TESTIMONY
OF
JACOB J. LEW
DIRECTOR
OFFICE OF MANAGEMENT AND BUDGET
BEFORE THE
HOUSE COMMITTEE ON THE BUDGET
FEBRUARY 8,
2000
We must Maintain Sound Fiscal
Policy in an Era of Surplus
For three years now, we - the
Administration and the Congress - have faced a new challenge:
maintaining a sound fiscal policy in an era of surplus. Having fought our
way back from large
and expanding deficits that threatened our economy, we now continue the
fiscal discipline that
has brought us the strongest economy in memory.
Budget surpluses and
debt
reduction are no longer just projections. We ran a $69 billion surplus
in fiscal year 1998, and did not spend it. We ran a $124 billion surplus
in 1999, and did not
spend it. Eight short months from now, we will have an even larger surplus
in fiscal year 2000.
From 1998 through the end of 2000, we will pay off $297 billion worth of
publicly held debt. It
should be clear by now that we can run surpluses and pay down our public debt
- if we create the
right processes and policies to maintain that fiscal discipline.
We must now continue a fiscal policy
that is working. Our new challenge boils down to relying
on realistic assumptions and baselines, setting priorities, and making
choices to maintain a
balanced program. It requires addressing our existing commitments before
we make new ones.
The President's budget relies on
realistic assumptions and reflects balanced priorities.
Economic Performance Reflects
Fiscal Policy
It is useful to begin by reviewing the
state of our economy, because it shows how much is at
stake. Though the private sector is the engine for economic progress,
fiscal policy can encourage
or discourage growth.
Our fiscal discipline has helped
achieve a rapid growth of business investment, because the
Federal government has stopped draining the Nation's pool of capital. This
has helped to
accommodate lower interest rates, and has reduced fears of inflation.
Businesses have better
access to capital and are better able to invest and innovate.
Under this Administration, we have
enjoyed the best sustained growth of business
investment
since the 1960s. We have seven consecutive years of
double-digit inflation-adjusted growth of
business equipment investment - which is unprecedented.
Economic progress has reached almost
every facet of our economic life, raising living standards
for most Americans.
- The economy has created 20.8 million
jobs since 1993, nearly all of them in the private sector
- most of them full-time and in high-paying industries.
- The unemployment rate is the lowest it
has been in 30 years; for African Americans and
Hispanics, unemployment is lower than at any time in the quarter-century
for which statistics
have been kept. A record percentage of adults are employed.
- Work has begun to pay more, reversing a
two-decade trend of declining real wages and
boosting household incomes throughout the economy. Cumulatively, since the
beginning of
the Clinton Administration, real wages have increased by 6.6
percent.
- After two decades of decline and
stagnation, Americans at the lower end of the income scale -
those in the poorest 20 percent of households - have seen a rise in their
real incomes. From
1993 to 1998, their incomes have risen by nearly $900 per household in 1998
dollars, a 10
percent increase. The median family's income has grown by 12
percent.
- In the past seven years, 7.2 million
people have left the welfare rolls, a 51 percent decline.
Welfare recipients now account for the lowest percentage of the U.S.
population since 1967.
Meanwhile, 1.5 million people who were on welfare in 1997 are now working,
and every State
has met the overall work requirements mandated by the 1996 welfare reform
law.
- From 1993 to 1998, the number of poor
people in America declined by 4.8 million, and the
number of poor children by 2.1 million. The poverty rate has declined
sharply from 15.1
percent to 12.7 percent, the lowest it has been in over two
decades.
- Crime rates are at the lowest level
in over 25 years.
- A record number of Americans now own
their own homes, which was made possible by lower
real interest rates and larger real incomes. The number of households that
are homeowners
increased by more than eight million since the President took
office.
The President helped to set off this
virtuous economic cycle with his 1993 economic plan.
We Have Made Enormous,
Unprecedented Fiscal Progress
In 1998 and 1999, we had the first
consecutive balanced budgets since 1957. We expect a larger
surplus in 2000, and we propose a still-larger surplus in 2001. The 1999
surplus was the largest
as a percentage of the economy since 1951. And the proposed 2001 surplus
would be the ninth
consecutive year
of fiscal improvement -- the first time ever.
After 12 years of spiraling debt
threatening to expand beyond control, we are now paying off the
debt. By 2013, the United States will be effectively debt-free - for the
first time since 1835,
when Andrew Jackson was President. By the end of this year, the Treasury
expects to have
reduced our debt held by the public by about $300 billion from where it was
three years ago.
