U.S. GOVERNMENT PRINTING OFFICE

62–608cc WASHINGTON : 2000

PRELIMINARY ANALYSIS OF PRESIDENT CLINTON’S

FISCAL YEAR 2001 BUDGET

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, FEBRUARY 16, 2000

Serial No. 106–8

(

Printed for the use of the Committee on the Budget

(II)

COMMITTEE ON THE BUDGET

JOHN R. KASICH, Ohio, Chairman

SAXBY CHAMBLISS, Georgia,

Speaker’s Designee

CHRISTOPHER SHAYS, Connecticut

WALLY HERGER, California

BOB FRANKS, New Jersey

NICK SMITH, Michigan

JIM NUSSLE, Iowa

PETER HOEKSTRA, Michigan

GEORGE P. RADANOVICH, California

CHARLES F. BASS, New Hampshire

GIL GUTKNECHT, Minnesota

VAN HILLEARY, Tennessee

JOHN E. SUNUNU, New Hampshire

JOSEPH PITTS, Pennsylvania

JOE KNOLLENBERG, Michigan

MAC THORNBERRY, Texas

JIM RYUN, Kansas

MAC COLLINS, Georgia

ZACH WAMP, Tennessee

MARK GREEN, Wisconsin

ERNIE FLETCHER, Kentucky

GARY MILLER, California

PAUL RYAN, Wisconsin

PAT TOOMEY, Pennsylvania

JOHN M. SPRATT, Jr., South Carolina,

Ranking Minority Member

JIM MCDERMOTT, Washington,

Leadership Designee

LYNN N. RIVERS, Michigan

BENNIE G. THOMPSON, Mississippi

DAVID MINGE, Minnesota

KEN BENTSEN, Texas

JIM DAVIS, Florida

ROBERT A. WEYGAND, Rhode Island

EVA M. CLAYTON, North Carolina

DAVID E. PRICE, North Carolina

EDWARD J. MARKEY, Massachusetts

GERALD D. KLECZKA, Wisconsin

BOB CLEMENT, Tennessee

JAMES P. MORAN, Virginia

DARLENE HOOLEY, Oregon

KEN LUCAS, Kentucky

RUSH D. HOLT, New Jersey

JOSEPH M. HOEFFEL III, Pennsylvania

TAMMY BALDWIN, Wisconsin

PROFESSIONAL STAFF

WAYNE T. STRUBLE, Staff Director

THOMAS S. KAHN, Minority Staff Director and Chief Counsel

(III)

C O N T E N T S

Page

Hearing held in Washington, DC, February 16, 2000 .......................................... 1

Chart: Federal Reserve Board Chairman Alan Greenspan’s quote on surpluses .................................................................................................................... 3

Chart: Inflated baselines ......................................................................................... 4

Statement of Dan L. Crippen, Director, Congressional Budget Office ................ 6

Chart 1: CBO Baseline Projections of the Surplus ........................................ 8

Chart 2: Indebtedness to the Public Under the CBO Baseline .................... 9

Chart 3: Changes in CBO Projections of the Total Surplus Since July

Under the Capped Baseline ......................................................................... 10

Chart 4: Economic Assumptions ..................................................................... 11

Chart 5: Increases in Workers and Social Security Beneficiaries ................ 12

Chart 6: GDP Fraction ..................................................................................... 13

Prepared statement of Dr. Crippen ........................................................................ 13

Written response to information requested by Mr. Minge concerning States’

tax actions during times of surplus .................................................................... 41

(1)

PRELIMINARY ANALYSIS OF PRESIDENT

CLINTON’S FISCAL YEAR 2001 BUDGET

WEDNESDAY, FEBRUARY 16, 2000

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC.

The committee met, pursuant to call, at 10:25 a.m. in room 210,

Cannon House Office Building, Hon. John R. Kasich (chairman of

the committee) presiding.

Members present: Representatives Kasich, Chambliss, Franks,

Smith, Hoekstra, Gutknecht, Sununu, Ryun of Kansas, Wamp,

Green, Fletcher, Miller, Ryan of Wisconsin, Toomey, Spratt, Rivers,

Thompson, Bentsen, Davis, Markey, Clement, Moran, Hooley,

Lucas, and Holt.

Chairman KASICH. 10:25 a.m. The hearing will come to order

and—I don’t know what that cartoon is—it is not mine. Is that

yours?

Mr. CRIPPEN. It is.

Chairman KASICH. It says, I found out about Santa and the tooth

fairy, and now I am beginning to wonder about the budget surplus.

Frank and Ernest. That is pretty good. It will not take the place,

though, of Charles Schulz, as I think everybody will admit. What

an absolutely amazing development that on the very last day of the

publishing of Charles Schulz’s work, that the man passed, and everybody I know thought what a great—how great he was for children and for adults probably more than children.

Dan, we are glad to have you here this morning. I am glad that

you are working hard. First of all, I think you have taken your

share of criticism, and I think—and I don’t—I am not happy about

it because I think you are professional, and I know that you had

in the United States Senate a very unfortunate meeting over there

6 months ago—I was thinking about it this morning as I was getting ready—where some of the elected officials take delight in

pounding on people who are not elected like a punching bag. I

didn’t like what they did over there, and I think things are settling

out a little bit. And when we had your predecessor, we never attempted to ever manipulate or maneuver her any more than we do

it with you.

