provide an assessment on why large
budget surpluses projected a year ago have declined. This
accounting is expected to show that most of the surplus
reduction in fiscal year 2003 and over the next 10 years as a
result of terrorist attacks on the United States; the war
against terrorism being waged overseas; and the economic
recession that we find ourselves in. Such conclusions would be
contrary to the views of administration critics who have been
repeatedly trying to blame the surplus decline on tax reduction
measured by the enactment of the tax bill last year. The
hearing's witness today will be Dan Crippen, the director of
the Congressional Budget Office, who will make the report on
these findings.
Before I turn it over to my friend and colleague, Mr.
Spratt, let me just make a couple of opening comments that I
think need to be made at this particular juncture. I don't
think there is any speech I have heard in the last couple of
months that didn't begin with ``on September 11, the world
changed.'' For me, I have a simple question and challenge for
my colleagues: Will those changes manage us or will we manage
those changes? I believe it is incumbent on the United States
Congress, the President of the United States and particularly--
using the leadership role of the Budget Committee--to begin to
manage those changes in the budget that we will begin to
discuss and review is the first step in making some of those
important management decisions for the changes that we all know
have to happen.
After four straight balanced budgets and half a trillion
dollars worth of debt reduction, we find ourselves in a
deficit. Why? Well, there are those who obviously cheerily
blame tax relief from last year and, in fact, have already put
forward ideas on raising taxes as a way to try and get
ourselves out of the situation that we find ourselves in. But
it wasn't taxes that got us here, and raising taxes isn't going
to get us out of the problem that we find ourselves in, and so
let me be very clear from the outset. This budget committee
will not raise taxes as a management plan to deal with the
fiscal situation that we find ourselves in. We will do quite a
bit over the next number of years, but raising taxes is not an
option, particularly when we are in the middle of a recession.
In order for us to deal with the challenges, we have got to
fund America's priorities first. That has to be job one of this
budget, and obviously, the priorities have changed since last
September. We have a war, we have a recession, and we have a
national emergency to deal with. The President, in his February
address to the Congress, said that there were only three
individual reasons why the United States Federal Government
might have to go into deficit. Number one was a war. Number
two, separately was a recession, and number three, separately,
was the national emergency. Because of September 11--a
deepening recession that now most experts suggested started at
least last spring, if not before--we now find ourselves dealing
with all three at the exact same time.
Now, I know for many reasons it will be very interesting,
particularly in a political year, to try and blame policies of
tax relief, when taxes were the highest of any time since World
War II, to try and blame tax relief as a way of demonstrating
how we got into this situation. But as the report from the
Congressional Budget Office suggests, that is just simply not
the case. I think probably one of the best ways to demonstrate
that is by looking at where the surplus went. So let us look at
a chart, see how the Science Committee does on technology here
for us. So far, so good, I guess, on a chart that can help
depict exactly where the surplus went according to what the
Congressional Budget Office is telling us. Just in case it
doesn't come up, we use the--oh, here we go. And, boy, it looks
like a headline news. Surplus estimates drop sharply. Boy, that
isn't news. Everyone has known that has been coming. Mr. Spratt
has been telling us that since how long ago?
Mr. Spratt. Since you passed the tax cut.
Chairman Nussle. Since we are in the Science Committee, let
me state very clearly, it didn't take a rocket scientist to
come up with that deduction, because we planned on that. We
wanted that tax cut. We felt it was important to give people
back their money, because in a recession, when you are trying
to deal with economic changes, letting people spend their own
money, not letting the government do that for them was job one,
and that is exactly why we passed the budget in the tax relief
package from last year. As you see, that is just a small part
of the change. According to the Congressional Budget Office,
1.6, almost equal to the tax cut relief over the 10 years, came
from the economy, .8 from spending, which, let me remind my
colleagues, we almost all cheerfully voted for in the packages
that were passed this fall. We have a remaining surplus over
this particular time. So, yes, the surplus has--and the surplus
estimates over the 10 years have dropped sharply. Some of it
was deliberate, and deliberate at a time when we needed a shot
in the arm for the economy, and the rest came from the economy
and spending that we all, in a bipartisan way, put forward.
In order to meet the challenges from the war, the recession
and the emergency, we need to focus on coming up with a budget
to deal with this. We are going to disagree today. I have no
doubt that there will be those who suggest that tax cuts is
what got us here and tax cuts alone. Tax increases is not how
we are going to get out of it, but we do need a plan. We have
put forward, I think, a very positive and constructive plan
from the House of Representatives in order to deal with this,
and let me just review what we have done.
First of all, we had a budget that prioritized in a number
of different positive ways what America's priorities should be.
Second, we passed protrade negotiation authority so that we
could begin to improve, renegotiate and begin to negotiate an
open trade around the country to create jobs around the world.
Next was an energy plan so that we could break the bonds of 56,
57 percent dependency on foreign oil--much of it coming from
the Middle East--and recognizing that we will continue to be
entangled in the Middle East as long as we have that
dependency.
And last but certainly not least, an economic stimulus
package that said that we need to deal with dislocated workers,
we needed to cut taxes for the middle class, we needed to
provide benefits to workers, and we also needed to make sure
that those who did not receive the benefits from the first tax
relief package received some benefits in this plan. We passed
it twice, and we are waiting for action; we passed an emergency
plan and we are waiting for action; we passed a stimulus plan
and we are waiting for action; we passed protrade negotiative
authority and we are waiting for action.
Where does that action need to come? From the Senate. We
are waiting. America is waiting. We have a plan to get out of
this mess. We know we are in a mess. America knows we are in a
mess. We didn't put ourselves in that mess. We were put there
by Osama bin Laden and the number of terrorists that we are
dealing with right now, and we will deal with them, and we will
reprioritize our budget to deal with them, even as we have
stated in our balanced budget amendments in the past, and as
the President has stated in his financial address to the
Congress this past year, even if it means having to borrow for
a short period of time--and I emphasize the word ``short''--in
order to deal with those problems.
So we wait for action from the United States Senate. My
concern, in watching the process thus far, is that as we look
at the budget process, I am concerned whether or not we can
actually achieve a budget through the Congress this year, and
let me be very clear about my intentions as the chairman and
what I will be advocating to the House of Representatives as we
move forward. We are going to be on time. We are going to hold
the hearings. We are going to write the document. We are going
to accept the President's recommendations, and we are going to
draft a budget. And we are going to have it done on time the
way we did last year. We are going to be prepared to negotiate
and to discuss and to prioritize with our colleagues in the
Senate. But we will continue, as we have this fall, to move in
a positive direction forward for our constituents and for
America if, in fact, the Senate fails to act. We will continue
to move forward. We will not wait. We will not stop. We will
not falter. We will not allow the gridlock of five or six
acting minority leaders in the Senate to stop our progress in
the House of Representatives. And that you can be assured of.
We realize that there will be a number of negotiations, as
there has to be, this year on priorities. We know that we are
not going to have commonality, even within our own caucuses, on
exactly what needs to be done, but we have to start moving
forward, we have to start having the votes. The House has had
the votes. The Senate needs to have those votes, and we are
going to continue to apply pressure so that America can move
successfully forward to meet the challenge that has been
presented to us by the last number of months.
It is not going to be easy. We all know that. We have been
home talking to our constituents. You think this budget is hard
to balance, try balancing a budget when you don't have a job.
Try and figure out how you are going to pay for college when
you are not making any money and you are trying to work off of
unemployment. Forget about it. This budget is important, as
important as any other job that we have to meet this year, but
this is still about people, and making sure that they have got
the resources around their kitchen table to deal with their
home budget, their farm budget or their small business budget.
But today's focus is on where we are, and the good news is that
we have got a projection for where we are today. The challenge,
of course, as we always talk about with our good friend, Mr.
Crippen, is that the numbers are almost never precise.
Mr. Crippen. That was kind.
Chairman Nussle. And it calls upon all of us to use our
best judgment as we move forward, but we appreciate the advice
that CBO is going to be giving us today.
With that, let me turn it over to my friend and colleague,
Mr. Spratt, for any opening comments he would like to make, and
before he does that, all members--I ask unanimous consent that
all members be allowed to put in a statement in the record at
this point.
Mr. Spratt.
Mr. Spratt. Thank you, Mr. Chairman.
Chairman, it was just a month ago that President Bush said
that his administration had--and quoting--brought sorely needed
fiscal discipline to Washington. Today the Congressional Budget
Office reports that $4 trillion of the $5.6 trillion projected
surplus, $4 trillion, has disappeared in a year. Last January,
CBO projected a surplus of $359 billion for fiscal year 2003.
This January, today, CBO projects a deficit of $14 billion, a
wing from a surplus of $359 billion to a deficit of $14
billion, a reversal of almost $400 billion in 1 year. Surely
the biggest budgetary reversal in the history of this country.
If this is fiscal discipline, it has an odd bottom line.
The chairman said it. I repeat it. War and recession and
tax cuts have overtaken the budget, and I think that adhering
to this budget, the budget that was passed by resolution last
year in the face of this report, isn't fiscal discipline. It
would be fiscal denial. I don't want to be in the role of
saying I told you so, but a lot of the things that are laid out
in this report and will be testified to by Dr. Crippen today
confirm our concerns that we have expressed about the
Republican budget for an entire year. First of all, the
fragility of these surpluses. In 1 year, $4 trillion of the
unified surplus has vanished, and the on-budget surplus has
become an on-budget deficit. That is a fact. The on-budget
surplus has become an on-budget deficit.
Now, that is important. Dr. Crippen will talk consistently
about the total surplus, the total deficit, but the number that
matters most to us, if we abide by the law, is the on-budget
surplus, the surplus in our budget exclusive of Social
Security. Why? When I was here 10, 12 years ago, we all voted
for a law that took Social Security off-budget and made it an
independent account. Secondly, if we want to abide by our
promise as represented by the lock box that we touted so much
over the last 2 years, not to borrow and spend the Social
Security surplus, but to save the surplus and to use it only
for Social Security purposes or for buying up outstanding debt
held by the public, then the number that we must target and
look at and be concerned about is the on-budget surplus number,
and as I said, for all practical purposes, for every year
throughout this forecast, the on-budget surplus is gone.
So the problem is not so much where we are. We can't do
much about that. The problem is where we are going. As you look
out over time, the horizon and over the horizon, particularly
after 2008, when the baby boomers retire and begin to draw
their Social Security benefits.
Now, I am not here to tell you that the tax cut is the sole
and only cause of the problem. It is not. We advocated a
smaller tax cut ourselves last year, about half the size that
was actually passed. We certainly aren't for raising taxes now
in the middle of a recession. I want to make that clear. We are
not here to claim that the tax cut is the only cause of the
vanishing surplus. But it is one of the causes, as the chart
that is now before you shows. You can't see the colors clearly
on this. Or at least I can't. I am red, green color-blind but--
--
Chairman Nussle. I will interpret it for you.
Mr. Spratt. You can see that the surplus was a major factor
last year. That is because of the tax rebate. It is a minor
factor this year and next year, but over time each year it
stairsteps upward. In 2010, it drops down again, but that is
for a reason that we all know won't be applicable. This tax
bill--in order to shoehorn as much as possible into the limits
of a $1.35 trillion allocation, has a very improbable feature
to it, a sunset. All of the tax provisions that implement
steadily over time are suddenly repealed in the year 2010. Now,
that is not going to happen. Politically, it is not going to
happen. I know it, whether I am here or not, in 2010, it is not
going to happen, and if you assume that it doesn't happen, that
the sunset won't be repealed, then those stairsteps keep going
upward, and the surplus for the 10-year frame of time, assuming
the repeal of the repealer, the recession of the sunset,
constitutes more than 50 percent of the cause for the
disappearance of the unified surplus.
This makes a mockery of all of our rhetoric about a lock
box, because what we are going to be doing over the next number
of years, probably for the full time frame that is forecast
here, is dipping into Social Security again. First of all, we
are going to spend all of Medicare. Now, Mr. Chairman, I know
that you made an earnest statement last year when Mr. Daniel
was here, and he would not disavow the intent to spend some of
the Medicare trust fund. You proposed spending some of the
Medicare trust fund, building up over the next 10 years, for
Medicare prescription drugs. Well, let me tell you, we are
going to spend all of it and not for Medicare, not for
prescription drugs. We are going to spend it to run the basic
operations of the United States Government, all of it. And we
are probably going to dip into Social Security to at least half
the trust fund. I don't think that is a radical proposal at
all.
So after all of this earnest talk about this lock box--and
it was--the core idea of which was a good idea, that we would
begin to use the Social Security surpluses as a mechanism for
increasing net national saving, and we would lay the basis on a
bipartisan basis for the first step toward this long run
solvency of Social Security is out the window, unless this
budget is significantly changed.
One small item. Over the last 3 or 4 years, we have had a
dividend that has barely been seen, but it has been realized as
we have been allocating and appropriating out of our budget,
and that is the decline in net national interest payments by
20, $30 billion for a period of 3 or 4 years, they have
staircased downward. As a result of the consequences of this
budget built into this budget, we are going to see an increase
of over a trillion dollars, in the interest payments of this
Federal Government on its debt over this period of time.
Now, let me say that the numbers we are talking about are a
current services, current policy baseline. They don't include
an awful lot of things that are in the pipeline on the agenda
and are likely to be beyond this year or next year or in the
very near future. For example, Mr. Chairman, the farm bill,
that is not included in this baseline. We don't have anything
for natural disasters, not fully affected in this baseline. We
don't have a full increase in defense. I heard today that the
defense increase will be at least $30 billion, maybe $40
billion, for the Department of Defense alone. This assumes less
than half of that amount.
This is a current services baseline before we have done
anything additional in the way of spending initiatives or
anything additional in the way of additional tax cuts. And they
are coming, too. You all know the expiring tax provisions. You
all know we have got a huge problem with the individual
alternative minimum tax that we will have to fix sooner or
later, and you have got, as I said, the repealer at the tail
end of your tax cut, which itself will be rescinded before it
is all over with, and that will add $373 billion or take away
$373 billion from the bottom line here.