Under the President's fiscal policy, debt held by the public by the end of
2004 will decline to the
lowest ratio of our GDP since 1974 - completely undoing the debt buildup of
the 1980s. And by
the end of 2007, the public debt will fall to its lowest share of the GDP
since before the United
States entered World War I.
How We Achieved this Unprecedented
Economic and Fiscal Progress
When President Clinton took office
seven years ago, the budget deficit was $290 billion, the
largest in the Nation's history. Between 1980 and 1992, publicly held debt
quadrupled, from
about $700 billion to $3 trillion. It also doubled as a share of GDP, from
about 25 percent to
about 50 percent.
Both CBO and OMB projected that these
adverse trends would accelerate without changes in
fiscal policy. OMB forecast the 1998 deficit, in the absence of policy
change, at $390 billion; by
2003, we expected the deficit to be $639 billion. Nothing indicated that
the vicious cycle would
abate.
Reversing these adverse trends required
tough policy choices, which the Administration and the
Congress took in 1993 and 1997.
The President's initial economic plan
cut spending and increased revenues in equal amounts.
From 1994 through 1998, deficit reduction more than doubled prior estimates
- instead of the
projected cumulative $505 billion, deficits fell by $1.2
trillion.
This Administration has controlled
Federal spending well beyond the record of its predecessors.
- In 1999, spending declined to its
smallest share of the GDP since 1966.
- As a percentage of GDP, spending in
every year for which President Clinton submitted a
budget has been lower than in any year of the two preceding
Administrations.
In 2001, our policy would further
reduce spending to 18.3 percent of GDP. And thanks to the
strong economy, receipts have grown beyond expectations, even
though income tax rates on
typical households are the lowest since the 1970s.
- A typical family of four with the median
family income will pay a lower share of its
income in income and payroll taxes this year than at any other time in a
quarter century.
Its income tax payment considered alone will be the lowest share of income
since 1966.
- A family with income at one-half of the
median level will pay the lowest share of its
income in income and payroll taxes since 1965. It will receive money back
from the
Federal government because of the earned income tax credit.
- Even a family at twice the median
income level will pay less in income tax as a
percentage of income than at any time since 1973.
The historic bipartisan Balanced Budget
Agreement of 1997 has reinforced expectations of
Federal fiscal responsibility. This has had a positive impact on interest
rates and has helped spur
economic growth.
In the last seven years, we have
enjoyed extraordinary economic performance in part due to sound
fiscal policy. To continue our strong economic performance, we must
continue along the path of
fiscal discipline and prudent investments.
We Need a Realistic Baseline, with
Adequate Resources for a Strong Defense and Critical
Investments in the Future
Since 1993, discretionary spending has
declined in inflation-adjusted dollars. The Federal
government must continue to accomplish the missions assigned to it in a
growing economy with a
growing population. We often take for granted the need to maintain
critical functions like air
safety, law enforcement, the administration of Social Security and
Medicare, and national security
-- both defense and diplomacy. We need realistic budget projections to
provide funding for these
essential functions that the Nation has a right to expect its government to
perform well.
Realistic projections also needed to
accommodate investments in education, families, protecting
the environment, research and development and national security -- all
necessary to assure a
better future. CBO served the policy process well this year by
illustrating three potential
discretionary baselines -- only one of which I believe is
realistic.
A discretionary budget baseline that
would retain the 1997 spending caps is not realistic.
Congress appropriated above those caps by tens of billions of dollars in
both 1999 and 2000. To
bring spending down to the caps in 2001 would require an unachievable
one-year reduction from
2000 program levels of almost $70 billion of budget authority - 11
percent.
Likewise, a discretionary budget freeze
over ten years is unrealistic. The Congress increased
discretionary budget authority by 7.0 percent in 1999, and 3.5 percent in
2000. A nominal freeze
in 2001 would require a budget authority reduction from 2000 program levels
of 3 percent.
Extending such a freeze for ten years would require program level cuts of
23 percent by 2010 -
assuming that defense would be frozen along with non-defense. Such
reductions should not, and
I believe would not happen.
If defense spending increases within
the overall freeze, the implications for all other spending
would be even more severe. Within an overall freeze, appropriating the
President's 2001 defense
request would turn a hard freeze into a 9 percent cut from 2000 levels for
all non-defense
programs. Any addition to the President's defense request would make the
effect on non-defense
programs even worse. This is just not realistic.
In contrast, a baseline that maintains
the program levels enacted by the Congress last year would
provide a sound basis to plan for the future. It would allow for continued
investments in key
program areas and for the maintenance of vital government
functions.
A budget based on unrealistic
assumptions is unlikely to stop necessary spending. What
ultimately would suffer are fiscal discipline and the commitment to protect
the Social Security
surplus. If the surplus is exaggerated to make room for either tax cuts or
spending increases,
when discretionary spending cuts do not materialize, the non-Social
Security surplus disappears.