And in our conversations, you have been clear with me, and we

don’t have that many conversations, but you always make it clear

that, John, I have a job to do, and I don’t want you to do anything

but your job. And I think you are doing great, and I think you are

very smart, and I think you have a very good staff, and I am glad

that you are upgrading all of your activities there.

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I think it is important we go back and look at all the models and

try to be as accurate. I think that is what you want to do.

Obviously we are all very, very pleased with the state of the

economy. We talked about last week when we had Jack Lew in. In

fact, last night I was talking to a friend of mine who lives in the

Silicon Valley, and he was saying, I think this boom is going to last

at least another 10 years, and I kind of chuckled because this is

not a 10-year deal. This is not snow on the ground and then it gets

warm and it all melts.

To me we are really in a new period of revolution, idea revolution, just like the industrial revolution, and when you take the development of the high tech, whether it is biotechnology or whether

it is the Internet, and you see the various industries now that are

starting to grow off of these main industries, that represents really

the greatest evidence that we are now in a period of significantly

increased productivity, although I have got to tell you I was a little

concerned last week when the President made a statement saying

that don’t anticipate these productivity increases like we have been

having them. And I don’t like to hear that. That is not designed

to be pejorative toward the President. It is just that we better keep

these productivity increases up, because if you do not continue to

grow at the same rate, and you get stagnant there, then you lose

your revenues.

One of my concerns is if the stock market does go negative, and

I am not—I believe it is possible that it will go to 20,000 over time,

that is my personal view—but if it doesn’t grow and we have

slumps, people sell less stock, I think we are going to find over

time that capital gains collections were a very significant part of

the surpluses. Then you could find yourself in a position of not having the surpluses that you want.

But I am not here to be negative because I can’t quite see much

on the horizon that should sink this economy in the short and intermediate run, I mean, even including things like oil. I do have

concerns, though, about a little bit more of the longer-term impact

on the economy. I put education first and foremost. I just really believe that we are educating—failing to educate too many of our

young people today, and with people not having the tools—having

the brains, but not having the tools, we begin over time to lose that

battle of ideas and development. And I just think the education

system needs total revamping, and I think that poses a significant

threat to the long-term economic growth of our economy.

Secondly, I believe that regulations are a huge part of what government does. Now, we are having a running debate in this country today, and it is a bipartisan debate, everybody talking about

what a low percentage of GDP we are spending. I remember in my

own district we had a big company out there. They made a lot of

money, and, boy, when times were good, they built their infrastructure, and when times went bad, they had to fire people to bring the

right people in to chop the infrastructure. With government, once—

you know, the reason we are doing so well on GDP right now is

because the economy is growing so strong. But if we lock things in

place that lead to higher levels of infrastructure for government,

then when times are bad, the word around here is, oh, well, we

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can’t make any changes now because the economy is bad. To me,

this is the time that you get the reform agenda going again.

In addition to that, I am very concerned about the total inability

of Congress to come to grips with the entitlement problems. Now,

your report reflects, I think, about 10 years. About 2 or 3 years

after that, we fall off a cliff, and I really wish that you had talked

about the inability of Congress to address the acute problems of

Medicare and—which are devastatingly acute, and the devastating,

less acute problems of Social Security and what it can mean to the

long-term impact on our economy.

And I think it is also very important we maintain fiscal discipline, the ability to have fiscal discipline. And I can remember

back in 1994 visiting with Alan Greenspan and him telling me both

privately and then coming and saying publicly that if the Congress

can show that they have a commitment to smaller government,

then we can have a stronger economy.

I have got just two little deals here I would like to put up. One

that I just—I don’t know why we didn’t see this earlier. It is a

quote from Alan Greenspan where the Chairman says in his confirmation hearing, ‘‘My first priority would be to allow as much of

the surplus to flow through into a reduction of debt to the public.

If that proves politically infeasible, I would opt for cutting taxes.

And under no conditions do I see any room in the longer-term outlook for major changes in expenditures.’’

People have always said, well, Greenspan is not for cutting taxes.

I don’t think that is a correct and proper analysis of where he is,

not that I think we ought to be spending all of our time discussing

where Alan Greenspan is, but the fact is that he does matter, and

that is his position.

Now, if you would stick this other chart up, because we have

been talking about the need for inflation increases in discretionary,

not even talking about what we are going to do with prescription

drugs or any other entitlements programs, particularly the probVerDate 11-SEP-98 20:45 Mar 23, 2000 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 H:\DOCS\HEARINGS\106-8\HBU047.000 HBUDGET1 PsN: HBUDGET1
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lems of Medicare as it relates to reimbursement. But if you look at

that chart, it is a little confusing, but if you go to 1991, the red

line represents how much spending we would have had had we just

grown at the rate of inflation. The blue line is what we actually

did, and as you can see, in 1993 we started to bring spending down

fundamentally, the results of cuts in defense.

Then we got down to 1995. Well, look, 1994, 1995, 1996, the

glory years, the height of the Republican empire so to speak, you

know, the glory days of Greece and Republicans when we were cutting spending and limiting government. You can see what happened to that blue line.

And then it is interesting, isn’t it, when you look at 1998, and

1999 and 2000, you know, it is kind of off to the races again because we have surpluses, and when you have surpluses, you spend,

because all politicians are fundamentally tarred with the same

stick. So what you see there, though, is the gap between that blue

line and that inflation-adjusted spending. You have got $419 billion

more in spending than you would have had had we restrained discretionary spending, and, frankly, it is twice as much, it is twice

as much as where we started in 1991.