So what we are looking at here is as good as it gets, and
as a result, what we are going to see is the on-budget surplus,
that most important number of all, the one that we should
really be targeting, we are going to see it decline from $3.1
trillion just last January. It already dropped $846 billion by
August. As a result of what we are baselining--what we have
here today--there you go. Well, there it is right there, in
simple language, $3.1 to $742 billion deficit over that period
of time. This is a dire situation, and I hope, Mr. Chairman,
that we can do our business on time, but I would like to think
that we could somehow come to the table. Everybody would come
to the table, and everything would be on the table, because
this budget needs major work, or we are going to be faced with
dire consequences for years and years to come.
Dr. Crippen, welcome, and I look forward to your testimony.
Chairman Nussle. Welcome CBO Director Dan Crippen again to
the Budget Committee. We welcome you, look forward to your
testimony. You may proceed. Your entire report will be made
part of the record and your testimony and you may proceed as
you see fit. Welcome.
STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Crippen. I am gratified to be here for a number of
reasons. I am also----
Chairman Nussle. You may need to push a button up there. I
am not sure.
Mr. Crippen. Did that do anything?
Chairman Nussle. No.
Mr. Crippen. How's that?
Chairman Nussle. There you go. Thank you.
Mr. Crippen. I started to send an appreciative comment also
on where I am sitting. You could have put me underneath that
thing, which I think has a cable and a winch, and you could--
anyway.
Mr. Chairman, Congressman Spratt, and other members of the
committee, I appreciate the opportunity to represent CBO this
afternoon, presenting our current assessment of the economic
and budget outlook. I might say, as I did this morning, that I
am here to reveal the worst-kept secret in Washington. Our
surplus estimates of a year ago have diminished. As many of
your colleagues said this morning as well, what a difference a
year makes. I have often heard that a year in politics is an
eternity, but it turns out that a year in economics is also a
long time.
As you are all aware, the results we present today, as Mr.
Spratt just said, are our current best estimate for the economy
over the next 10 years and the associated budget outlook, but
with no policy changes. No increase in spending for the war on
terrorism or for homeland defense, no additional spending for
farm programs, no additional reduction in taxes for stimulus
beyond that under current law. No renewal of expiring tax
provisions.
These first two charts attempt to illustrate graphically
and numerically what has happened to the projected surpluses
and why our projections have changed (see figures 1 and 2).
Now, the gross numbers here both of you have already addressed.
The outlook for surpluses over the next 10 years has gone from
$5.6 trillion to $1.6 trillion over the same period, obviously
a reduction of $4 trillion. The primary causes of that decline,
the diminished performance of the economy and the passage of
legislation, vary in importance over the 10-year period.
In the near term, the biggest change since last January is
clearly the economy. Instead of the 3.4 percent real growth in
gross domestic product (GDP) we forecast a year ago--which was
at the time similar to most other forecasts--we now expect GDP
to grow less than 1 percent this year. As a result of that
change in economic circumstances and the mostly related
technical adjustments that go along with it, the balance for
our current fiscal year will be something like $240 billion
less than we forecast a year ago.
Legislation enacted since last January will further reduce
balances this year by nearly $90 billion--not counting debt
service--one-third of which is in reduced revenues and two-
thirds in increased outlays. Combined, those changes amount to
a swing of over $300 billion, and they alter our forecast from
roughly a $300 billion surplus to a $20 billion deficit. A
similar pattern exists for the budget year 2003, with a
resultant small deficit of $14 billion. By 2004, under current
policies, we forecast the emergence of unified surpluses, with
on-budget surpluses developing again near the end of the
decade.
Our projection of changes in the second half of the next 10
years show somewhat the reverse pattern. Changes in legislation
have a more important impact than changes in the economy. By
2011, changes in law since last January directly reduce the
surplus that we estimated last January by just under $200
billion, $120 billion from revenue and $63 billion from
spending. Changes in the economic outlook and technical changes
account for an additional $124 billion.
Over the 10 year period from 2002 through 2011, then,
changes account for 40 percent of the diminution in surpluses,
whereas legislative changes account for 60 percent.
This recession, Mr. Chairman, and its effects on the budget
have been unusual in several respects. First, the downturn was
precipitated not by the usual circumstances of demand
outstripping supply, causing inflation and a subsequent
tightening of monetary policy. Rather, this time a precipitous
drop-off in capital spending and inventories by corporations of
all types, but especially for IT products, caused about three-
quarters of the decline in GDP growth. Although the increase in
consumer spending slowed, it remained a source of strength
through much of last year.
Second, what has been characterized as an over-investment
was accompanied by a marked decline in equity markets,
especially for high-tech stocks, which, in turn, meant fewer
capital gains, slowdowns in gains realization, and therefore in
capital gains revenues.
Third, the attacks of September 11 probably exacerbated the
recession we were already in, and while most of the initial
impact seems to have worn off, at least some industries, such
as airlines, have not recovered. The possibility of future
terrorist attacks has increased uncertainty and led to a
significant and growing level of expenditure on security.
Fourth, our current economic projections alone would not
have reduced revenues as much as was implied by this overall
forecast. Revenue collections at the moment are running lower
than expected, even given the current level of anemic growth.
There are some phenomena here we simply don't fully understand.
They may be temporary or permanent, but they are permanently
built into this forecast.
Finally, while not directly related to the downturn, the
Bureau of Economic Analysis has simultaneously and
substantially reduced its estimates of for the previous three
years, which, in turn, lowered the base and the expected growth
of the economy in the future.
Given the nature of this recession, that is, the dearth of
capital spending, the economy will likely be slow to recover
even after it bottoms out. Only when consumption and inventory
needs to strain current capacity, will it be profitable to
invest again in capital stock, and only then will growth in the
economy resume its 3 percent potential rate.
Mr. Chairman, I am sure the committee has many questions
about this forecast and its implications for policy, and I
don't want to try to anticipate them in my statement. Before I
relinquish the floor, I feel compelled once again--as I
normally do--to remind everyone that the 10-year period in our
baseline will only begin to touch on the era of what is likely
to be the largest actual real, not merely projected, fiscal
swing in our history.
The retirement of my generation will double the number of
retirees receiving Federal benefits, while the workforce that
must support us and must pay our benefits will grow only
nominally. What this means, I believe, is found in this poor
chart I drag around with me everywhere I go, mainly that these
three programs--Social Security, Medicare and Medicaid--will
consume more than twice as much of the economy as is presently
the case (see figure 3).
There are a number of important implications to take away
from this graph. First, there are really only two moving parts
to the picture. Spending on the elderly, which is the
numerator, and the size of the economy, which is the
denominator. While the operation of the trust funds is not
wholly irrelevant, the most important thing we can do for our
children and grandchildren is to grow the economy, not the
trust funds, and perhaps accept lower benefits for ourselves.
When the day comes to collect my Social Security, it
matters less how the cash that I will spend is generated, but
how much of what my kids are producing I will demand they hand
over to me. Whether it is financed by taxes on them, or
providing less of other government programs for them, it will
be my kids nonetheless, who pays my benefit.
Finally, this growing wedge will consume nearly the
resources we now expend for all Federal programs. That means,
quite simply, that other programs will need to be cut, taxes
raised, or debt issued to the tune of nearly 10 percent of GDP.
As the next chart illustrates, since World War II the
average Federal tax take has been 18 percent of GDP (see figure
4). Even with last year's tax cut, revenues will remain well
above that average. Put more starkly, the extremes here are
quite clear. One of them will be that we would have to raise
taxes to about 30 percent of GDP to pay for benefits. Another
way to look at this, and I don't think you have an electronic
version of this last chart, is the debt levels that might be
required to sustain the current Federal budget, along with the
increases in Social Security, Medicare and Medicaid (see figure
5).
Almost any fiscal scenario one could envision, which is an
increase or decrease from the baseline on debt, will, before
too long, become unsustainable. The highest point ever, which
was reached in World War II, is the horizontal line of a little
more than 100 percent of GDP--or where Japan finds itself now--
but it won't take long before we would exceed that highest ever
level if we were to issue debt.
The result here, if you look at extreme solutions, is that
we will have to increase borrowing by a very large and likely
unsustainable amount, raise taxes to 30 percent of GDP from 19
percent of GDP currently, or eliminate most of the rest of the
government as we know it. None of those are very palatable.
Some combination of them is likely, but we need to take action
as soon as we can to address what we only see now as the tip of
the proverbial iceberg. With that, Mr. Chairman, I will retire.
Chairman Nussle. Not yet. You can stop, but you don't need
to retire yet.
[The prepared statement of Dan L. Crippen follows:]
Prepared Statement of Dan L. Crippen, Director, the Congressional
Budget Office
Mr. Chairman, Congressman Spratt, and members of the committee, I
am pleased to be here today to discuss the current outlook for the
budget and the economy. The Congressional Budget Office (CBO) will
release its report on that topic, The Budget and Economic Outlook:
Fiscal years 2003-2012, on January 31. My testimony today will
summarize that report.
The economic recession and recent laws have combined to sharply
reduce the budget surpluses projected a year ago. In January 2001, CBO
projected that under the laws and policies then in force, the Federal
Government would run surpluses in fiscal years 2002 through 2011
totaling $5.6 trillion. 1 In CBO's new projections, that
cumulative surplus has fallen to $1.6 trillion--a drop of $4 trillion
(see Table 1 on page 7).
---------------------------------------------------------------------------
\1\ That projection appeared in Congressional Budget Office, ``The
Budget and Economic Outlook: Fiscal Years 2002-2011'' (January 2001).
---------------------------------------------------------------------------
About 60 percent of that decline results from legislation--the tax
cuts enacted in June and additional discretionary spending--and from
its effect on the cost of paying interest on the Federal debt. Changes
in the economic outlook and various technical revisions since last
January account for the other 40 percent of that decline.
For both 2002 and 2003, CBO now projects that, instead of
surpluses, the total budget will show small deficits, if current
policies remain the same and the economy follows the path that CBO is
forecasting. In 2001, by contrast, the Federal Government recorded a
surplus of $127 billion (see Table 2).
The deficit projected for this year--$21 billion--represents a
change of more than $300 billion from last January's projection. Over
70 percent of that reduction results from the weak economy and related
technical factors, which have considerably lowered the revenues
expected for this year and next.
For the current 10-year projection period, 2003 through 2012, CBO
estimates a total surplus of nearly $2.3 trillion. However, almost half
of that total comes from the surpluses projected for 2011 and 2012--the
last 2 years of the projection period and thus the most uncertain. The
surpluses for those years also reflect the scheduled expiration in
December 2010 of the tax cuts enacted last June.
In CBO's new baseline, the off-budget accounts (which reflect the
spending and revenues of Social Security and the Postal Service) run
surpluses throughout the projection period. In the on-budget accounts,
by contrast, surpluses do not reemerge until 2010.
CBO's baseline projections are intended to serve as a neutral
benchmark against which to measure the effects of possible changes in
tax and spending policies. They are constructed according to rules set
forth in law and long-standing practices and are designed to project
Federal revenues and spending under the assumption that current laws
and policies remain unchanged. Thus, these projections will almost
certainly differ from actual budget totals: the economy may not follow
the path that CBO projects, and lawmakers are likely to alter the
nation's tax and spending policies. Therefore, CBO's baseline should be
viewed not as a forecast or prediction of future budgetary outcomes but
simply as the agency's best judgment of how the economy and other
factors will affect Federal revenues and spending under current law.
THE BUDGET OUTLOOK
If current policies remain in place, CBO projects, the budget will
be in deficit for the next 2 years. Those deficits are expected to be
quite small, amounting to only 0.2 percent of the nation's gross
domestic product (GDP) in 2002 and 0.1 percent of GDP in 2003. After
that, surpluses are projected to reemerge and gradually increase.
For the 5 years from 2003 through 2007, CBO projects a cumulative
surplus of $437 billion. That figure represents off-budget surpluses
totaling more than $1 trillion offset by on-budget deficits that add up
to $617 billion. For the 10-year period through 2012, the total budget
surplus under current policies is projected to approach $2.3 trillion.
Again, that amount is made up of surpluses in Social Security ($2.5
trillion) offset by a cumulative on-budget deficit ($242 billion).
Without the scheduled expiration of tax-cut provisions in 2010, the
total 10-year budget surplus would fall to $1.6 trillion.
The total surplus is projected to equal 1 percent of GDP by 2006
and grow to 3.7 percent of GDP by 2012. Estimates of large surpluses
should be viewed cautiously, however, because future economic
developments and estimating inaccuracies could change the outlook
substantially. In addition, future legislative actions are almost
certain to alter the budgetary picture.
Changes in the Past Year
As an illustration of how quickly the budget outlook can change,
CBO's projection of the cumulative surplus for 2002 through 2011 has
plunged by $4 trillion in just 1 year (see Table 1). 2 Some
$2.4 trillion of that drop can be attributed to legislative actions.
The legislation with the largest effect was the Economic Growth and Tax
Relief Reconciliation Act of 2001, enacted in June. That law is
estimated to reduce surpluses by nearly $1.3 trillion over 10 years
(not including associated debt-service costs).
---------------------------------------------------------------------------
\2\ About 45 percent of that reduction results from changes made
since CBO issued its updated ``Budget and Economic Outlook'' in August.
The drop since August totals $1.8 trillion and is attributed, in
relatively equal measures, to legislative, economic, and technical
changes.
---------------------------------------------------------------------------
Additional discretionary spending since last January accounts for
another $550 billion reduction in the projected surplus for the 2002-
2011 period. That amount stems from both regular and supplemental
appropriations. CBO's January 2001 baseline assumed that discretionary
budget authority for 2002 would total $665 billion. 3 The
actual amount appropriated for 2002 in the 13 regular appropriation
acts totaled $691 billion. In addition, the Congress and the President
enacted $20 billion in supplemental budget authority in December as
part of their response to the terrorist attacks of September 11--
thereby generating a total of $711 billion in budget authority for
2002, $45 billion more than CBO assumed last January.
---------------------------------------------------------------------------
\3\ That figure was calculated by assuming that the amount
appropriated for the base year of 2001 would grow at specified rates of
inflation.
---------------------------------------------------------------------------
Under the provisions of the Balanced Budget and Emergency Deficit
Control Act of 1985, CBO's baseline assumes that annual appropriations
for discretionary programs continue at their current level, increasing
only by the rates of inflation projected for each year. As a result of
the appropriations enacted for 2002, projections of discretionary
spending in the current baseline begin at a level that is $45 billion
higher than a year ago.