This means that both fiscal discipline and the Social Security surplus
would be jeopardized.
Moreover, any perception that fiscal discipline in Washington is on the
decline would undermine
our unprecedented economic progress.
Our projection of the non-Social
Security surplus of $746 billion over ten years provides
substantial resources for a balanced program, in the context of realistic
assumptions. The
President's budget continues the fiscal discipline that since 1993 has
fostered this era of
prosperity and surplus. It uses conservative economic assumptions and a
realistic baseline for
discretionary spending. To stay on our successful budget track, we urge
the Congress to consider
this approach, and the President's specific policy choices as
well.
The President's Budget Framework
Relies on a Balanced Approach
The President's budget relies on a
balanced approach, which maintains fiscal discipline,
eliminates the national debt, extends the solvency of Social Security and
Medicare, provides a
tax cut and funds essential investments for our future.
- The President's budget projects a total
surplus of $2.9 trillion over the next ten years. Of that,
$2.2 trillion is the surplus from Social Security, which is put in a Social
Security solvency lock
box and used to retire the Nation's publicly held debt. Beginning in 2011,
interest savings
because of the Social Security surplus will be transferred from the
on-budget surplus to the
trust fund, to extend Social Security solvency to 2054. These interest savings are substantial.
In 1993, we projected that in 2010 interest would consume 23 cents out of
every Federal
dollar. Today we project that only three cents out of every dollar will go
to interest. These
savings permit the extension of Social Security solvency.
- The remaining on-budget surplus is $746
billion.
- Overall, $432 billion is allocated to Medicare: (1) $299 billion is contributed to the Medicare
trust fund to extend its solvency for ten years, to 2025; (2) $98 million is used for Medicare
prescription drug policy along with several other health initiatives
(including allowing
uninsured older workers to buy into Medicare); and (3) $35 billion is reserved to augment the
President's proposal for prescription drug coverage under Medicare, to
provide for
catastrophic costs to the elderly. Pending enactment of that policy, this
sum, too, retires debt.
(This debt reduction, combined with the Social Security surplus, allows the
President to make
the Nation effectively debt-free by 2013.)
- Another $91 billion of the surplus is
allocated to the President's initiative to expand health-care coverage
under the existing State Children's Health Insurance Program (SCHIP) and
extend coverage to the uninsured parents of those children.
- The President's proposed tax cuts -
to help low-income working families with children, to
reduce the marriage penalty and the burden of the Alternative Minimum Tax
(AMT), to
encourage saving for retirement, to make higher education more affordable,
to aid in school
construction and renovation, to help those with long-term health care needs
and to extend
health insurance coverage, to promote philanthropy, and encourage energy
efficiency and
protect the environment - use $256 billion of the surplus. (The tax cuts
alone total $351
billion, but they are partially offset by proposals to limit the benefits
of corporate tax shelter
transactions, and end other unwarranted tax benefits.)
- The balance of the President's
framework policies yields a small net savings. These policies
include the President's proposals to restore the farm safety net, the net
interest cost of all of
these initiatives, and the budget savings that result from the President's
tobacco policy.
A
balanced approach requires that each element be properly sized. If a tax
cut grows within the
bounds of a realistic surplus projection, it precludes strengthening Medicare and extending health
care coverage through the Children's Health Insurance Program
(CHIP).
The following discussion explains the
various elements of the President's framework in more
detail.
The President's Budget Eliminates
the Debt
The President's plan will eliminate the
publicly held national debt by 2013. That would be the
first time our nation has been debt-free since 1835 - when Andrew Jackson
was President. The
President's successful policy of fiscal discipline and deficit reduction
has already allowed us to
pay off $150 billion in debt, increasing to about $300 billion by the end
of the current fiscal year.
If we maintain our fiscal discipline, and eliminate the public debt, we can
devote the savings from
debt reduction to Social Security. Last year, the government paid $230
billion in interest costs to
finance the national debt - payments that, under the President's plan, will
become unnecessary.
The President's Budget Strengthens
Social Security
The President's commitment to Social
Security has resulted in general acceptance of the need to
protect the Social Security surplus. Now, we must meet the next challenge
by strengthening
Social Security for the future. The President's framework transfers part
of the on-budget surplus
- $100 billion in 2011, rising to $211 billion in 2020 through 2050 - to
Social Security, to extend
its solvency to 2050 (2054 with the President's proposed investment in
equities). The President's
plan to pay down and eliminate the national debt results in savings in
interest costs, which fully
justify these transfers for the solvency of Social
Security.