So thank goodness we did not go on autopilot and we restrained

spending over this decade, and there is credit that goes to both parties on that. There are. Then there is blame that goes to both parties as we kind of escalate our spending again.

I worry that the growth in government brings about more regulations, more bureaucrats, more red tape. And it is interesting. If you

talk to people who live in the Silicon Valley, there is a raging debate there as to whether they ought to even engage politicians in

Washington. Some of the more—I don’t want to say radical—some

of the more aggressive ones argue that any time you sit down with

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a politician, you end up with a compromise that does you in, and

they don’t come here anymore. They don’t want to be here. They

don’t want to deal with us because they think the result is more

regulation and less progress for them.

I just think that we have got lots of good things going. I wish

we would be doing more things with entitlement also, and I am

going to be talking about that even when I am gone from here. And

I hope we don’t get carried away with spending and just get loose

around here and build a big infrastructure that we can’t control.

And I hope at some point we are going to actually confront education in this country, and open this system up and reform it, and

not have a government monopoly in education in this country, and

improve things. So just some observations.

I am glad you are here, Mr. Crippen. I will look forward to Mr.

Spratt’s comments and then to your testimony.

Mr. SPRATT. Dr. Crippen, welcome. I like your cartoon. I think

it honestly sets a good theme for this particular hearing because

we have reidentified these projections as if they were ready to be

disposed of, and we have yet to earn them. The economy has yet

to produce them, as well as the budget.

There are a couple of variables that I think would be useful for

you to help us focus on. One the Chairman has just touched upon,

and that is what is the right level for discretionary spending. You

can’t make normative judgments about that, but you can look back

over the past and look at the present and tell us what some of the

risks are if we understate discretionary spending.

We have focused for the most part in this discussion on discretionary spending. That is the one variable that you manipulate in

deriving three different projections. Yesterday the American Federation of Hospitals was in my office, and they were showing me

their projection of Medicare over the next several years, emphasizing the fact that in order to attain these surpluses as you projected

them, we have got to keep Medicare growing below the cost growth

level that was projected in the BBA for several years to come at

historically low growth rates, and it is questionable whether or not

that can be attained as well.

So there are lots of iffy assumptions underlying these projections.

It won’t be easy to attain, and they are certainly not automatic assumptions by any means. They will require a lot of discipline on

the part of Congress, and cut some things that some of us really

aren’t advocating right now.

Yesterday we had a meeting of the procurement subcommittee,

of the Armed Services Committee, and the Chairman of that subcommittee, Mr. Hunter, who is a Republican and a good friend of

mine, said quite earnestly and honestly, we have asked each of the

chiefs of staffs of the four services what they need over and above

what has been provided in the President’s defense budget, which

is an increase of $12.2 billion over last year. As I pointed out to

him, it is also an increase of $24.4 billion over what we provided

for defense in the balanced budget agreement in 1997 for the year

2001. The chiefs told us they need another $15.5 billion for procurement alone. If you add that to the $24.4 billion, you are $40

billion above what was provided for defense in 2001 in the BBA.

How can we return to the caps if we are going to make that kind

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of provision for defense, and then if we don’t return to the caps,

what is the proper level to send?

I think you have done a good job in laying out the choices for us

in the economic projection you have provided us, and I look forward

to your testimony to explain those choices and explain the surplus

today. Thank you very much for coming.

Chairman KASICH. If I could just—one other comment. I think

John raises a very good issue about this whole issue of reimbursement. The question to me on health care is whether we keep pumping money into a model that is clearly not working very well. In

our hearings tomorrow, we are going to be talking about Medicare

and how hard it is to try to control the spending on it. We clearly

have problems in our hospitals, with our physicians. Do we put

more in the old model, or do we figure out a way in which we create a new model?

This year I think we will do—John would like to do some hearings on Medicare. I don’t know that it will be done before we mark

up the budget because we are on a fast track, but whatever we

mark up is clearly going to be subject to changes, and it is a really

great issue and an important issue because there is real people

that pay a price. I just talked to a nurse the other day, pediatric

nurse, and she has got seven patients, a number of them, seven patients they need to take care of because the—there is just not

enough money there.

These are vexing problems, and it is going to be interesting to

see how we deal with it this year and really how we deal with it

long term.

Mr. Crippen, you are recognized.

STATEMENT OF DAN L. CRIPPEN, DIRECTOR,

CONGRESSIONAL BUDGET OFFICE

Mr. CRIPPEN. Thank you, Mr. Chairman. Before I begin, I want

to thank you for your gracious opening comments. I hope that I will

ultimately deserve them, but I want to assure you that my colleagues—both those who are here and those who are back across

the freeway working—deserve them much more than I do. They are

a hard-working, professional crew. I am just representing them

here today.

I don’t know if any of you ever take time out to look at the comics. Of course, I know a lot of you only read the New York Times,

so you don’t have a chance. But I do look at the comics, and I

brought this one today, as Congressman Spratt said, because I

thought it had some relevance to our debate over competing versions of our baseline.