Furthermore, two supplemental appropriation laws enacted in fiscal
year 2001--one for defense personnel and readiness programs and another
in immediate response to the attacks of September 11--will generate
outlays totaling around $25 billion in 2002 and beyond. However, budget
authority from actions in 2001 is not carried forward into the baseline
projections for future years because those appropriations occurred
before the current year.
Overall, legislated reductions in revenues, additional
discretionary spending, and other laws with smaller budgetary effects
have reduced projected surpluses--and thereby increased the
government's borrowing needs--by $1,858 billion for 2002 through 2011.
That increased borrowing is projected to result in an extra $562
billion in net interest costs over the 10-year period.
Changes in the economic outlook since January 2001 account for
another $929 billion decline in the 10-year surplus. About three-
quarters of that total reflects lower revenue projections, mostly
resulting from the substantially weaker economic growth expected in the
near term and the slightly lower average growth rates projected for the
following several years. Much of the rest of the decline attributable
to the economic outlook represents additional debt-service costs
resulting from the reduction in anticipated revenues.
Technical changes--those not driven by new legislation or by
changes in CBO's economic forecast--have reduced the projected 10-year
surplus by a total of $660 billion since last January. As with the
economic changes, revenues account for over 75 percent of the technical
changes, and debt service accounts for much of the rest. The technical
changes to revenues stem primarily from revised projections of capital
gains realizations and adjustments for lower-than-expected tax
collections in recent months.
Homeland Security
Since the attacks of September 11, Federal agencies, State and
local governments, and the private sector have perceived a heightened
threat to the United States and a need to commit more resources to
homeland security. On the Federal level, legislation following the
attacks increased the budget authority provided for such security from
$17 billion in 2001 to $22 billion for 2002. What level of resources to
commit to homeland security will undoubtedly be a key issue as the
Congress and the President make decisions about spending and other
policies this year.
The Outlook for Federal Debt
In the January 2001 Budget and Economic Outlook, CBO estimated that
Federal debt held by the public would reach a level in 2006 that would
allow the Treasury to retire all of the debt available for redemption.
At that time, CBO also projected that the statutory ceiling on all
Federal debt (which includes debt held by government accounts) would
not be reached until 2009. Now, CBO estimates that debt held by the
public will not be fully redeemed within the 10-year projection period
and that the current debt ceiling will be reached in the next few
months. Nevertheless, if the surpluses projected in the current
baseline materialize, debt held by the public will fall to about 15
percent of GDP in 2010--its lowest level since 1917.
THE ECONOMIC OUTLOOK
In CBO's opinion, the most likely path for the economy is a mild
recession that may already have reached its nadir. CBO expects the
annual growth rate of real (inflation-adjusted) GDP to accelerate from
-0.2 percent in 2001 (measured from the fourth quarter of calendar year
2000 to the fourth quarter of 2001) to 2.5 percent in 2002 and to
accelerate further to 4.3 percent in 2003.
CBO believes, some unusual features of the current recession will
cause it to be mild. Chief among those features are the rapidity of
policymakers' responses, the moderating behavior of prices, and an
early reduction in businesses' inventories. In less than 1 year, the
Federal Reserve has cut the Federal funds rate 11 times--from 6.5
percent to 1.75 percent. Also, the tax cuts enacted in June prevented
consumption from slowing more than it might have otherwise, and
additional Federal spending in response to the terrorist attacks will
boost GDP in 2002. Lower prices for oil and natural gas and mild price
increases for other items are supporting consumption by boosting real
disposable income. Furthermore, businesses began to reduce inventories
earlier in this recession than they did in past downturns, which may
mean that fewer cuts in inventories remain than at this stage of the
typical recession.
CBO projects that weak demand in the short run will translate into
weak employment, pushing the unemployment rate higher for the next
several quarters while restraining inflation. With growth of real GDP
near zero early this year, the unemployment rate is expected to
increase to 6.1 percent in calendar year 2002 from 4.8 percent last
year (see Table 3). The rate of inflation faced by consumers is
forecast to fall from 2.9 percent last year to 1.8 percent in 2002.
Lower oil prices account for most of the projected decline in
inflation, although the recession also plays a role. As oil prices
stabilize in CBO's forecast, inflation bounces back to 2.5 percent in
2003.
Looking out through 2012, CBO expects the growth of real GDP to
average 3.1 percent during the 2002-2012 period--roughly the same as it
projected last January for the 2002-2011 period. Nonetheless, the level
of real GDP is lower each year than in last January's projections,
primarily because actual GDP ended up much lower in 2001 than CBO had
expected a year ago.
UNCERTAINTY OF THE PROJECTIONS
CBO's baseline projections represent the midrange of possible
outcomes based on past and current trends and the assumption that
current policies do not change. But considerable uncertainty surrounds
those projections for two reasons. First, future legislation is likely
to alter the paths of Federal spending and revenues. CBO does not
predict legislation--indeed, any attempt to incorporate future
legislative changes would undermine the usefulness of the baseline as a
benchmark against which to measure the effects of such changes. Second,
the U.S. economy and the Federal budget are highly complex and are
affected by many economic and technical factors that are difficult to
predict. As a result, actual budgetary outcomes will almost certainly
differ from CBO's baseline projections.
In view of such uncertainty, the outlook for the budget can best be
described as a fan of probabilities around the point estimates
presented as CBO's baseline (see Figure 1). Not surprisingly, those
probabilities widen as the projection period extends. As the fan chart
makes clear, projections that are quite different from the baseline
have a significant probability of coming to pass.
THE LONG-TERM OUTLOOK
Despite the sizable surpluses projected for the later years of
CBO's 10-year budget outlook, long-term pressures on spending loom just
over the horizon. Those pressures result from the aging of the U.S.
population (large numbers of baby boomers will start becoming eligible
for Social Security retirement benefits in 2008 and for Medicare in
2011), from increased life spans, and from rising costs for Federal
health care programs. According to midrange estimates, if current
policies continue, spending on Social Security, Medicare, and Medicaid
combined will nearly double by 2030, to almost 15 percent of GDP.
Taking action sooner rather than later to address long-term
budgetary pressures can make a significant difference. In particular,
policies that encourage economic growth--such as running budget
surpluses to boost national saving and investment, enacting tax and
regulatory policies that encourage work and saving, and focusing more
government spending on investment rather than on current consumption--
can help by increasing the total amount of resources available for all
uses.
TABLE 1.--CHANGES IN CBO'S BASELINE PROJECTIONS OF THE SURPLUS SINCE JANUARY 2001
[In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total, Total,
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002-2006 2002-2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Surplus as Projected in January 313 359 397 433 505 573 635 710 796 889 2,007 5,610
2001...................................
Changes:
Legislative:
Tax act\1\.......................... -38 -91 -108 -107 -135 -152 -160 -168 -187 -130 -479 -1,275
Discretionary spending.............. -44 -49 -52 -54 -56 -57 -58 -59 -60 -61 -255 -550
Other............................... -4 -6 -5 -3 -4 -2 -2 -2 -2 -2 -23 -33
Debt service\2\..................... -5 -12 -22 -32 -44 -57 -72 -88 -106 -124 -114 -562
---------------------------------------------------------------------------------------------------------------
Subtotal.......................... -91 -158 -186 -197 -238 -268 -293 -317 -355 -317 -870 -2,420
Economic.............................. -148 -131 -95 -81 -75 -75 -76 -79 -82 -88 -530 -929
Technical \3\......................... -94 -84 -62 -51 -64 -64 -65 -64 -65 -45 -356 -660
---------------------------------------------------------------------------------------------------------------
Total Changes..................... -333 -373 -343 -330 -377 -406 -433 -460 -502 -450 -1,757 -4,008
Total Surplus or Deficit (-) as -21 -14 54 103 128 166 202 250 294 439 250 1,602
Projected in January 2002..............
Memorandum:
Changes in the Surplus by Type of
Discretionary Spending:
Defense............................... -33 -29 -29 -29 -29 -29 -30 -30 -31 -32 -149 -301
Nondefense............................ -11 -20 -23 -25 -26 -28 -28 -29 -29 -30 -106 -249
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--For purposes of comparison, this table shows projections for 2002 through 2011 because that was the period covered by CBO's January 2001
baseline. The current projection period extends from 2003 through 2012.
\1\ The Economic Growth and Tax Relief Reconciliation Act of 2001, which was estimated at the time of enactment to reduce revenues by $1,186 billion and
increase outlays by $88 billion between 2002 and 2011.
\2\ Reflects only the change in debt-service costs that results from legislative actions. Other effects on debt-service costs are included under
economic and technical changes.
\3\ Technical changes are revisions that are not attributable to new legislation or to changes in the components of CBO's economic forecast.
Source: Congressional Budget Office.
Table 2.--THE BUDGET OUTLOOK UNDER CURRENT POLICIES
[In billions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Actual Total, Total,
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003-2007 2003-2012
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
On-Budget Surplus or Deficit (-).............................. -33 -181 -193 -141 -108 -99 -76 -56 -23 4 131 319 -617 -242
Off-Budget Surplus \1\........................................ 161 160 178 195 212 227 242 258 274 290 307 322 1,054 2,505
---------------------------------------------------------------------------------------------------------------------------------
Total Surplus or Deficit (-)................................ 127 -21 -14 54 103 128 166 202 250 294 439 641 437 2,263
Debt Held by the Public (End of year)......................... 3,320 3,380 3,410 3,373 3,288 3,177 3,027 2,840 2,605 2,325 1,900 1,273 n.a. n.a.
Memorandum:
Total Surplus or Deficit (-) as a Percentage of GDP........... 1.3 -0.2 -0.1 0.5 0.8 1.0 1.2 1.4 1.7 1.9 2.7 3.7 0.7 1.6
Debt Held by the Public (End of year) as a Percentage of GDP.. 32.7 32.8 31.3 29.2 27.0 24.8 22.5 20.0 17.5 14.8 11.5 7.4 n.a. n.a.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--n.a. = not applicable.
\1\ Off-budget surpluses comprise surpluses in the Social Security trust funds and the net cash flow of the Postal Service.
Source: Congressional Budget Office.
Table 3.--CBO'S ECONOMIC FORECAST FOR 2002 AND 2003
------------------------------------------------------------------------
Forecast
Estimated ---------------------
2001 2002 2003
------------------------------------------------------------------------
Fourth Quarter to Fourth Quarter
(Percentage change):
Nominal GDP.......................... 1.7 4.2 6.5
Real GDP............................. -0.2 2.5 4.3
Calendar Year Average:
Real GDP (Percentage change)......... 1.0 0.8 4.1
Consumer Price Index (Percentage 2.9 1.8 2.5
change) \1\.........................
Unemployment Rate (Percent).......... 4.8 6.1 5.9
Three-Month Treasury Bill Rate 3.4 2.2 4.5
(Percent)...........................
Ten-Year Treasury Note Rate (Percent) 5.0 5.0 5.5
------------------------------------------------------------------------
\1\ The consumer price index for all urban consumers.
Sources: Congressional Budget Office; Department of Commerce, Bureau of
Economic Analysis; Department of Labor, Bureau of Labor Statistics;
Federal Reserve Board.
Note.--This figure shows the estimated likelihood of alternative
projections of the surplus under current policies. The calculations are
based on CBO's past track record. CBO's baseline projections fall in
the middle of the darkest area. Under the assumption that policies do
not change, the probability is 10 percent that actual surpluses will
fall in the darkest area and 90 percent that they will fall within the
whole shaded area.
Actual surpluses will of course be affected by legislation enacted
during the next 10 years, including decisions about discretionary
spending. The effects of future legislation are not included in this
figure.
An explanation of how this probability distribution was calculated
will appear shortly on CBO's Web site (www.cbo.gov).
Source: Congressional Budget Office.
CBO'S BASELINE BUDGET PROJECTIONS
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Actual Total, Total,
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003-2007 2003-2012
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Billions of Dollars
Revenues:
Individual income taxes..................................... 994 947 998 1,059 1,114 1,162 1,228 1,305 1,387 1,477 1,673 1,841 5,562 13,245
Corporate income taxes...................................... 151 179 175 199 235 246 260 275 289 303 319 335 1,115 2,635
Social insurance taxes...................................... 694 710 748 789 832 869 908 948 994 1,045 1,097 1,151 4,146 9,381
Other....................................................... 152 146 149 159 161 170 172 179 186 183 188 223 811 1,769
---------------------------------------------------------------------------------------------------------------------------------
Total..................................................... 1,991 1,983 2,070 2,206 2,342 2,447 2,568 2,706 2,856 3,008 3,277 3,549 11,633 27,030
On-budget............................................... 1,484 1,464 1,525 1,632 1,739 1,816 1,907 2,014 2,130 2,243 2,474 2,706 8,620 20,187
Off-budget.............................................. 508 518 545 574 602 631 661 693 727 764 803 842 3,014 6,842
Outlays:
Discretionary spending...................................... 649 733 764 784 808 824 841 866 888 910 937 953 4,021 8,575
Mandatory spending.......................................... 1,095 1,188 1,248 1,292 1,362 1,428 1,508 1,602 1,701 1,809 1,933 2,023 6,837 15,904
Offsetting receipts......................................... -87 -88 -101 -113 -119 -115 -122 -129 -136 -143 -152 -160 -570 -1,289
Net interest................................................ 206 170 174 188 188 182 175 165 153 138 120 92 908 1,577
---------------------------------------------------------------------------------------------------------------------------------
Total..................................................... 1,864 2,003 2,085 2,152 2,238 2,319 2,402 2,504 2,606 2,714 2,838 2,908 11,196 24,767
On-budget............................................... 1,517 1,645 1,718 1,774 1,848 1,915 1,983 2,069 2,153 2,240 2,343 2,387 9,237 20,429
Off-budget.............................................. 347 358 367 379 391 405 419 434 453 474 495 521 1,960 4,337
Surplus or Deficit (-)...................................... 127 -21 -14 54 103 128 166 202 250 294 439 641 437 2,263
On-budget................................................. -33 -181 -193 -141 -108 -99 -76 -56 -23 4 131 319 -617 -242
Off-budget................................................ 161 160 178 195 212 227 242 258 274 290 307 322 1,054 2,505
Memorandum:
Gross Domestic Product........................................ 10,150 10,315 10,890 11,556 12,168 12,803 13,468 14,166 14,897 15,664 16,469 17,314 60,884 139,394
As a Percentage of GDP
Revenues:
Individual income taxes..................................... 9.8 9.2 9.2 9.2 9.2 9.1 9.1 9.2 9.3 9.4 10.2 10.6 9.1 9.5
Corporate income taxes...................................... 1.5 1.7 1.6 1.7 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.8 1.9
Social insurance taxes...................................... 6.8 6.9 6.9 6.8 6.8 6.8 6.7 6.7 6.7 6.7 6.7 6.6 6.8 6.7
Other....................................................... 1.5 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.2 1.2 1.1 1.3 1.3 1.3
Total..................................................... 19.6 19.2 19.0 19.1 19.2 19.1 19.1 19.1 19.2 19.2 19.9 20.5 19.1 19.4
On-budget............................................... 14.6 14.2 14.0 14.1 14.3 14.2 14.2 14.2 14.3 14.3 15.0 15.6 14.2 14.5
Off-budget.............................................. 5.0 5.0 5.0 5.0 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9
Outlays:
Discretionary spending...................................... 6.4 7.1 7.0 6.8 6.6 6.4 6.2 6.1 6.0 5.8 5.7 5.5 6.6 6.2
Mandatory spending.......................................... 10.8 11.5 11.5 11.2 11.2 11.2 11.2 11.3 11.4 11.5 11.7 11.7 11.2 11.4
Offsetting receipts......................................... -0.9 -0.9 -0.9 -1.0 -1.0 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9
Net interest................................................ 2.0 1.7 1.6 1.6 1.5 1.4 1.3 1.2 1.0 0.9 0.7 0.5 1.5 1.1
Total..................................................... 18.4 19.4 19.1 18.6 18.4 18.1 17.8 17.7 17.5 17.3 17.2 16.8 18.4 17.8
On-budget............................................... 14.9 16.0 15.8 15.3 15.2 15.0 14.7 14.6 14.5 14.3 14.2 13.8 15.2 14.7
Off-budget.............................................. 3.4 3.5 3.4 3.3 3.2 3.2 3.1 3.1 3.0 3.0 3.0 3.0 3.2 3.1
Surplus or Deficit (-)........................................ 1.3 -0.2 -0.1 0.5 0.8 1.0 1.2 1.4 1.7 1.9 2.7 3.7 0.7 1.6
On-budget................................................... -0.3 -1.8 -1.8 -1.2 -0.9 -0.8 -0.6 -0.4 -0.2 * 0.8 1.8 -1.0 -0.2
Off-budget.................................................. 1.6 1.6 1.6 1.7 1.7 1.8 1.8 1.8 1.8 1.9 1.9 1.9 1.7 1.8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--* = between zero and 0.05 percent of GDP.