The President's Budget Strengthens
Medicare
The President's framework extends the
solvency of Medicare until 2025, with transfers of part of
the on-budget surplus - $299 billion from 2001 to 2010, and further
transfers in the next five
years.
The framework also modernizes Medicare
with a needed prescription drug benefit. This plan
ensures that seniors get the drugs they need, as prescription drugs are now
more central to
medical treatment than they were when Medicare was established thirty-five
years ago.
Prescription drugs can save money by obviating the need for more-expensive
subsequent in-patient treatment. Most elderly lack comprehensive and
reliable prescription drug coverage. The
budget expands access to preventive benefits, and improves Medicare
management.
The President's Budget Expands
Health-Care Coverage
The President's budget framework
addresses other health-care needs as well. For example, the
budget expands the successful health insurance program (State Children's
Health Insurance
Program) for low-income children, and extends it to their working parents.
Established with
bipartisan support as part of the 1997 Balanced Budget Act, SCHIP has
already enrolled two
million children of working low-income parents.
The President's Budget Addresses
Needs in Farm Country
The budget also provides a
comprehensive farm aid package of $11 billion over the next two
years, until the next farm bill is enacted. The President's package
includes income assistance that
responds to falling crop prices; a major farm conservation program; and
targeted assistance to
certain segments of the farm and rural communities.
The President's Budget Has Fair
Middle-Class Tax Cuts
The President's plan proposes $350
billion for tax cuts ($250 billion in net tax cuts) for
America's working families.
- It reduces the marriage penalty for
two-earner couples, by increasing the standard deduction
and introducing an exclusion for part of the earnings of a second working
spouse.
- It expands the Earned Income Tax Credit,
to help America's hard-working low income
families, especially larger families which are more likely to be poor than
families with only
one or two children.
- It helps families finance higher
education, child care and long-term care, as well as expanding
health insurance options for those facing unique barriers to
coverage.
- The President's plan also establishes
Retirement Savings Accounts, to give 76 million
Americans the opportunity to build wealth and save for their
retirement.
The Budget Continues the
President's Policy of Investment
Education, in our competitive global economy, has become the dividing
line between those who
are able to move ahead and those who lag behind. Over the last seven
years, we have worked
hard to ensure that every boy and girl is prepared to learn, that our
schools focus on high
standards and achievement, that anyone who wants to go to college can get
the financial help to
attend, and that those who need another chance at education or to improve
or learn new skills can
do so. The budget builds on the sustained commitment to make college more
affordable by
increasing the tax credit than funds higher education and increasing Pell
Grants and other college
scholarships from the current record levels. It reduces class size by
recruiting and preparing
thousands more teachers and building thousands more new classrooms, as well
as providing for
urgent and essential repairs.
The budget expands access to
after-school learning opportunities to help children, especially in
the poorest communities. It recruits teachers in high-poverty areas and
encourages school
districts to pay teachers more through peer review. It ends social
promotion by expanding after
school learning hours to help students to earn advancement. The budget
funds monetary awards
to the highest-performing schools that serve low-income students, and helps
States to identify and
change the least successful schools. It invests in programs targeted to
Hispanic students. It
narrows the digital divide through technology centers in low income
areas.
The budget promotes early learning by
significantly increasing 21st Century Learning Community
Centers. It makes child care more affordable by expanding tax credits for
middle-income
families, and establishes a tax credit for businesses to establish child
care. It assists parents who
attend college to meet their child care needs, as well as parents who
choose to stay at home to
raise a young child, and makes the Child and Dependent Care Tax Credit
refundable. The budget
proposes an expansion of the Early Learning Fund and builds on the
expansion of the successful
Head Start program to help meet the goal of serving one million children by
2002. It increases
funding for the Child Care and Development Block Grant for poor and
near-poor children.
Supporting
families. The
budget promotes responsible fatherhood by enforcing child support,
and aiding the employment and training of low-income parents. The budget
allows low-income
working families, who need transportation to work, to own a modest vehicle
and retain food
stamp eligibility. And it provides health care to legal immigrant
children, and restores
Supplemental Security Income benefits to legal immigrants with disabilities
and to legal
immigrants in families with eligible children.
Extending prosperity to all
of America. The
New Markets Initiative provides tax credit and loan
guarantee incentives to stimulate billions in new private investment in
distressed rural and urban
areas. It builds a network of private investment institutions to funnel
credit, equity, and technical
assistance into businesses in America's untapped markets, to target small
businesses and help
them to grow. The budget increases the number of Empowerment Zones and
Enterprise
Communities, which provide tax incentives and direct spending to encourage
private investment,
and provides more capital to the Community Development Financial
Institutions program. The
budget also includes significant funding increases for Native American
communities, for
enforcement of the Nation's civil rights laws, and for the partnership we
have begun with the
District of Columbia.