Before I discuss the baseline, however, let me report briefly on

our upcoming analysis of the President’s budget. Like you, we have

had the budget a little more than a week. It will take us another

2 to 3 weeks to finish our analysis and another week or so after

that to produce a report. Obviously, if it is the desire of the committee, I will be happy to return next month to discuss that analysis with you. For today, however, I am prepared to speak only

about our baseline report. Indeed, we have no analysis yet of the

President’s budget on which I can report.

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But I can report on our assessment of the budget and economic

outlook, which has substantially improved since last July. First, we

project that there will be an on-budget surplus this year and every

year for the next 10 years. During the coming decade, under current policies, we believe the line between Social Security and the

rest of the budget will not be crossed. The off-budget Social Security surpluses will accumulate over $2 trillion over the next 10

years (see Chart 1). Thus, if there are no on-budget deficits, debt

held by the public will be reduced by at least that amount.

As I will explain in a moment, the on-budget surpluses range

from a little more than $800 billion to just under $2 trillion. If

those surpluses were dedicated to paying down the national debt,

it would be possible to retire all debt held by the public that was

available for repurchase in the next 10 years.

Differences in the estimates of the on-budget surplus are attributable to three variations in our baseline, variations based on, as

Congressman Spratt said, differing assumptions about the future

path of discretionary spending. The first variation assumes strict

compliance with CBO’s estimates of the spending caps that are in

place for 2000. The second variation assumes that discretionary resources are held to the level provided in the 2000 appropriations.

The third variation presents the implications of inflating appropriations for 2000 to approximate the resources it would take to continue the same spending over 10 years.

Mr. Chairman, each of these formulations is flawed, and the

flaws are more apparent now than ever before. Discretionary

spending, as the name implies, is not cast in stone, although we

sometimes treat it as such. And a baseline is, among other things,

an attempt to extrapolate current policy into the future so that the

impact of changes in policy can be measured. But the policy for discretionary appropriations is established one year at a time.

The capped variation, reflecting the agreement reached in 1997

between the Congress and the President, has by our reckoning

been breached by ever-increasing amounts in the past 2 years. Adherence to the cap for 2001 would require an absolute reduction in

spending of approximately $25 billion.

The freeze variation may provide a good approximation of current discretionary policy from one year to the next, but adherence

to it would require unprecedented restraint over the 10 years considered in this outlook.

To assume adjustments for inflation, as our third variation does,

makes appropriations appear to be mandatory, not discretionary,

implying that the same level of real (inflation-adjusted) resources

must be provided each year, regardless of the merits of existing

programs and the needs of the future.

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CHART 1

Both the freeze and inflated baseline of variations include spending that is not likely to be repeated, although the mechanics of constructing those variations inherently assume that it will be. For example, funds for the 2000 census as well as all other funds appropriated for emergency purposes, including one-time items such as

funding for the Wye River Accords, are assumed to be repeated in

2001, 2002, and every year thereafter.

In addition, the inflated variation implicitly assumes no increases in government productivity and no improvements in providing government services, despite the obvious improvements in private-sector productivity that have been reported.

The second chart shows that total surpluses would exceed total

debt held by the public in 2009 or 2010, under both the capped and

freeze alternatives (see Chart 2). With the inflated alternative,

total surpluses would exceed total debt soon after the end of the

decade.

A word of caution here. The tables in the testimony show debt

held by the public to be positive in those last years. That is because

even though sufficient surpluses would be generated to retire all

debt, there is an irreducible minimum debt over this 10-year period

because of outstanding long-term bonds and, we assume, the continuation of the savings bond program. To determine the Nation’s

true net debtor position, the amounts in the ‘‘excess cash’’ line

must be subtracted from debt held by the public. For our purposes,

we assume that the excess cash generated under this outlook would

be invested in a way that produced a return equal to that on shortterm, risk-free instruments.

To summarize, if these projections are in the ballpark and the

underlying mandatory policies are not changed, the Federal Government should be able to save an amount roughly equal to or

9

greater than the amount of debt held by the public over the next

decade.

CHART 2

Our next chart summarizes what has changed since July (see

Chart 3). We compare the capped alternative with the July baseline because the July estimates also assumed adherence to the cap,

allowing us to make strict comparisons between the two.

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CHART 3

Regarding legislative changes since July, spending increases and

revenue reductions obviously reduce the surpluses, but the effects

of economic and technical changes in our forecast are eight times

greater than the effects of legislation. The economy, specifically

productivity, continues to grow at a rate well above previous

trends. We now assume that growth in real gross domestic product

(GDP) will average 0.4 percentage points more than we assumed

in July. Half of that increase is due to productivity.

In the 20 years prior to 1996, productivity grew at an average

rate of 1.6 percent. In the past 4 years, productivity has grown at

an average rate of 2.6 percent, a full percentage point higher. We

assume that about 60 percent of that increase will prove to be permanent, for an average productivity growth of 2.2 percent over the

2001–2010 period.

Tax revenues remain higher relative to GDP than past experience would suggest. Over time, we assume that collections will decline relative to GDP and for some, categories will revert to past

patterns, with personal income taxes remaining somewhat higher

than historical levels and corporate taxes slightly lower.

Finally, the slowdown in Medicare spending—last year’s spending actually declined by close to 1 percent—has lowered the base.

Some of the dampening effect of reforms under the Balanced Budget Act of 1997 (BBA) and enhanced enforcement of antifraud measures will continue to restrain Medicare growth in the future—to

the tune of about $140 billion less in costs over the 10 years than

we had earlier estimated.