Source: Congressional Budget Office.
CBO'S BASELINE PROJECTIONS OF DISCRETIONARY SPENDING
(In billions of dollars)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Actual Total, Total,
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003-2007 2003-2012
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Budget Authority
Defense..................................................... 331 348 357 367 376 386 396 406 417 428 439 451 1,881 4,022
Nondefense.................................................. 331 363 376 385 394 404 414 425 436 447 459 470 1,973 4,211
Total..................................................... 662 711 733 751 770 790 810 831 853 875 898 921 3,854 8,233
Outlays
Defense..................................................... 306 351 356 363 375 381 387 401 411 422 437 441 1,862 3,974
Nondefense.................................................. 343 381 408 421 433 443 454 465 476 488 500 512 2,159 4,600
Total..................................................... 649 733 764 784 808 824 841 866 888 910 937 953 4,021 8,575
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Notes.--CBO's baseline projections assume that discretionary spending grows at the rate of inflation after 2002, using the inflators specified in the Balanced Budget and Emergency Deficit
Control Act of 1985 (the gross domestic product deflator and the employment cost index).
In CBO's projections, discretionary outlays always exceed budget authority because of spending from the Highway Trust Fund and the Airport and Airways Trust Fund, which is subject to
obligation limitations in appropriation acts. The budget authority for such programs is provided in authorizing legislation and is not considered discretionary. Another reason outlays exceed
budget authority is that outlays include spending from appropriations provided in previous years.
Source: Congressional Budget Office.
CBO'S CURRENT AND PREVIOUS ECONOMIC PROJECTIONS FOR CALENDAR YEARS 2001 THROUGH 2011
----------------------------------------------------------------------------------------------------------------
Forecast Projected Annual
Estimated ------------------ Average
2001 -----------------------
2002 2003 2004-2007 2008-2011
----------------------------------------------------------------------------------------------------------------
Nominal GDP (Billions of Dollars)
January 2002............................................. 10,193 10,422 11,063 \1\13,639 \2\16,676
January 2001............................................. 10,446 11,029 11,623 \1\14,100 \2\17,132
Nominal GDP (Percentage change)
January 2002............................................. 3.2 2.2 6.1 5.4 5.2
January 2001............................................. 4.7 5.6 5.4 4.9 5.0
Real GDP (Percentage change)
January 2002............................................. 1.0 0.8 4.1 3.3 3.1
January 2001............................................. 2.4 3.4 3.3 3.0 3.1
GDP Price Index (Percentage change)
January 2002............................................. 2.2 1.4 2.0 2.0 2.0
January 2001............................................. 2.3 2.1 2.0 1.9 1.9
Consumer Price Index\3\ (Percentage change)
January 2002............................................. 2.9 1.8 2.5 2.5 2.5
January 2001............................................. 2.8 2.8 2.7 2.5 2.5
Unemployment Rate (Percent)
January 2002............................................. 4.8 6.1 5.9 5.2 5.2
January 2001............................................. 4.4 4.5 4.5 4.8 5.2
Three-Month Treasury Bill Rate (Percent)
January 2002............................................. 3.4 2.2 4.5 4.9 4.9
January 2001............................................. 4.8 4.9 5.0 4.9 4.9
Ten-Year Treasury Note Rate (Percent)
January 2002............................................. 5.0 5.0 5.5 5.8 5.8
January 2001............................................. 4.9 5.3 5.5 5.7 5.8
Tax Bases (Percentage of GDP)
Corporate book profits
January 2002......................................... 6.9 6.1 7.0 7.9 8.1
January 2001......................................... 8.9 8.5 8.4 8.1 8.0
Wages and salaries
January 2002......................................... 50.0 50.3 50.1 49.3 48.9
January 2001......................................... 48.2 48.2 48.2 48.1 48.0
----------------------------------------------------------------------------------------------------------------
Notes.--CBO's January 2001 projections for GDP and its components were based on data from the national income
and product accounts before the accounts were revised in July 2001.
Percentage changes are year over year.
\1\ Level of GDP in 2007.
\2\ Level of GDP in 2011.
\3\ The consumer price index for all urban consumers.
Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor,
Bureau of Labor Statistics; Federal Reserve Board.
Chairman Nussle. Let me start with the basics again, and
just to cover your principal reasons for the decline of the
projected surpluses, you suggested were, number one, economic
factors, and that was to the tune of how much?
Mr. Crippen. Of the 10-year total, it is 40 percent.
Chairman Nussle. 40 percent.
Mr. Crippen. For the first year, it is most of it. It is
$240 billion out of the $300 billion.
Chairman Nussle. All right. The second reason for increased
spending and, at least that which you can--because you are not
factoring into this some of the items Mr. Spratt was talking
about, many of us know are on the horizon, but you don't take
those into consideration. Most of that spending was, as I
recall--and correct me if I am wrong--but the emergencies, the
war and added security.
Mr. Crippen. Yes, mostly. There were some increases before
that, but, yes.
Chairman Nussle. And finally--go ahead.
Mr. Crippen. That was about 20 percent of the 10-year
change.
Chairman Nussle. So 40 percent for the economy over 10
years, 20 percent for increased spending over the 10 years, and
the tax cut would be----
Mr. Crippen. The rest of it, the 40 or so percent that is
left.
Chairman Nussle. According to Mr. Spratt's comments to
start with, it appears that at least on the House side, the
Democrats have taken taxes off the table as one of the possible
solutions, and obviously we have. We have made that very clear.
In fact, we are very deliberate about taking taxes off the
table. That's why the taxes are back on the kitchen table and
not out here on the committee table.
So having said that, what are our options for solutions? If
the Republicans say we are not going to repeal the tax cut, and
in fact we are looking for other ways to stimulate the economy,
and the Democrats are suggesting that taxes are off the table,
and we are not going to increase taxes, where do we find a
solution to getting us back into surpluses in the short term or
long term?
Mr. Crippen. Well, in the short term, there aren't many
places to go. If you define the problem as the budget not being
balanced, then either you raise revenues or cut spending. In a
weak economy, of course, most of us would believe that running
a deficit is not necessarily a bad thing, that the economy
could probably use a bit of stimulation now, and it may be in
the pipeline. It may be that we have already turned the corner.
Nonetheless, deficits aren't inherently evil when it comes
particularly to a weak economy. In the long run, I would argue,
what we need to keep our eye on is not so much the balance,
particularly of any given trust fund, but rather the size of
the economy, and the commitments we are making for our
children. For many of these issues, the best way certainly for
economists to view it is to look at how much of the economy we
are consuming. In that case, there are only two things you can
adjust: spending and the size of the economy.
So, in the short run, there is not much you can do, perhaps
that you want to do. In the long run, you could grow the
economy and grow the revenue base in addition to doing other
things.
Chairman Nussle. Let me focus then on spending. The
baseline that you have presented today assumes that the $20
billion of emergency spending that we approved after September
11 will continue in the baseline indefinitely. Even though none
of--well, very little of that, most of it, was not intended to
be any more than a one-time expense. Could you explain the
reason why CBO puts that $20 billion into the baseline? I mean,
if we are looking for places for spending, that may be one of
the areas that we can focus on.
Mr. Crippen. It is. There were, of course, two
appropriations of $20 billion each last year. One was
appropriated for 2001. The second, as you are referring to
here, is for 2002. The rules of the road require us to take
2002 appropriations, including this $20 billion, and simply
inflate it over the baseline, period. So the $20 billion is
added by requirement of the way the rules are written.
I am not sure you would want CBO in the business of saying
what is or isn't a one-time expenditure, but as you suggest,
only about $3 billion as I recall, $2.8 billion or something
like that went to defense in Afghanistan. The rest went to FEMA
and other agencies, some of it undoubtedly for ongoing
activation to counter for bioterrorism, perhaps, and other
things. But some of it, like cleaning up New York City, might
be for one-time expenditures, so you are absolutely right. You
want to look at what is in the so-called baseline that you
would be able to allocate to other things.
Chairman Nussle. Finally, and there are a number of members
that have questions, so I will limit mine to the 5 minutes. The
statutory debt limit comprises both of debt in the private
sector and the intergovernmental debt, debt held by the public,
debt held by the government, as is typically said. You
indicated that the debt is--subject to debt limits, is going to
be increasing. Which kind of debt is mainly responsible for the
increases over increasing the debt subject to the limit over
the past 3 or 4 years, and what does that look like going into
the future?
Mr. Crippen. Most of the increase on debt--in fact, all of
the increase of the past few years--have been due to
intragovernmental debt, that is debt held by other parts of the
government; trust funds in particular. Debt held by the public
has actually gone down over the past four years. So what has
been increasing has been debt held by government accounts to
the transfers to trust funds and other Federal accounts. We
will have to borrow again from the public, if our projections
are right, for the next year or two at least, small amounts
hopefully. Then any increase during that time and thereafter
almost by definition will be in the government accounts the
debt owed to government accounts will be growing, not the debt
owed to the public. So it is mostly found in trust funds. The
Social Security surplus gets translated into Social Security--
or debt held by the Social Security system, which goes into the
gross debt number, for example.
Chairman Nussle. So boiling it down, one of the biggest
challenges we have is to answer the question, are we willing to
borrow from the public for a short period of time to deal with
the war, the emergency, the recession, some of our priorities,
if, in fact, taxes are off the table? And as I said, to make it
very clear, taxes are off the table. We have been hearing
rumbling that there is a table where some taxes might still be
on, but we hear that table evidently doesn't exist over here.
It will be very interesting to see where that table exists.
So with that, I will turn it over to my friend, Mr. Spratt.
Mr. Spratt. Dr. Crippen, on page 2 of your testimony, you
say that if current policies stay in place, the budget will be
in deficit for the next 2 years, and by that you mean the
unified budget?
Mr. Crippen. I do.
Mr. Spratt. All accounts of the government included?
Mr. Crippen. Yes.
Mr. Spratt. Now, what I call the basic budget, excluding
Social Security, the main and largest trust fund account, will
bear a deficit, however, for a number of years, in fact through
2009, will it not?
Mr. Crippen. Yes.
Mr. Spratt. So, for most of the years in your forecast,
there is an on-budget deficit, and if we----
Mr. Crippen. Yes.
Mr. Spratt. Do you know what the consequences are if we
assume, which I think is practical to assume, that the sunset
provision in the Tax Act is repealed, what then will be the
effect? Won't we have on-budget surpluses for the full 12-year
period you have laid out here?
Mr. Crippen. I believe that's correct. The numbers aren't
the most current because the Joint Committee on Taxation hasn't
reestimated on the basis of our new baseline, but it looks like
expiring provisions of revenues would add $162 billion or
thereabouts in 2011 and $268 billion in 2012.
Mr. Spratt. 162 plus 268?
Mr. Crippen. [Witness nodded head.]
Mr. Spratt. So that would put us in on-budget deficit for
the whole time period through 2012?
Mr. Crippen. Yes.
Mr. Spratt. 168 plus 2----
Mr. Crippen. 68.
Mr. Spratt. 268.
Mr. Crippen. There are a few other expiring provisions
along the way, so it is a small number plus that.
Mr. Spratt. Do you agree that the on-budget target is an
important number?
Mr. Crippen. It is not for me to agree or disagree,
Congressman. It is up to you and other members of the committee
to say what your target is. What I keep discussing, I am sure,
to distraction, is that we need to keep our eye on what I think
is a different ball. It is not the budget and its balance or
the trust funds per se. It is the effects we have. It is
probably a good idea to have a rule of thumb about balance over
the average of a long term. But whether or not we are in
deficit this year and whether or not we have a surplus next
year is much less important than how the economy behaves and
how we finance the necessary costs of the Federal Government.