Fighting
Crime. The
budget adds funds to hire 500 new ATF agents and 1,000 State and local
gun prosecutors. It funds smart gun technology development. The budget
also provides funds to
prevent violence against women, and to address the growing law enforcement
crisis on Indian
lands. The budget strengthens border enforcement in the South and West.
It combats illegal drug
use, particularly among young people, through treatment and prevention, law
enforcement,
international assistance, and interdiction.
Research. The budget introduces a Science and Technology
Initiative for high-priority long-term basic research, including
nanotechnology - the manipulation of matter at the atomic and
molecular level, offering the promise that medical science may one day be
able to detect
cancerous tumors when they comprise only a few cells. The budget also
increases the
Information Technology Initiative to invest in long-term research in
computing and
communications. It will accelerate development of extremely fast
supercomputers to support
civilian research, enabling scientists to develop life-savings drugs,
provide earlier tornado
warnings, and design more fuel-efficient, safer automobiles. The budget
provides strong support
for the Nation's two largest funders of civilian basic research at
universities: the National Science
Foundation and the National Institutes of Health.
Environment. The Nation does not have to choose between a strong
economy and a clean
environment. The past seven years are proof that we can have both. The
budget establishes
dedicated funding and increases resources for the historic interagency
Lands Legacy initiative to
preserve the Nation's natural and historic treasures. The budget also
supports the Clean Energy
initiative, to reduce the threat of global warming, and Greening the Globe,
to save tropical and
other forests around the world. It supports farm conservation to upgrade
water quality, the Clean
Water Action plan to clean up polluted waterways, climate-change technology
to increase
energy-efficiency, and renewable energy to strengthen our economy while
reducing greenhouse
gases.
National security --
diplomacy and defense. Our Nation now has the greatest opportunity in its
history to advance American interests and values while building a better
and more peaceful
world. However, doing so requires leadership and engagement. This budget
supports a
democratic society and stronger economy in Kosovo. It proposes increased
funding to ensure the
continued protection of American embassies, consulates and other
facilities, and the valuable
employees who work there. It supports significant increases in funding for
State Department
programs to address the threats posed by weapons of mass destruction. In a
fiscal year 2000
emergency supplemental, the budget provides critical assistance to the
Government of Colombia
in its fight against narcotics traffickers. It proposes funding to
promote international family
planning, contain the global spread of AIDS, and promote debt forgiveness
for the world's
poorest countries. The budget also increases programs that support U.S.
manufacturing exports
and continues our long-standing policy of opening foreign markets.
This budget builds upon our major
commitment last year to maintain our military readiness. It
provides additional resources to ensure that the military services can
recruit and retain quality
personnel, meet training standards, procure new equipment and spare parts,
and maintain
equipment in top condition. In addition, this budget provides resources
for the Department of
Defense and other agencies to combat emerging threats - including
terrorism, weapons of mass
destruction, and cyber-crime against critical infrastructure. It supports
counter-narcotics efforts,
including a 2000 supplemental to increase assistance to the Government of
Colombia in their
fight against narco-traffickers. It also provides additional funding for
contingency operations in
Kosovo.
The Budget Continues the
President's Drive for Better Management
This Administration set out to create a
governent that works better, costs less and gets results
Americans care about. We have streamlined Government, cutting the civilian
Federal work force
by 377,000, giving us the smallest work force in 39 years. While we have
made real progress,
there is still much work to do. We have set a list of the highest
priorities: 24 Priority Management
Objectives are listed in this budget. It is a mark of our success that in
early 2000, we were able
to remove last year's number one objective from the list: Manage the
Year 2000 (Y2K) Computer
Problem. We will continue to address other priorities, including
modernizing student aid
delivery and completing the restructuring of the Internal Revenue Service.
The steps we have
taken to change and improve the way government works have also changed the
way Americans
view their government, increasing the confidence and trust of the American
public.
We must Choose Now to Maintain
Fiscal Discipline
The President has recognized the need
to maintain the fiscal discipline that has brought us not
only unprecedented budgetary progress, but also the strongest economy in
memory.
Under the President's leadership, we
have maintained the surplus for the last three years. We can
do it again. In the face of the demographic pressures that will begin to
burden the budget in less
than a decade, we must stay on this course - and create the right processes
and policies to
maintain that fiscal discipline.
Again, the President has measured the
future in realistic terms, set his priorities, and made
balanced choices. We are proud of our budget, and we commend it to your
consideration.
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