Thus, the story continues to be one of strong economic performance and growth in revenues that is greater than previously forecast, coupled with a small reduction in expected spending for Medicare.

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As with any 10-year forecast, there is a great deal of uncertainty

to any particular path. We generate specific numbers, but no one

should be sanguine about the apparent precision they imply. Many

of the numbers presented here are the result of accumulating many

estimates, which are themselves uncertain. This year, the uncertainty is probably greater than usual, encompassing uncertainty

about the long-run trend in productivity and future spending and

tax policies.

Indeed, most other economic forecasters do not venture to project

as far forward as 10 years. The next chart compares our economic

forecasts for this year, next year, and the next 5 years (see Chart

4). Looking at the 5-year averages in the far right-hand column,

you can see that we are at the bottom of the range of forecasts, and

we are obviously quite close to our brethren at the Office of Management and Budget (OMB).

We don’t pretend to know much, Mr. Chairman, about economic

performance in the last half of our forecast other than that we

know growth in the economy will be limited to the increase in the

workforce and in productivity, a combination that we assume for

the terms of this projection will amount to growth of 2.9 percent

in a steady state toward the end of the decade.

It is once again obvious that small changes over a long period

make a big difference, a lesson I hope we can carry over to the reform of programs for the too-soon-to-be-elderly people like me. The

apparent good news in this forecast is tempered by what lies just

over the 10-year horizon—namely, my generation, the baby

boomers.

CHART 4

Between this year and 2030, the number of retirees will grow by

80 percent, although the number of workers will increase by only

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10 percent. The portion of the economy that will be transferred

from the younger working population—that is, from our children—

to us will almost double, rising from just over 7 percent to just

under 14 percent of GDP. To try and put that in perspective, Mr.

Chairman, if the characteristics of 2030——

CHART 5

Chairman KASICH. Give us those numbers a little slower. Those

are—that is not in your testimony here, is it?

Mr. CRIPPEN. Probably not. From this year to 2030, the number

of retirees will grow by approximately 80 percent, yet the number

of workers will only grow by about 10 percent (see Chart 5).

From our estimates, we assume that the portion of the economy

that will be dedicated to support retirees will grow from 7 percent

of GDP to 14 percent of GDP. I’ll try and put that in perspective

in relation to today’s terms and today’s debates. If the characteristics of 2030 applied to the budget you are working on for 2001—

that is to say, if Social Security, Medicare, and Medicaid consumed

an amount equal to 14 percent of GDP—you would have about

$400 billion to spend on everything else next year instead of the

roughly $1 trillion you will have to fund the rest of the government. Put another way, you would have to raise taxes by $600 billion for next year alone in order to have the same relative spending

for everything other than the programs for the elderly.

As the economic outlook improves, even in the short run, so does

the outlook, of course, for those programs. I would like to note that

the 14 percent of GDP we project for programs for the elderly in

2030 is down over 1 full percentage point from last July, primarily

because increased economic growth, albeit small, makes a big difference over the long haul.

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Think of it this way. The calculation of the share of GDP is a

fraction with two moving parts (see Chart 6). The relative amount

of resources transferred from the productive working population to

retirees can be diminished by reducing the obligations or benefits—

the numerator of the fraction—or by growing the economy—the

fraction’s denominator.

CHART 6

Can we grow our way out of this problem? Probably not, and certainly not if we define the problem as keeping the relative share

of the economy transferred to the elderly constant. What is likely

is that my generation when retired will consume more than 7 percent of GDP because the economy will not grow that quickly. Nevertheless, the larger the economy, the easier it will certainly be to

support those retirees.

Again, in terms of the budget you are about to write, the 1 percent improvement in the 2030 forecast translates into roughly $100

billion today. That is, the higher growth in this forecast is the

equivalent of $100 billion in spending cuts or tax increases that

would otherwise be necessary to fund government as we know it.

Ultimately, Mr. Chairman, it is not the size of the balances in

a trust fund that will limit our ability to pay for these long-term

obligations but the size of the economy. How much of the funding

are we going to push off to succeeding generations? How much of

what our children produce are we going to demand that they give

us? Thank you, Mr. Chairman.

[The prepared statement of Dr. Crippen follows:]

PREPARED STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET

OFFICE

Mr. Chairman, Congressman Spratt, and Members of the Committee, I am

pleased to be with you this morning to discuss the budget and economic outlook for

fiscal years 2001 to 2010.

Total Federal revenues exceeded spending by $124 billion in fiscal year 1999, producing a surplus in the total budget for the second consecutive year. The Congressional Budget Office (CBO) estimates that without legislative changes, that surplus

will rise to $176 billion in 2000 (see Summary Table 1). If current policies remain

in place, the surplus will continue to increase after 2000, CBO projects; however,

the size of that increase depends on the amount of discretionary spending that is

assumed.