So we said last year, and we will continue to say that if
we generated surpluses, if we were looking at 3 percent
economic growth, then it might be useful to have surpluses
saved by paying down debt held by the public because that
should help economic growth and therefore the future outlook.
We also said there are other policies that would help economic
growth. But right now we are looking at growth that is not 3
percent a year, at least for the next year or two. So not
saving--not having surpluses and not saving--shouldn't be
something we are as concerned about as we would have been if we
had 3 percent growth.
Mr. Spratt. Well, my concern is that as I read your
testimony about dealing with the total surplus, you tend to
diminish the extent of the problem as I see it, because Social
Security has to be a major concern. The demographics are
already in place. It is just a matter of when they unfold.
Mr. Crippen. What I am suggesting, sir, is that the fact
that my generation will consume twice as much of the economy as
we are consuming today just in Federal benefits will occur
whether or not we have trust funds. That will occur whether or
not we have balances now or small deficits. That is going to
occur. What we need to be mindful of is not just the status of
trust funds and just the balance of the Federal budget, but
what the effects are on the economy, the obligations----
Mr. Spratt. We have a different concept going for the trust
funds. We want to make them a net addition to national savings
for the next dozen years.
Mr. Crippen. Right.
Mr. Spratt. That would have helped the economy. That also
would have helped the Treasury when the baby boomers begin to
retire and draw their benefits. The Treasury would have been
free of debt to the public and much more solvent and able to
meet those obligations as they came due.
Mr. Crippen. All I am suggesting is that that policy looked
a little different, in the short run at least, a year ago than
it does today. To generate trust fund surpluses, and actually
buy down debt held by the public, fiscal policy would be
restrictive. Whether or not that is a result you would want in
times of weak economic growth or indeed a recession would be a
question. So all I am suggesting is that we all keep telling
each other today, that a year has made a difference, and the
policy that may be most attractive, at least in the short run,
may well have changed.
Mr. Spratt. Well, the difference that is made in the on
budget surplus is this year it is $180 billion in deficit, I
said surplus. Next year it is $193 billion in deficit; the next
year it is 141; 2005, 108; 2006, 99. For the next 5 years, we
have got $100 billion to $200 billion in on-budget surplus
every year, and that is before any additional spending
initiatives or tax cuts, and there are more tax cuts coming for
various reasons, extenders and AMT fixes and things like that
are bound to come. They are in the agenda. So we have got a
problem. Wouldn't you agree?
Mr. Crippen. It depends on how you define the problem. I am
not sure. Clearly, the fiscal condition has deteriorated. I
mean, $4 trillion is a lot, even over a number of years. But
this morning I was reminded as I was listening to some of the
questions, that three years ago or four years ago, we wouldn't
be quite as distressed if we had been looking at a small
deficit in the unified budget and the prospect of surpluses
before too long.
Mr. Spratt. But keep in mind that we are 3 years further
along toward the day of judgment, the day of reckoning when the
baby boomer retire. Let me put it a different way by going back
to your testimony last year.
Mr. Crippen. Do you have to?
Mr. Spratt. Last year you foresaw the possibility that we
could repay, under current policies, all the debt held by the
public that was available for redemption by the year 2006 if we
simply followed current policies, we could repay all debt held
by the public by 2006. This year in your testimony, you say in
the whole time frame we are looking at, we won't be able to pay
off that much debt.
Mr. Crippen. That's right.
Mr. Spratt. Last year you said we won't need to have an
increase, a hike in the statutory debt ceiling until 2009. Now
you acknowledge we will have to do it in about 2 months. Those
are real measures of substantial change, but one thing struck
me when I compared the two testimonies. Last year, in 2008--
looking at a chart that you had, Table 1-4, page 15--in last
year's budget and economic outlook. By 2008, CBO projected that
we could either pay or provide for payment of all the
outstanding debt held by the public. We might not be able to
redeem it, but we could certainly provide the payment. By 2008,
the year the baby boomers began to retire, the demographics of
the country changed dramatically.
This year you project that in 2008, we will still have $2.8
trillion debt. That is before factoring in any of these
additional likely further actions. We will only pay down about
$500 billion of that debt. We will still be right at $3
trillion as the baby boomers retire.
Mr. Crippen. Right.
Mr. Spratt. Well, that makes it harder to bear the burden
of the demographics and the baby boomers retirement, does it
not?
Mr. Crippen. It may or it may not. What I have been trying
to convince you of, in part, is that it depends on what we do--
or how the economy performs between now and then--more than it
depends upon the absolute level of debt. Certainly the lower
the debt, the easier it will be for the government to borrow.
But as that last chart I introduced showed you, even if we had
surpluses 2 percent greater than we have in our baseline, which
I think would suggest on-budget surpluses the entire time, you
would soon reach an unsustainable level of debt anyway. So it
is not just debt that we need to be looking at. It is a larger
issue that we are about to run into.
Mr. Spratt. It is a big problem that has more than one
solution. We had one solution in place. There was bipartisan
agreement on it, and we virtually dashed all hope that that can
be affected under the budget situation we have before us now, I
am afraid. Thank you for your testimony.
Chairman Nussle. Mr. Sununu.
Mr. Sununu. Thank you, Mr. Chairman. Welcome, Mr. Crippen.
I think it is important to remember--as I am sure that you do--
that what we are talking about today, for the most part, are
projections, 10-year projections, economic projections, which
are very challenging and very difficult and we see how quickly
the economic situation in the country can change. As Mr. Spratt
has pointed out in detail--not quite exhaustive detail, but
substantive detail--these economic projections have really
changed. We see deficits in the foreseeable future. We did have
projections of surpluses.
At the same time, though, I can't help but look back a year
to a lot of the discussion that we heard as we were conducting
hearings, preparing for the budget resolution then, and then
what we heard, for the most part, from the minority was a lot
of criticism that the projected surpluses were nothing but a
fiction. They were an unrealistic projection. They weren't
real. They weren't material. While I am as concerned as anyone
about the current set of forecasts, I hope that the irony of
lamenting the disappearance of something you never believed in
is not lost on my colleagues.
I am encouraged as well to hear a pretty firm commitment
from the other side that increasing taxes is not an option. I
think most people in this country would agree, in the middle of
a recession, very uncertain economic times and certainly
uncertain times in the international front, it is probably not
the best of time to be raising taxes on the American people.
What that means is the baseline is the revenue baseline is what
it is. We make the best projection we can. We trust on the
expertise of you and others. We put together that revenue
baseline, and if we want to have a material effect on the
surpluses or the deficits projected for the coming fiscal year
or the coming 5 fiscal years or the coming decade, there are
really only two things that I can see that will affect it. One
is enacting policies that result in a higher level of economic
growth, and therefore a higher level of revenue collections. Or
enacting policies that control, modify or limit or the amount
that the Federal Government is spending.
Now, we can lament the change in our economic position all
we want. We can wring our hands about legislation that has been
signed into law that has established the revenue baseline, but
unless you are willing to step forward and say let us repeal
that tax cut, let us increase taxes, let us raise taxes on some
segment of the economy to increase the revenue baseline, you
have got just two options, policies that increase economic
growth and increase revenue collection by raising the economic
growth rate or policies to control the level of spending, or
cut spending. We certainly haven't heard any proposals of that
nature from the minority side today or in the last few months.
I would like you to address two points. One in each of
those areas. First with regard to economic growth. To the best
of the assessment of--you know, best of your ability and the
assessment of the people that are working with you, has there
been a benefit, an effect, an economic effect to the Tax Relief
Act that was signed into law last year? And on the spending
side, is there a reason that you have not looked at fiscal year
2002 spending to back out those appropriations that were
effectively, or at least presented as one-time distributions,
emergency spending, things that were directly--appropriations
that were made directly to deal with recovery or reconstruction
in New York or Washington, et cetera, that probably shouldn't
be part of a baseline that is looking out 10 years? If you
could address those two points, I would be grateful.
Mr. Crippen. Let me start with the last point first. The
rules of the road, as I call them, by which we have to abide
say that we take the total budgetary resources for 2002, which
include the $20 billion in supplemental appropriations, and
simply inflate them over the next 10 years as the best proxy
for an operations policy. As I said to the Chairman a few
minutes ago, there may well be things in there, as you suggest,
that won't bear repeating and that you might want to use for
something else or not spend at all. But I would also say, as I
did earlier, that I am not sure you would want us in the
business of saying this is one time and this isn't. Some things
are clearer than others, but in the main, it is a judgment call
that we would be uncomfortable making.
Mr. Sununu. Why would you be uncomfortable at least
providing your estimate or your assessment of what would be
most appropriately considered to be occurring?
Mr. Crippen. I can give you today the breakdown of the $20
billion supplemental, for example, that rules require we put in
the baseline, and there are things there that may well strike
you as being or that should be one time, but it shows up in
agency budgets. FEMA, for example, its baseline is bigger
because of the New York City cleanup expenditures. So you may
well want to take some of those out or spend them otherwise,
but we are not allowed--at least by the rules, and I would
suggest we would be uncomfortable trying--to say this is one
time and this isn't. But you certainly can, and we can clearly
give you a list of where the $20 billion went and for what.
Mr. Sununu. And the economic impact of the Tax Relief Act
that was signed into law?
Mr. Crippen. Well, we haven't examined it since last July,
and we do not--to the frustration of some of you--try to look
at the immediate impact of legislation on the economy in our
initial scoring of bills. So regarding the tax bill itself, we
didn't do an assessment at the time it passed to say whether it
would grow the economy or not; but subsequently, we did do a
qualitative statement which appeared in our August report, that
suggesting there are some negatives to the tax bill in terms of
the economy and some positives and that on net it probably has
a slight positive effect on economic growth.
Mr. Sununu. On Page 5 of your report, you say that the tax
cuts enacted in June prevented consumption from slowing more
than might have happened otherwise. You certainly stick by that
statement?
Mr. Crippen. Absolutely.
Mr. Sununu. Thank you.
Chairman Nussle. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman. Mr. Crippen, I have a
couple of questions for you. First of all, I want to say to my
colleague from New Hampshire, I think if anything, we have
found out that our theory has moved from the fiction side of
the bookstore to the nonfiction side of the bookstore, because
I think the numbers bear out that in fact what we were saying,
and what even CBO was saying last year was that these
projections were highly speculative, and may not turn out. You
had a graph last year that was the best graph I think you all
put out. You have a revised one now that is the one that looks
like a--I think someone described it as a fish fin or something
last year. It is--I think it is this graph right here that----
Mr. Crippen. Well, we like to call it a fan, but----
Mr. Bentsen. A fan, whatever, all over the map, and that is
where we have ended up. I mean, it looks to me like we have had
an increase in interest costs over the 10-year projection of
$600 billion, an increase of--a reduction in the surplus of
nearly a trillion dollars. Now, I remember meeting with your
staff early last year and asking the question about what the
impact would be if we had a severe recession, and if I recall
correctly, I was told, well, it wouldn't be more than a hundred
or $200 billion, because by the time we had the upswing, that
that would be made up, but this is--$900 billion is a little
bit more than a hundred or $200 billion. So we clearly missed
on that. I realize it is hard to make these projections.
Let me ask you, in your baseline assumptions, does that
include any funding for prescription drug program like that
that was discussed, even in the Republican budget last year?
Does it include the $75 billion additional funding for
agriculture that was proposed in the current fiscal year's
budget resolution? Does it include the trillion dollars for the
President's Social Security privatization? Does it include
the--I think I know the answer to this last one. Does it
include the 9 percent that we read in real--or 9 percent plus-
up in spending that the President is supposed to propose in his
budget when he sends it up here at the end of this month or
early next month? Are any of those in your baseline?
Mr. Crippen. None of them that you cite.
Mr. Bentsen. So it is fair to say that the baseline will
have to be adjusted, assuming that any of those issues are
enacted, including things that even our friends on the other
side of the aisle have proposed. If we are going to do a
prescription drug program, we are going to have to figure out
where to put that in. If we are going to spend $975 billion in
the new farm bill, pass it in the House, then we are going to
have to figure out where to put that in.
Let me ask you another question, and you can answer this
for the record. But I would be interested to know what the
economic value is of borrowing money at 4.9 percent over 10
years, or whatever the 10-year Treasury is today, and putting
that back in the form of tax cuts. Can your economists tell me
do we get a real bang for that or is there some drag associated
with that? You can provide that for the record.
Mr. Crippen. OK.
[The information referred to follows:]
Response to Congressman Bentsen's Question Concerning Deficit-Financed
Tax Cuts
Tax cuts affect the economy in two ways. They can stimulate the
economy in the short run by encouraging consumers and businesses to
spend more. Tax cuts can also affect incentives to work, invest, and
save, and thus affect the long-term productive potential of the
economy. In both cases, the structure of the tax cut is crucial: in
particular, which tax is changed, how it affects marginal taxes on work
and saving, and how the tax cut is financed.
When there are unused resources in the economy (as there are today
or in any recession), a deficit-financed tax cut can boost economic
growth in the short run by encouraging spending. However, different
kinds of tax cuts can have varying effects: cuts that increase workers'
take-home pay probably deliver the greatest bang for the buck in terms
of short-run stimulus.\1\
---------------------------------------------------------------------------
\1\ For more details, see Congressional Budget Office, Economic
Stimulus: Evaluating Proposed Changes in Tax Policy (January 2002).
---------------------------------------------------------------------------
The impact of any short-run stimulus is going to depend in part on
the permanence of the tax cut as well as on what people believe it
implies for future budget surpluses or deficits. Other things being
equal, permanent cuts in personal income taxes are more likely to boost
people's consumption than are temporary ones, whereas temporary cuts in
some types of business investment taxes can be more stimulative than
permanent ones in the short run. The effect of the tax cut on the
budget is also relevant because smaller budget surpluses (or larger
deficits) in the future can increase long-term interest rates today,
which can reduce spending for investment on new plants and equipment
and cause the value of the dollar to appreciate, reducing the demand
for net exports.
The Congressional Budget Office has examined the short-run effects
of the Economic Growth and Tax Relief Reconciliation Act of 2001 using
simulations of various macroeconomic models. Although the simulations
indicated that the reduction in future surpluses could increase long-
term interest rates and slow the growth of investment and net exports,
those negative effects were not large enough to offset the short-run
positive economic effects of the tax cut. The simulations do not
support the view that the tax cut has worsened the recession.