SUMMARY TABLE 1.—THE BUDGET OUTLOOK UNDER CURRENT POLICIES

[By fiscal year, in billions of dollars]

Actual

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 

Discretionary Spending Grows at the Rate of Inflation After 2000:

On-Budget Surplus .......................................................................................................................................... 1 23 11 26 31 37 43 86 115 131 162 Off-Budget Surplus .......................................................................................................................................... 124 153 166 182 195 209 225 239 254 268 281 

Total Surplus ............................................................................................................................................... 124 176 177 209 227 246 268 325 368 399 444 

Discretionary Spending Is Frozen at the Level Enacted for 2000:

On-Budget Surplus .......................................................................................................................................... 1 23 22 50 76 102 129 194 245 288 346 Off-Budget Surplus .......................................................................................................................................... 124 153 166 182 196 209 226 240 255 269 282 

Total Surplus ............................................................................................................................................... 124 176 188 232 271 312 355 434 500 556 628 

Discretionary Spending Equals CBO’s Estimates of the Caps Through 2002 and Grows at the Rate of Inflation

Thereafter:

On-Budget Surplus .......................................................................................................................................... 1 23 69 112 126 136 151 199 231 258 298 Off-Budget Surplus .......................................................................................................................................... 124 153 166 182 195 209 225 239 254 268 281 

Total Surplus ............................................................................................................................................... 124 176 235 294 321 345 376 438 485 526 579 

SOURCE: Congressional Budget Office.

15

CBO’s baseline projections are intended to provide the Congress with estimates

of the spending and revenues that will occur if current laws affecting the budget

remain unchanged. In the case of mandatory spending and revenues, which are generally governed by permanent laws, the projections incorporate the effects of anticipated changes in the economy, demographics, and other relevant factors.

In the case of discretionary spending, however, which is controlled by annual appropriation acts, no consensus exists about how to define current policy as it applies

to future years. Is it best represented by the statutory caps on discretionary budget

authority and outlays, which were most recently specified in the Balanced Budget

Act of 1997? Or does section 257(c)(1) of the Balanced Budget and Emergency Deficit Control Act of 1985 better depict current policy by specifying that baselines

should be adjusted for inflation? Or is current policy for discretionary spending simply the amount that was provided in appropriations for the current year?

Without any definitive answer to those questions, CBO presents three variants of

its baseline in this report. Each one reflects a different assumption about discretionary spending.

• The ‘‘inflated’’ variation assumes that budget authority for discretionary programs grows at the rate of inflation each year after 2000.

• The ‘‘freeze’’ variation pegs discretionary budget authority to the level enacted

for the current year, plus amounts already enacted for 2001.

• The ‘‘capped’’ variation assumes that discretionary spending equals CBO’s estimates of the statutory caps through 2002 and grows at the rate of inflation thereafter.

The Congress has used each of those spending paths as a benchmark in some past

budget deliberations. Each alternative has limitations, however. As they currently

stand, the caps may not be a realistic reference point given recent action on discretionary spending. The inflated baseline, for its part, implicitly earmarks future resources to maintain the real (inflation-adjusted) level of discretionary spending even

though there is no explicit statutory basis for such earmarking. And the freeze baseline ignores the effects of pay raises and inflation—costs that could erode the

amount of services or programs that the government can deliver. In addition, both

the inflated and freeze baselines mechanically repeat funding for programs (such as

the decennial census) whose needs are known to be significantly greater or less in

future years.

Most of the components of CBO’s baseline budget projections—revenues, mandatory spending, and offsetting receipts—are the same no matter which assumption

about discretionary spending is used. Net interest costs, however, depend on the

amount of projected debt outstanding, which in turn reflects the choice of paths for

discretionary outlays. Likewise, projections of the surplus will vary depending on assumptions about the discretionary portion of the budget and the resulting effects on

interest costs.

Regardless of the variant, the budgetary picture is a bright one. Between 2001

and 2010, accumulated surpluses are projected to total $3.2 trillion under the inflated baseline and $4.2 trillion under the freeze or capped baseline. On-budget surpluses (which exclude the spending and revenues of Social Security and the Postal

Service) total more than $800 billion under the inflated baseline and $1.9 trillion

under the other two baselines.

Those surpluses are much larger than the ones that CBO projected last July in

‘‘The Economic and Budget Outlook: An Update.’’ Comparing capped baselines

(which CBO used in that report), the cumulative surplus for the 2000–2009 period

is now $879 billion higher, despite legislation enacted since July that reduces that

surplus by a total of $127 billion between 2000 and 2009. The effects of new legislation are more than offset by changes in economic and other factors that increase

revenues by $651 billion over that period and reduce spending by $355 billion.

Most of the improvement in the budgetary picture results from CBO’s updated

economic outlook. Real economic growth is forecast to average about 3 percent a

year over the next 2 years, with only a slight rise in the underlying rate of inflation.

For the longer term, CBO projects that real growth will average 2.7 percent a year

from 2002 through 2010, taking into account the possibility of booms and recessions

during that period.

THE BUDGET OUTLOOK

The total budget surplus of $176 billion that CBO is projecting for this year results from a $153 billion surplus in off-budget accounts—mainly the Social Security

trust funds, whose inflows and outflows are accounted for separately from those of

the rest of the government—and a $23 billion surplus in on-budget accounts. That

16

on-budget surplus would be the largest ever in nominal dollars. Measured as a percentage of gross domestic product (GDP), it would be the largest since 1951.

Assuming that current policies do not change, CBO projects growing surpluses

over the next decade. The total budget surplus would reach between 3 percent and

5 percent of GDP by 2010 depending on the path of discretionary spending (see

Summary Tables 2, 3, and 4). The on-budget surplus would range between 1 percent

and 3 percent of GDP.

SUMMARY TABLE 2.—CBO BASELINE BUDGET PROJECTIONS, ASSUMING THAT DISCRETIONARY SPENDING GROWS AT THE RATE OF INFLATION AFTER 

[By fiscal year]

Actual

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 

IN BILLIONS OF DOLLARS

Revenues:

Individual income ............................................................................................................. 879 945 986 1,026 1,068 1,112 1,162 1,217 1,275 1,339 Corporate income ............................................................................................................. 185 189 189 187 190 194 200 208 216 225 Social insurance ............................................................................................................... 612 653 684 714 742 770 808 842 878 913 Other ................................................................................................................................. 151 158 158 169 177 187 192 198 202 210 

Total ............................................................................................................................. 1,827 1,945 2,016 2,096 2,177 2,263 2,361 2,465 2,572 2,686 

On-budget ................................................................................................................ 1,383 1,465 1,515 1,571 1,630 1,693 1,764 1,843 1,923 2,010 Off-budget ............................................................................................................... 444 480 502 525 547 570 597 623 649 676 

Outlays:

Discretionary spending ..................................................................................................... 575 603 635 650 669 684 702 716 730 750 Mandatory spending ......................................................................................................... 977 1,020 1,071 1,119 1,182 1,249 1,329 1,385 1,460 1,550 Offsetting receipts ............................................................................................................ ¥78 ¥79 ¥85 ¥91 ¥94 ¥93 ¥98 ¥103 ¥108 ¥113 

Net interest ....................................................................................................................... 230 224 218 209 194 177 160 142 122 101 Proceeds from investing excess cash .............................................................................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 

Total ............................................................................................................................. 1,703 1,769 1,839 1,888 1,950 2,017 2,093 2,140 2,204 2,287 

On-budget ................................................................................................................ 1,382 1,442 1,504 1,545 1,598 1,656 1,721 1,756 1,808 1,879 Off-budget ............................................................................................................... 321 327 336 343 352 361 372 384 396 409 

Surplus 124 176 177 209 227 246 268 325 368 399 

On-budget ......................................................................................................................... 1 23 11 26 31 37 43 86 115 131 Off-budget ........................................................................................................................ 124 153 166 182 195 209 225 239 254 268 

Debt Held by the Public ............................................................................................................ 3,633 3,455 3,292 3,097 2,884 2,651 2,394 2,080 1,721 1,330 

AS A PERCENTAGE OF GDP

Revenues:

Individual income ............................................................................................................. 9.6 9.9 9.8 9.8 9.7 9.7 9.7 9.8 9.8 9.9 Corporate income ............................................................................................................. 2.0 2.0 1.9 1.8 1.7 1.7 1.7 1.7 1.7 1.7 Social insurance ............................................................................................................... 6.7 6.8 6.8 6.8 6.8 6.7 6.8 6.8 6.8 6.7 Other ................................................................................................................................. 1.7 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.5 

Total ............................................................................................................................. 20.0 20.3 20.1 20.0 19.9 19.8 19.8 19.8 19.8 19.8 

On-budget ................................................................................................................ 15.2 15.3 15.1 15.0 14.9 14.8 14.8 14.8 14.8 14.8 Off-budget ............................................................................................................... 4.9 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 

SUMMARY TABLE 2.—CBO BASELINE BUDGET PROJECTIONS, ASSUMING THAT DISCRETIONARY SPENDING GROWS AT THE RATE OF INFLATION AFTER 2000

[By fiscal year]

Actual

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 

Outlays:

Discretionary spending ..................................................................................................... 6.3 6.3 6.3 6.2 6.1 6.0 5.9 5.7 5.6 5.5 Mandatory spending ......................................................................................................... 10.7 10.6 10.7 10.7 10.8 10.9 11.1 11.1 11.2 11.4 Offsetting receipts ............................................................................................................ ¥0.9 ¥0.8 ¥0.8 ¥0.9 ¥0.9 ¥0.8 ¥0.8 ¥0.8 ¥0.8 ¥0.8 

Net interest ....................................................................................................................... 2.5 2.3 2.2 2.0 1.8 1.6 1.3 1.1 0.9 0.7 Proceeds from investing excess cash .............................................................................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 

Total ............................................................................................................................. 18.7 18.5 18.3 18.0 17.8 17.7 17.6 17.2 16.9 16.8 

On-budget ................................................................................................................ 15.2 15.1 15.0 14.7 14.6 14.5 14.4 14.1 13.9 13.8 Off-budget ............................................................................................................... 3.5 3.4 3.3 3.3 3.2 3.2 3.1 3.1 3.0 3.0 

Surplus ...................................................................................................................................... 1.4 1.8 1.8 2.0 2.1 2.2 2.2 2.6 2.8 2.9 

On-budget ......................................................................................................................... * 0.2 0.1 0.3 0.3 0.3 0.4 0.7 0.9 1.0 Off-budget ........................................................................................................................ 1.4 1.6 1.7 1.7 1.8 1.8 1.9 1.9 2.0 2.0 

Debt Held by the Public ............................................................................................................ 39.9 36.1 32.8 29.5 26.3 23.2 20.1 16.7 13.2 9.8 

SOURCE: Congressional Budget Office.NOTE: n.a. = not applicable; * = less than 0.05 percent of GDP.