Even though long-term interest rates have remained firm relative to
short-term interest rates during the current downturn, the decline in
projected surpluses may not have played much of a role. Most observers
recognized that the large budget surpluses projected last year were
based on the assumption of a continuation of current policies, and thus
the projected surpluses would probably not materialize because policies
would be changed. Therefore, the substantial reduction in the level of
those projected surpluses may not have had a large impact on the
markets.
Moreover, several other factors could be responsible for the
failure of long-term rates to decline in this recession.\2\ For
example, the markets may be looking beyond the current slowdown and
recognizing that short-term interest rates will rise as the economy
recovers. In addition, businesses and financial markets may believe
that the prospects for strong productivity growth in the United States
are still intact, which would work to keep real long-term rates
relatively high. Moreover, foreign long-term interest rates have fallen
by only a little. The markets may also be expecting inflation to pick
up because of the easy monetary policy put in place by the Federal
Reserve in response to the aftermath of the terrorist attacks and to
the recession. And last, there may be a recognition that long-term
rates are already quite close to their lows of the early 1960's, when
productivity growth and inflation rates were near current levels.
---------------------------------------------------------------------------
\2\ See Alan Greenspan, ``The Economy'' (speech given to the Bay
Area Council Conference, San Francisco, Calif., January 11, 2002).
---------------------------------------------------------------------------
Aside from any short-run effects on demand, tax cuts that reduce
marginal tax rates can increase incentives for people to work and save,
and thus they can have longlasting effects on the economy's productive
capacity.\3\ The long-run effects of a tax cut ultimately depend on how
it is financed. A tax cut cannot be financed by borrowing forever; at
some point, spending must be cut or other taxes raised to cover the
additional interest costs on the debt. If a tax cut displaces
government consumption, it could boost supply in the long run. However,
if it is financed by simply raising marginal tax rates in the future,
it could have an adverse effect on the economy's productive capacity in
the long run.
---------------------------------------------------------------------------
\3\ For more details, see Congressional Budget Office, The Budget
and Economic Outlook: An Update (August 2001), pp. 34-35.
Mr. Bentsen. What I am particularly concerned about, and
this is on page 6 of your testimony, I think you are as well, I
know we have some flexibility in our economic philosophies from
when we are in surplus and deficit. We can be Monetarist in
surplus times and Keynesian during deficit times. What I am
particularly concerned about, and I agree with you, is you say
that taking action sooner rather than later to address long-
term budgetary pressures can make a significant difference.
What bothers me a great deal about our budget outlook now--
and this is what a number of us were saying last year before we
went on and bet the farm on these 10-year projections--is while
we may go back to achieving a unified budget surplus and even
an on-budget surplus some time at the end of the decade but
then that we will have already crossed over into the retirement
of the baby boomers and then we will be 7 short years away from
when we start drawing down on the trust funds for Social
Security and Medicare. Then, on top of that, that assumes that
we will repeal the tax cut that was passed last year.
Now, if delaying--and I do agree to some extent in the
middle of a recession delaying a tax cut is countercyclical.
Repealing the tax cut in 2011 certainly would have some
countercyclical effect, I would imagine, on the economy going
forward. Are we setting ourselves up for sort of the perfect
storm, if you will? The fact that we had the opportunity to pay
down debt, position ourselves for these long-term, looming
liabilities which are upon--if they are not on our doorstep,
they are out on the sidewalk at the front yard, and are we--I
mean, how much have we set ourselves back rather than setting
ourselves forward taking action sooner rather than later?
Mr. Crippen. Perhaps the best way for me to answer that is
to say that certainly for this year and next--that is, 2002 and
2003--there is not much that has been done that wasn't
inevitable. Eighteen months ago or so, the cover of our summer
report tried to show the difference in the outlooks from 1997
in which deficits were still forecast to the surpluses that we
didn't foresee then but obviously developed. While there was
certainly a legislative piece to it, the actions that you all
took back then, much of the difference was due to the economy,
the unforeseen growth in productivity and real economic growth.
So the short version is, what the economy gives the economy can
take away, and that is precisely what we are seeing certainly
in the next year or two.
Mr. Bentsen. My time is up, but if you would answer this
quickly. Didn't last year, when we raised questions about the
economy and we had indications that we were heading into a
recession or at least a soft landing, we were led to believe--I
think by CBO and others--that it would not be a $900 billion
event, but today it is a $900 billion event. How did we miss so
badly?
Mr. Crippen. That is certainly a fair comment. In our
analysis last year at this time, we included a chapter on
uncertainty, which explained what a recession might do to the
outlook, but it was certainly much less than this recession
did. There are several reasons for it. One is that the current
recession, while it is not deeper than the recession of 1990
and 1991, it will last longer. We have also had a couple of
changes since then in the way the economy produces revenues
relative to economic growth, which have reduced revenues.
We thought by modeling the current recession and the
analysis on the 1991-1992 recession, we had something that was
representative. But that recession doesn't look like the
recession today, and a couple of other things have changed. So
a combination of both the economy and the changes in what we
call technical factors have led us to more of a loss of revenue
than we thought a simple recession would have in 1991 or 1992.
Mr. Bentsen. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Gutknecht.
Mr. Gutknecht. Thank you, Mr. Chairman.
I appreciate your testimony, and I want to come back to a
couple of key points because I think I must tell you I am
frustrated by this sort of roller coaster ride we have been on.
I have been on this committee I think 6 or 7 years. Charlie
is one of the only members that has been on this committee
longer than I have. We have sort of gone through this annual
and sometimes a semiannual and sometimes quarterly adjustment;
and, you know, it strikes me that we are going to have to come
up with better models. These wide fluctuations really make it
very difficult for us not only to look at 10-year projections,
which I happen to believe are probably not good ideas. Frankly,
I think we ought to look at 5-year projections because we see
we are off in the 6-month time span, let alone 10 years.
I want to get back to some of the assumptions that you
make, because I think in many respects the assumptions are even
more important or at least as important as the conclusions.
You are assuming, for example, that economic growth over
the entire fiscal year which we are currently in will be eight-
tenths of 1 percent, is that correct?
Mr. Crippen. Right.
Mr. Gutknecht. What has it been so far this fiscal year?
The question from my colleague here was fiscal year or calendar
year. Are we going by fiscal year or calendar years here?
Mr. Crippen. We have tables for both, but the number you
cited is for the fiscal year. John tells me we don't have any
numbers yet on the current year.
Mr. Gutknecht. The current calendar year you don't have
numbers on. I would assume you have numbers for the fiscal year
which began October 1st.
Mr. Crippen. We don't have the fourth quarter. We expect
that on the 30th we will have the preliminary numbers for the
fourth quarter. So we don't yet have it, but we will a few
days.
Mr. Gutknecht. That makes it even more difficult, doesn't
it?
Let me go back to another question then. We were told late
this fall that it was believed by the President's Council of
Economic Advisors that the recession began about--on or about
March 15. At least that is the date that we were given. When
did you find out that we were in a recession?
Mr. Crippen. Well, probably the same time you did in the
sense that it is officially designated by the National Bureau
of Economic Research (NBER). When they said March, everyone
accepted the definition. Certainly by the middle of last year
we saw some of the weakening in the economy, but at that point
we and others thought that the weakening wouldn't turn into a
recession. We were wrong. It did. And we may see some evidence
in this fourth quarter report of whether or not it has yet
bottomed out. Most of the numbers we are getting now are
relatively positive.
Last January at this time, clearly we thought 3 percent
growth was possible for the calendar year. By July it was
obvious that 3 percent wasn't possible, but it didn't look like
zero was going to be it either, and we were just wrong. The
economy went south more than we expected.
Mr. Gutknecht. Your original assumptions for this fiscal
year were what for economic growth?
Mr. Crippen. Around 3 percent.
Mr. Gutknecht. So a 2.2 percent drop, just using--making it
easy, simple subtraction has cost us in revenue how many
dollars?
Mr. Crippen. Well, over the course of the 10 years?
Mr. Gutknecht. Over the course of this year. I am not
concerned about 10 years. I am concerned about what is going on
this year and what will happen in fiscal year 2003.
Mr. Crippen. $150 billion in revenues.
Mr. Gutknecht. In revenue loss.
OK. Well, I guess what I want to get to is you go forward.
I am concerned, as the Chairman mentioned, that we have
automatically built into the baseline--I believe that number is
actually larger. You said $20 billion--that was what we
believed and I still believe--is emergency spending--is built
into the baseline for the next 10 years?
Mr. Crippen. Right.
Mr. Gutknecht. Is it 20 or is it 30?
Mr. Crippen. Twenty billion dollars is the amount of the
supplemental that was described and put in the defense
appropriation bill--I believe in the last days of the
Congress--and that was what was described as being emergency,
mostly one time. Only about $2.8 billion of the $20 billion
went to defense for the war in Afghanistan. Much of the rest of
it went to domestic agencies--HHS on bioterrorism, FEMA for New
York cleanup. As I said to Mr. Sununu, we had a list of where
that $20 billion went.
Now there certainly may be one-time expenditures in the
appropriation bills that occurred prior to that. We are
required to take the 2002 total, including the supplemental
appropriations, and just inflate it.
Mr. Gutknecht. That is the other factor I want to get at.
What are you assuming for inflation over the next 10 years? I
do want to come back to the 10-year projection now. What are
you assuming for the inflation rate and how much are you
assuming the baseline Federal Government budget will grow over
the next 10 years?
Mr. Crippen. There are two inflation factors that get used,
one of which is for employment. There is something called the
Employment Cost Index, ECI, which I think is about 3.5 percent
over the next 10 years. Then, for the rest of the government,
there is the GDP price deflator, which is 2 percent or so over
the 10 years. So call it 2.5 percent, which is the inflation
factor CBO assumes for the next 10 years.
For discretionary spending appropriated accounts, we
believe the economy will grow faster than just that inflation
rate. But if you add more spending now, of course you will have
boosted the base, and it could grow faster than the economy.
Mr. Gutknecht. So the base is going to grow somewhere
between 2 and a half and 3 percent. You are only assuming that
that is roughly the inflation rate.
Mr. Crippen. Right.
Mr. Gutknecht. Thank you.
Chairman Nussle. Mr. Clement.
Mr. Clement. Thank you, Mr. Chairman.
Dr. Crippen, I think you have been very forthright today,
but it is still discouraging to hear what you have had to say.
I heard the Chairman speak earlier about the world has
changed, and it definitely has changed in a lot of ways. And I
know the Chairman commented also about the tax cut, that, you
know, we need something. We have to do--to get a shot in the
arm to get this economy moving again.
Now, I see the Bush administration doing a good job on
combating terrorism in the world. I give them high marks. But I
can't give them high marks on the managing and handling of the
economy because I just don't think they have given the same
weight to managing the economy as they are combating terrorism,
which disturbs me greatly.
Then I see what has happened with jobs and disappearing--I
see the people losing their health coverage. I see people
suffering a lot of pain now. But I don't see a plan. I know
some comments have been made about some legislation yet to be
passed by the United States Senate.
But I have to ask you--and knowing that I don't like the
so-called 10-year projections either because I don't think we
should ever consider anything more than 5 years. Ten years is
just out of the question with all the variables and all the
forces at work and what is happening in this country and is
happening in other countries and how other countries impact
America and how America impacts other countries.
What are you expecting next year? I know we have talked
about that our projections are wrong for now, you know, and we
are way off what we thought the surpluses were going to be and
going back into a deficit situation looks like we are going to
have deficits for the rest of the Bush administration. But what
do you expect for next year?
Mr. Crippen. As far as the economy goes, we anticipate that
if we haven't already reached the bottom of the recession we
will soon, certainly in the first quarter of calendar year
2002. As one of your colleagues just pointed out, we are
assuming about 0.8 percent real growth for the current fiscal
year we are in; for the next year, 2003, we assume that real
growth will bounce back pretty considerably. But over the next
couple of years, we will certainly have unified deficits. We
think that, without any further programmatic changes in
spending, we will have a small deficit for 2003.
If there are other actions taken by this Congress, which
are entirely likely, that number could grow some. But my guess
is it is going to be somewhere in the neighborhood of 50 to
$100 billion when all is said and done. So the economy will be
coming back in our view and in the view of a lot of other
forecasters, for whatever that is worth; and the deficit will
be probably in the range of $50 billion to $100 billion for
2003.
Mr. Clement. Dr. Crippen, you and I know Democrats and
Republicans alike are not going to raise taxes in this
recession. It is not going to happen. It is off the table. I
would also like to think the Democrats and Republicans alike
would consider all the other options.
From my discussions and the meetings I have been in and
from a number of people I have talked to, I have to agree with
you--or I think you said this a while ago--that this particular
recession we are going to come out of it a lot slower than we
did in 1991, 1992. But I am not so sure I am hearing that from
the Bush administration. That seems to think we are going to
turn the corner within the next few months. Which is true?
Mr. Crippen. Well, we will soon see what the administration
has to say when they present you with their budget on February
4. They may be slightly more optimistic than we are in the
short run.
My guess is we won't be all that much different on
economics certainly in the 5 or 10-year framework. But
economists are, among other things, not very good at calling
turning points in the economy. Whether it was the downturn we
didn't foresee a year ago or when we hit the bottom and start
back up, it will have happened before we know about it. So it
may have happened in December. It may happen in March. My guess
is earlier rather than later.
But how quickly we grow, which is the point you have just
made, I think is in question because of the nature of this
recession. Because it was a dearth of capital spending that
started it, it is going to take real opportunities for capital
investment to climb again.
Consumers have been carrying their load pretty much all
along. The increase in consumer spending dropped from 5 percent
over the past couple of years to a 2 and a half percent
increase last year, but it still increased. So the primary
thing that dropped off was business capital investment and
inventories. Until those start rebuilding, we are not going to
recover quickly, but we will recover.
Mr. Clement. Thank you, Mr. Chairman.
Chairman Nussle. Thank you.
Mr. Thornberry.
Mr. Thornberry. Thank you, Mr. Chairman.
Mr. Director, as I think about the roller coaster of
projections that Mr. Gutknecht talked about, I am reminded how
much your job is more of an art than a science; and it is just
intriguing to think what you may be presenting to us next year.
I guess I want to understand something a little better that
you have mentioned twice. I think I understand most of the
reasons you have here for changes between your last
projections, but I come to this line that talks about technical
changes, and it talks about that, in a 10-year period, the
surpluses reduced by $660 billion, most of that is because of
revenue. In your testimony you said that something about
revenue collections is lower than the level of economic growth
would indicate. So it is telling me something strange is going
on.
Something, as I think you said, caused you to change your
models; and it seems to me we ought to understand that. If
economic growth is the key to solving our population issues,
what is happening and what is it that causes the revenue growth
to be even lower than the economic situation would indicate?
Mr. Crippen. There are several things specifically in this
forecast that I can note for you. One is, and it is clearly
related to economics, the amount of capital gains realizations,
which in turn, of course, drive capital gains tax collections.
People may have a lot of capital gains on paper, but until they
actually realize them, they don't incur any tax liability. When
people actually realize capital gains is something we haven't
been able to model very well.
Mr. Thornberry. So they are holding on to things.
Mr. Crippen. They can be holding on to things or not.
Mr. Thornberry. Maybe that is a psychological issue of
confidence to some degree.
Mr. Crippen. Could be. Part of the surpluses that surprised
us came from the fact that people were realizing capital gains
faster than we expected they would. Given the level of economic
performance, realizations of capital gains were unexpectedly
high. Now, realizations are unexpectedly low, given the current
state of the economy. That doesn't mean they don't have accrued
gains, however, and they may later begin realizing them and
paying taxes.
Another thing, as I suggested in the testimony, is that for
any given level of the economy, say it is a 3 percent rate of
growth, our models tell us roughly what we ought to expect for
revenue growth, and they are pretty good on that score. But if
you look at month-to-month withholding, for example, on income,
at the moment it is running a little behind what our models
suggest should be happening, which may mean that our income
measures are bad.
There are a lot of revisions that occur in the data we get
on income, for example. At the moment clearly the collections
are below what we would expect given what we think incomes are.
So that ends up being classified as a technical adjustment. We
assume, because we don't know better, that those technical
adjustments will carry forward.
Then, sometimes we get revised data. We can actually say
this unknown that we called a technical last year we now know.
We figured it out, and we can put it into the models in a way
that shows the adjustment was really economic. So these
adjustments are related in some way or another to the economy.
But we are also saying here that there are things going on
that we don't fully understand at the moment. Those things are
reducing revenues to well below where we would have expected
them to be. At the moment, because we don't know better, we
can't fathom why exactly this is happening, but we still carry
that technical adjustment forward. Am I making any sense?
Mr. Thornberry. You are coming as close as you probably can
with me----
Mr. Crippen. Or me.
Mr. Thornberry.--to making sense.
It does get back, to some extent, that there is a lot we
don't know. I guess one could theorize all sorts of things.
Maybe people who hold capital assets are expecting a lower
capital gains in the future and--their expectations of what we
do may play into it.
Let me ask you about one other issue. Mr. Spratt talked a
lot about the on-budget surplus. I was kind of interested in an
editorial over the break in the Wall Street Journal of one of
our colleagues who suggested that what we also ought to focus
on--with regard to the debt ceiling is the on-budget debt, if
you will--the debt that we borrow from the public, if that is
really what ought to be subject to the debt ceiling rather than
all of these intergovernmental transfers. Is there any economic
pros and cons or light that you can shed on that proposal that
it would matter one way or another?
Mr. Crippen. Certainly economists believe that the debt
held by the public is the most important because it is the
exchange between the government and the private sector. How
much the government is going to borrow from our capital
markets, from people, is what counts more than how much one
part of the government is lending to or borrowing from another.
In that regard, a debt ceiling based on debt held by the public
would probably make more sense.
The debt ceiling, in my view, was enacted as a way to
attempt to control government spending. Having
intragovernmental transfers and lending money from one part of
the government to another may or may not help you in that
regard. But limiting debt held by the public certainly does.
Because if you can't borrow, you can't spend what you don't
have. Whether or not you can't borrow in between government
accounts if you don't have the tax revenue.
Mr. Thornberry. Thank you.
Chairman Nussle. Mr. Capuano for 30 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
Chairman Nussle. I will give you five. When you asked for
30, I just wanted to be respectful. Five minutes.
Mr. Capuano. First of all, Mr. Crippen, thank you for
coming. I think you do a great job with the limitations of all
economists. I understand that, and I think you do a fantastic
job, and so does your staff.
Before I go, I do want to make sure I understand some of
the things in your prepared statement today. I would like to
start with the labor statistics. It is my understanding that
the labor force is about 135 million people, fair number?
Mr. Crippen. Sounds right.
Mr. Capuano. So that a 4.8 percent unemployment rate would
actually mean 6,480,000 people out of work.
Mr. Crippen. OK.
Mr. Capuano. That means a lot more to me than 4.8 percent,
because that is more than the entire population of the State of
Massachusetts. It is also more than the entire population of 38
states. I think the number should be on a footnote somewhere.
The 6.1 percent that you are projecting for this year,
which I am sure will be in the ballpark of everybody--I know
some people differ here and there, but they will be all in the
same ballpark--is an increase over the current year's number of
1,755,000 people. That is an increase. That is more than the
population of 13 states. It is the entire population of the
State of New Mexico or the entire population of the State of
Virginia. Everybody--man, woman and child. I think those
numbers need to have absolute numbers put to them to make them
real. They are faces, they are not percentages. That is more of
a footnote than anything else.
On table 2--I am pretty sure I am reading this right, but I
want to make sure. As I read this, through 2009 for the next 8
fiscal years, we will be using the money currently paid by all
of our people currently paying FICA taxes, Social Security
taxes, that everybody who pays them thinks it is going to
Social Security, that is the money we will be taking to
balance--well, actually to reduce, because we will still have a
deficit in two of those years on the remainder of those--to
balance the budget. Am I reading that correctly?
Mr. Crippen. You are.
Mr. Capuano. So we are doing exactly what virtually every
Member of this Congress has said we don't want to do since I
have been here, which is now 3 and a half years. So I want to
make sure I know that.
I have to go back to some of the original comments. I was
under the impression there was a difference between some of the
statistics you gave as economic changes versus technical
changes. Yet during some of this discussion they were lumped
together as all economic. I want to make sure they are not all
economic.
Economic and technical, many of the technical changes,
correct me if I am wrong, would have occurred or could have
occurred regardless of the economic changes. Is that accurate?
Mr. Crippen. Could have, yes. They are related to economic
changes, but----
Mr. Capuano. But if they were economic changes they would
have been put in the economic----
Mr. Crippen. Capital gains realizations, for example.
Mr. Capuano. So the economic impact of your changes is
really 23 percent, not 40 percent.
Mr. Crippen. Yes.
Mr. Capuano. Otherwise, I would have thought----
Mr. Crippen. Pure economic, sure.
Mr. Capuano. I tried to extrapolate some of the debt which
you didn't have for some of the tables. But all that
information is here, it just wasn't in one place.
As I read it, debt service has now increased by $562
billion versus the legislative changes of that 385, give or
take, is relative to the tax cut alone. $232 billion for the
economic changes, another $165 billion for the technical
changes, for a total increase of debt service alone of $959
billion over the next 10 years.
Mr. Crippen. Right.
Mr. Capuano. Which is a little short of 25 percent of the
total exchange in--I think that is an amazing statement. That
by doing tax cuts, by doing additional spending plus the
economy, the economy certainly has something to do with it, we
have now increased what we are going to pay out in debt service
to people. I think that has to be a very clear statement to
people, especially since last year we were all thumping
ourselves in the chest saying what a great job we were doing
reducing the debt, and we did, but we are now significantly
increasing it.
I guess really there are now too many questions. That is
why I was joking with the Chairman earlier about 30 minutes.
Some of this stuff to me--I also made the mistake of
pulling down one of your other reports that was published in
January relative to the economic stimulus. I want to read one
line, because for me, certainly I am concerned. I am a
politician like everybody else. I will be talking about what
happened and how we got here. We will all be doing that. But I
am more interested in what do we do to get out of it.
One of the major debates is, do we have another stimulus
package? Partially one of the debates is with the existing one.
But are we going to have another one?
I really recommend to everybody on this committee to, when
they read your report, just put out on this thing, are the
stimulus packages that are currently on the table, and on page
3 of that report, one sentence, and I will read it, it
concludes that most of the tax cuts that the report analyzes,
which are most of the major ones on the table now, are unlikely
to generate large first-year increases in gross domestic
product. Which to me means virtually worthless which if your
purpose is to stimulate the economy.
Of the two that you say might have a large impact, if I
read them correctly, you say both of them are highly
speculative as to whether they will have a change. Is that an
accurate reading of this report?
Mr. Crippen. And difficult to implement in some cases.
Mr. Capuano. At another time because my time is out, there
are so many questions here I look forward to how the OMB
director and others are going to suggest we get out of it
because there is no one way. I think that is where the debate
shall come and not necessarily with you.
I want to finish where I started. I want to thank you for
providing this information. It really does help. I want to
thank you also for maintaining what is professionalism and
neutrality in a place that it is difficult to do. So thank you
for that.
Chairman Nussle. The gentleman's time has expired.
Mr. Capuano. I thought I had 25.
Chairman Nussle. Mr. Toomey.
Mr. Toomey. Thank you, Mr. Chairman.
Director Crippen, thank you.
A couple of things. I want to touch on this economic growth
issue. It seems to me that one of the lessons we clearly should
be drawing from this extraordinary change in circumstances that
we have witnessed is just how fundamental central our
assumptions of economic growth are to that.
I cite on your first page of your testimony you refer to
the swing of about $300 billion in this year alone in our
projection, and in your testimony it states that over 70
percent of that change results from the weak economy and
related technical factors. Seventy percent of this $300 billion
swing is a change.
It seems to me pretty clear if we step back and look at
just a little bit of history it was surprisingly strong
economic growth that surprised us with huge surpluses. It was a
surprising downturn in the economic growth, in fact, a
contraction, that dramatically diminished the surpluses. And,
frankly, if and when we return to strong economic growth we are
going to be looking at strong surplus. It seems to me it is all
about growth.
I would like to ask you off the top of your head if you
have a rule of thumb you could share with us. Over the next 10
or so years, I think you assume about 3.2 percent for the
average annual real GDP growth, thereabouts. If that is wrong
and it really ends up being 4.2 percent, what is the annual
impact? What is the cumulative impact? Do you have a rule of
thumb for what 1 percentage growth is worth in budgetary terms?
Mr. Crippen. We do, I think. I am going to rely on my
colleagues to answer you in just a second. We have in our
report which we publish on the 31st now an Appendix A, which
has these rules of thumb as we currently look at them.
A tenth of a point is $250 billion over 10 years.
Mr. Toomey. A tenth of a percentage point is $250 billion
over 10 years. So if this is linear, which I assume it is,
roughly, a point is $2.5 trillion over 10 years.
Mr. Crippen. Probably wouldn't be that much, but it is
certainly a big number.
Mr. Toomey. Over 2 trillion. It would be a very, very large
number.
It seems to me that growth dwarfs virtually everything
else. So, therefore, our mission should be to say what do we do
to maximize economic growth. I, for one, think that further
important tax relief is the way to do that. Others will
disagree. But that is what we should be focusing on, it seems
to me.
A couple of questions as to how we got where we are. Is it
fair to say that we would be in surplus today, in fiscal year
2002, actual numbers, while they are still projected but you
would be projecting surplus for 2002, 2003 and beyond had we
kept to the spending caps what were passed on a bipartisan
basis in 1997?
Mr. Crippen. I don't know that we have done that, but I
think you are right.
Mr. Toomey. I have a chart that suggests that the
discretionary spending cap in terms of budget authority--
obviously, outlays ultimately sort of catch up to follow budget
authority. We had about $130 billion less spending in 2002 than
what we actually spent, about $130 billion. Now the deficit for
2002 is----
Mr. Crippen. Twenty billion dollars.
Mr. Toomey. Twenty. So it seems to me--let's put it
differently. If we hadn't stuck to the caps but we grew Federal
spending each and every year at the rate of inflation, would we
in 2002 and 2003--would we be looking at surpluses or deficits?
Mr. Crippen. Surpluses.
Mr. Toomey. Large surplus. It seems to me we have been
growing spending. My numbers here estimate about 6.1 percent as
an average rate of growth from 1997 to 2002. Is that about 2
and a half times the rate of inflation, 2 times the rate of
inflation?
Mr. Crippen. Yes.
Mr. Toomey. So let me ask another question. This chart is
something that you guys produced, right, CBO?
Mr. Crippen. Yes.
Mr. Toomey. The way I read this it seems to suggest that
the total tax revenue as a share of GDP from 2001 through 2012
is going to be each and every one of those years consistently
well above the average total tax as a percentage of GDP in the
whole post-war era.
Mr. Crippen. That is correct.
Mr. Toomey. If I arrange out the years from 2001 through
2011--thanks for the help--the technical help here. That makes
it easier. If you drew an average on that, it looks like the
average might even be as high or higher than any point in the
post-war era, aside from immediately after in 1944, 1945.
My point is, it seems to me very clear what has happened is
spending has accelerated dramatically. It is well above what we
said we would spend. Taxes, even with the tax relief package
that we passed last year, will remain at historically high
levels, post-war era, certainly.
It is amazing to me that anyone thinks that taxes are the
problem here. Taxes are very high, still. The problem seems to
be spending.
I yield the balance of my time.
Chairman Nussle. Mr. Price.
Mr. Price. Thank you, Mr. Chairman.
Mr. Crippen, let me add my thanks for your appearance here
today and for the quality of your testimony.
I would like to pick up on the line of questioning Mr.
Spratt and Mr. Capuano were pursuing regarding the debt held by
the public and where we are going with those figures.
You testified a year ago that the publicly held debt would
essentially be retired by 2006, that is all of the debt that is
available for redemption would be redeemed by 2006. I am not
sure what that figure was and how much you calculated would be
available for redemption. That whole debate now seems rather
quaint as to whether we were going to reach a point of too much
debt retirement.
In any case, under current projections, how much has that
debt projection for 2006 increased? Just to give us a
benchmark, what were you thinking a year ago it will be in
2006? What are you now thinking it will be in 2006? And then
how much will the publicly held debt be by 2012, the end of the
10-year period? That is my first question.
The second has to do with the debt service that accompanies
the debt. What will the debt service burden be over this period
and how much more is that than what you projected last year? I
think it is just short of a trillion dollars.
Could you clarify those two figures for us?
Mr. Crippen. On the first figure, my colleagues are
scrambling to give you the difference between our projection of
debt held by the public last year and this year.
On the second figure regarding debt service, you are right.
The debt service costs will be considerably higher that what we
projected last year; that, in turn, allows us to retire less
debt held by the public over the next 10 years.
Mr. Price. The debt service approaches a trillion dollars.
That is what you told Mr. Capuano.
While we are getting those actual figures as to what the
actual debt is, I wonder if you could comment on the impact of
that trillion dollars in debt service. What are the opportunity
costs associated with that? We were speaking earlier about the
capacity to meet our obligations to Social Security retirees,
for example, a decade from now. We all know about things we
would like to do with prescription drug coverage for Medicare.
These are public and private uses of that trillion dollars that
I think most of us would agree are more productive. Do you have
any thoughts on that, the opportunity costs of sinking another
trillion dollars over the next 10 years into debt service?
Mr. Crippen. Certainly from the point of view of our
baseline, without other policies, the primary opportunity cost
that is missed here is the ability to pay down even more debt
held by the public. A trillion dollars more, just because of
debt service, will be held at the end of this 10 years than
would otherwise be the case.
As you are saying, there is always an opportunity cost.
Rather than pay down debt held by the public as last year's
forecast assumed, there is also an opportunity to provide
things that folks are interested in doing, such as
pharmaceuticals for beneficiaries or cut tax rates. So there is
an unlimited range of opportunity costs here.
The economic impact may not be as severe or as important in
some ways as the opportunity costs for public programs. The
main thing higher debt service cost have done is restrict the
ability of us to do more things with the budget, either pay
down debt or increase spending.
Mr. Price. Some of those programmatic priorities, as
important as they are, do remain discretionary. Most of them
do. But the necessity of redeeming bonds held by the Social
Security trust fund and making good on those obligations when
the cash flow in Social Security reverses is not discretionary.
Mr. Crippen. No.
Mr. Price. One way or another we are going to have to meet
those obligations. Would you not agree that is much more
difficult to envision doing if we are carrying a huge debt load
and huge debt service load?
Mr. Crippen. That is part of the conversation Mr. Spratt
and I were having. It is absolutely true. The more debt
presumably we have, the harder it will be to borrow more money.
We have looked at a number of hypothetical fiscal policies
you could pursue of having the debt level as we see it today,
and we saw it last year, as we could see it get even worse.
Under any of those scenarios, we are going to start
experiencing a very heavy debt load after my generation
retires. So it makes a few years' difference as to when the
trajectory really takes off, but only a few years.
What is most important is not the level of debt we hold as
we go into the baby-boomer retirement but how much can the
economy--can our kids--afford to give us as we retire.
As you said, when the swing takes place, when we start
paying out more than we are taking in in payroll taxes, 2011 or
so, whether we have a trust fund doesn't matter at that point
in some ways. The options for the Federal Government at that
point are the same whether or not you have a trust fund,
because those bonds have to be turned into cash. So you are
going to have to raise taxes, cut other spending, or borrow
from the public to get the cash to pay off the beneficiaries.
That is the same whether or not we have a trust fund.
So the real impact depends on how many resources we are
taking from our kids, not what the level of the trust fund is
in this case. But you are right that the lower the debt level
the easier it would be for us to borrow, but that is a
temporary or, if you will, ephemeral effect. Because
eventually, no matter what our debt level, we are going to have
to borrow or change other policies by very significant amounts.
Mr. Price. I understand that the longer term challenges are
daunting. Nonetheless, these years of projected debt reduction
are years that we had counted on and that in fact both parties
had counted on and had pledged their fealty to not touch the
Social Security and Medicare surpluses and apply this to debt
reduction so that we would get this debt service off our backs
and be more prepared to meet our obligations in the next
decade. So I think we are going to have to come to terms rather
quickly with the abrupt reversal in those projections.
Do you have the full debt numbers that I requested
initially?
Mr. Crippen. Two trillion dollars.
Mr. Price. Two trillion at what point?
Mr. Crippen. 2006.
Mr. Price. At the end of the 10-year period?
Mr. Crippen. My guess is about three.
Mr. Price. If you could clarify those numbers for the
record, it would give us a point of comparison. If you will,
when you furnish those numbers, put alongside them the
projections from this point last year.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman.
Dr. Crippen, thank you for coming to bring your words of
wisdom to us today and sitting around the table and listening
to all the comments about how bad things are. It was so nice
when I first came up last year as a freshman to hear how good
things were. It is amazing how things could change so rapidly
in such a short period of time.
I heard different ideas about how we might be able to make
a difference. I noted somebody mentioned 1.8 million folks out
of a job that were working last year. You know, the House
passed two stimulus packages and sent them to the Senate. I
believe I heard you--somebody commented about a report you made
that you said that maybe none of those things would work. Did I
understand that correctly; that nothing in the stimulus package
might change the position in which we find ourselves?
Mr. Crippen. We said that there are a lot of reasons to be
skeptical, not that necessarily it wouldn't work, and to be
skeptical because it takes a long time to implement any of
those stimulus packages. Some of them do not put money into
people's hands so they can buy things very quickly. So at this
point, what we are saying is it would take a long time to get
something that probably would kick in anytime soon.
Mr. Brown. Weren't we going to give an immediate tax relief
for people and tax rebates last year and weren't we going to
extend the unemployment benefits from 16 weeks to 39 weeks and
weren't we going to accelerate depreciation for businesses so
it would give them incentive to purchase additional equipment?
Mr. Crippen. Right.
Mr. Brown. None of those things might not be of benefit?
Mr. Crippen. They may be of benefit. What we are saying in
our response to Chairman Conrad in the Senate was that, of the
things that were being discussed at that time--and I think he
actually listed them--some were better than others. Things like
a payroll tax holiday probably will give you more consumption,
if that is your goal, than marginal tax rate cuts in 2006. That
kind of makes sense.
Some of the changes in taxation of capital, as you are
saying, such as eliminating the alternative minimun tax (AMT)
reward past behavior more than they stimulate future behavior.
An investment tax cut, on the other hand, would lower the cost
of new capital immediately, and that could have a more positive
impact than changing taxation of capitol that has already been
purchased.
So all we are doing is looking at the timing of these
various things. That is not to say they might all be salutary
or not salutary at all, but if your objective is to get people
and companies to spend as fast as possible, some packages are
better than others.
Mr. Brown. Then I guess, since your background is in
investments also, you know, some of us had proposed cutting the
capital gains tax thinking that this might help stimulate more
investments, too. How do you feel about that proposal?
Mr. Crippen. It certainly might over the long run. My guess
is that, in the short run, it wouldn't have much effect on
capital expenditures.
Mr. Brown. But did I hear you earlier say that one of the
losses of revenue was in the capital gains section?
Mr. Crippen. Sure. It is in capital gains realized, not
just in capital gains taxes. So something has to induce
people--you are suggesting--to realize capital gains that
increase revenues some. If your goal is in the very short term
to get companies to invest, changing the capital gains rules
might not have that impact.
Mr. Brown. I guess my finishing statement is, I don't think
we can criticize the President for the economy if we are not
going to give him the tools in order to try to make things
better. Thank you.
Chairman Nussle. Mrs. Clayton.
Mrs. Clayton. Dr. Crippen, thank you for being here. I
guess I am the one that is holding you up.
Mr. Crippen. There is no place I would rather be.
Mrs. Clayton. He is smart and charming. How about that?
I do want to thank you for your testimony. For those of us
who are trying to follow your explanation it certainly helps
us. So I am appreciative not only of your written word but also
of the explanation you are trying to put on it.
I would like for you to explain, the deficit. You are
making a new assessment of the deficit. Now it would be
something like $21 billion for this year. And on your chart
here, you say why. As one of my colleagues tried to make the
distinction between the economic and the technical changes,
but, whatever the reason, on this page, this column, is we now
have a $21 billion projected deficit that we didn't anticipate
earlier.
Mr. Crippen. Right.
Mrs. Clayton. Did I misunderstand you earlier, that the
debt really wouldn't make that much difference in the economy?
Was that relative to the extension of that statement as it
relates to the trust fund for the Medicaid and Social Security?
Mr. Crippen. It was more related to the trust fund.
Mrs. Clayton. Rather than this deficit piece. So having the
deficit which means that we have a debt does indeed affect the
economy.
Mr. Crippen. In this case, there are a lot of
macroeconomists who would say that. Whether you call it
Keynesian or not, it might be a good thing to have a deficit so
that we can get the economy rolling again. Or, put the other
way, it may be a bad thing if we were running big surpluses
right now because that would mean the Federal Government was
actually helping to restrict the economy or contain it. So in
some sense it is not necessarily a bad thing that we have a
deficit. Some of my colleagues would say it is appropriate.
Mrs. Clayton. So it depends on the situation in terms of
society if we need to deficit spend in order to do certain
things.
Mr. Crippen. Right.
Mrs. Clayton. Along that line, we have needs to fulfill our
commitment to Social Security. We have needs to address issues
in society like prescription drugs or like Patients Bill of
Rights or other areas that we know that would need. And to the
extent that we are not able to do that, obviously, society is
not helped. But some of this spending is not discretionary.
Prescription drug may be discretionary, but Social Security is
not.
Whether we are deficit spending or not, our obligation is
to our veterans. Our obligation is to those that are in those
fixed obligations, whether it is Social Security or Medicare.
The deficit we are going to spend and I want my colleague to
hear, it is not an option whether we spend or not. There are
some things we are going to spend because we are obligated to
spend. In my own judgment, there are some things we ought to
spend that we are not going to spend for. So it is not a
question of whether we spend or give a tax break. The question
is how we spend and to what extent we incur debt.
The issue is, if indeed having so much debt will to deter
the ability of the economy to raise the quality of life for
people, we need to do something in public policy that would
stimulate that.
Am I right so far?
Mr. Crippen. Absolutely. I couldn't have said it better.
Mrs. Clayton. You get better and better.
I tell you what. You said that the consumers were doing
their part and their spending didn't go up 5 percent, but went
up 2.5 percent. But the area that you found a void or deficit
was business capital investment, right?
Mr. Crippen. Right.
Mrs. Clayton. Well, I think the Bush administration wants
to give a big corporate tax benefit. Now, I am assuming that
projection is based on the fact that, if we did that, we would
speak to businesses not investing. Well, the tax that they are
proposing is that one of the responses you made to Senator
Conrad? Or is that a different tax?
Mr. Crippen. The AMT was certainly one of those.
Mrs. Clayton. Let me ask the question then. How do we get
businesses to invest their capital so that the economy can be
stimulated? Do we do it by the proposal you have heard, the one
of the corporate tax break? Does that help? If so, how fast can
we do that?
Mr. Crippen. We are skeptical of at least one of the
proposals that has been talked about and I think the House
passed, which is a major change in the alternative minimum tax
for corporations. While its repeal may have positive effects in
the future, mostly what the retroactive part would give
corporations is a benefit for capital they have already
invested. So it doesn't have a stimululative impact. It is more
of a retroactive effect.
Mrs. Clayton. What was the tax relief for those that
invested in foreign countries? They got a tax break. How did
that help us?
Mr. Crippen. I think you refer to the FSC.
Mrs. Clayton. Does that help the economy?
Mr. Crippen. They can. Although the international trade
organizations have now said the provision is not legal in their
view, essentially what the provision does is companies who earn
revenues abroad a lower tax rate. So to the extent that other
economies are allowing our corporations to sell and our people
to work and build things to be sold abroad, that means that
there is an added bonus to doing that. So it could help. But
that is not a big revenue loser or something that is much in
play.
Mrs. Clayton. I know you say you are not policy, so you are
not going to recommend it, but what in your judgment of these
options on the table would speak to the lack of businesses
investing their capital to stimulate the economy?
Mr. Crippen. First, consumers have to keep up their end. As
we have said, they have been doing pretty well. But without
consumer spending, without people buying the things
corporations and businesses make----
Mrs. Clayton. It is hard for them to do that when they
don't have jobs. It is hard for them to do that when they are
losing their retirements. It is hard to keep that up.
Mr. Crippen. It is all related. But, in addition to
consumption, there are things that you could do to change the
price of capital for companies. One of the things that was done
in the past, for example, was to complement an investment tax
credit, which simply gave a credit for the price of a machine
simple example. But probably the primary thing you could do is
reduce the cost of capital to the point where companies have
the rate of return that their shareholders and owners demand.
Mrs. Clayton. Greenspan has been doing that, hasn't he?
Mr. Crippen. On the short term interest rate, certainly.
The cost of borrowing in the short run has gone down
considerably, and the money supply has been growing at a 10
percent rate recently. All of those things should help.
Policies that you can pursue would be to reduce the cost of
capital in a generic sense which would help companies that are
close to being ready to invest, it would push them over the
edge and increase investment demand.
Inventory should kind of take care of itself. If consumers
are buying and inventories are too low, companies will start
building their inventories again. That was the other piece of
the downturn that we didn't expect, was heavy inventory sell-
off.
I am a little pessimistic that at this point there is
anything you can do in the very short run that would
dramatically change the outlook. Because this is going to be a
slow recovery you may have plenty of opportunities here to
think about ways to help over the next several quarters.
Mrs. Clayton. Thank you very much.
Chairman Nussle. Director Crippen, thank you very much for
your testimony today, for presenting the good, the bad, the
ugly.
Mr. Crippen. I am the ugly, see.
Chairman Nussle. In years past I have been critical about
CBO's projections and the way that they can be unpredictable. I
don't know if there is any way that anyone could have predicted
this last year one way or the other. Certain things were, I
suppose, predictable. But what you have reported today had a
lot to do with things that were out of everyone's control. We
appreciate the way you have given us the news straightforward,
the way you always do.
For purposes of announcement, we will be taking testimony
from Mitch Daniels, OMB Director, February 5; Treasury
Secretary O'Neill on February 6. Unless I am aware of any other
time, it will be 10 I believe. OK. 2:30 for the 5th and 10 for
the 6th. Hopefully, we will be back in the Budget Committee
room at that time.
There is no other business before the committee, we will
stand adjourned.
[Whereupon, at 4:25 p.m., the committee was adjourned.]