SUMMARY TABLE 3.—CBO BASELINE BUDGET PROJECTIONS, ASSUMING THAT DISCRETIONARY SPENDING IS FROZEN AT THE LEVEL ENACTED FOR 

[By fiscal year]

Actual

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 

IN BILLIONS OF DOLLARS

Revenues:

Individual income ............................................................................................................. 879 945 986 1,026 1,068 1,112 1,162 1,217 1,275 1,339 Corporate income ............................................................................................................. 185 189 189 187 190 194 200 208 216 225 Social insurance ............................................................................................................... 612 653 684 714 742 770 808 842 878 913 Other ................................................................................................................................. 151 158 158 169 177 187 192 198 202 210 Total .................................................................................................................................. 1,827 1,945 2,016 2,096 2,177 2,263 2,361 2,465 2,572 2,686 On-budget ......................................................................................................................... 1,383 1,465 1,515 1,571 1,630 1,693 1,764 1,843 1,923 2,010 Off-budget ........................................................................................................................ 444 480 502 525 547 570 597 623 649 676 

Outlays:

Discretionary spending ..................................................................................................... 575 603 624 628 627 624 625 623 620 622 

19

Mandatory spending ......................................................................................................... 977 1,020 1,071 1,119 1,182 1,249 1,329 1,385 1,460 1,550 1,643 1,744Offsetting receipts ............................................................................................................ ¥78 ¥79 ¥85 ¥91 ¥94 ¥93 ¥98 ¥103 ¥108 ¥113 ¥119 ¥125

Net interest ....................................................................................................................... 230 224 218 208 191 171 150 127 101 81 72 68Proceeds from investing excess cash .............................................................................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. ¥9 ¥33 ¥65

Total ............................................................................................................................. 1,703 1,769 1,829 1,864 1,905 1,951 2,006 2,032 2,073 2,130 2,185 2,244

On-budget ................................................................................................................ 1,382 1,442 1,493 1,521 1,554 1,590 1,635 1,649 1,678 1,722 1,761 1,801Off-budget ............................................................................................................... 321 327 336 342 352 361 372 383 395 408 424 442

Surplus ...................................................................................................................................... 124 176 188 232 271 312 355 434 500 556 628 703

On-budget ......................................................................................................................... 1 23 22 50 76 102 129 194 245 288 346 407Off-budget ........................................................................................................................ 124 153 166 182 196 209 226 240 255 269 282 296

Debt Held by the Public ............................................................................................................ 3,633 3,455 3,281 3,062 2,805 2,506 2,162 1,739 1,249 1,078 1,016 941

AS A PERCENTAGE OF GDP

Revenues:

Individual income ............................................................................................................. 9.6 9.9 9.8 9.8 9.7 9.7 9.7 9.8 9.8 9.9 9.9 10.0Corporate income ............................................................................................................. 2.0 2.0 1.9 1.8 1.7 1.7 1.7 1.7 1.7 1.7 1.6 1.6Social insurance ............................................................................................................... 6.7 6.8 6.8 6.8 6.8 6.7 6.8 6.8 6.8 6.7 6.7 6.7Other ................................................................................................................................. 1.7 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.5 1.5 1.5Total .................................................................................................................................. 20.0 20.3 20.1 20.0 19.9 19.8 19.8 19.8 19.8 19.8 19.8 19.8On-budget ......................................................................................................................... 15.2 15.3 15.1 15.0 14.9 14.8 14.8 14.8 14.8 14.8 14.8 14.9Off-budget ........................................................................................................................ 4.9 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Outlays:

Discretionary spending ..................................................................................................... 6.3 6.3 6.2 6.0 5.7 5.5 5.2 5.0 4.8 4.6 4.4 4.2Mandatory spending ......................................................................................................... 10.7 10.6 10.7 10.7 10.8 10.9 11.1 11.1 11.2 11.4 11.6 11.7Offsetting receipts ............................................................................................................ ¥0.9 ¥0.8 ¥0.8 ¥0.9 ¥0.9 ¥0.8 ¥0.8 ¥0.8 ¥0.8 ¥0.8 ¥0.8 ¥0.8

Net interest ....................................................................................................................... 2.5 2.3 2.2 2.0 1.7 1.5 1.3 1.0 0.8 0.6 0.5 0.5Proceeds from investing excess cash .............................................................................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. ¥0.1 ¥0.2 ¥0.4

Total ............................................................................................................................. 18.7 18.5 18.2 17.8 17.4 17.1 16.8 16.3 15.9 15.7 15.4 15.1

On-budget ................................................................................................................ 15.2 15.1 14.9 14.5 14.2 13.9 13.7 13.2 12.9 12.7 12.4 12.1Off-budget ............................................................................................................... 3.5 3.4 3.3 3.3 3.2 3.2 3.1 3.1 3.0 3.0 3.0 3.0

Surplus ...................................................................................................................................... 1.4 1.8 1.9 2.2 2.5 2.7 3.0 3.5 3.8 4.1 4.4 4.7

On-budget ......................................................................................................................... * 0.2 0.2 0.5 0.7 0.9 1.1 1.6 1.9 2.1 2.4 2.7Off-budget ........................................................................................................................ 1.4 1.6 1.7 1.7 1.8 1.8 1.9 1.9 2.0 2.0 2.0 2.0

Debt Held by the Public ............................................................................................................ 39.9 36.1 32.7 29.2 25.6 21.9 18.1 14.0 9.6 7.9 7.2 6.3

SOURCE: Congressional Budget Office.NOTE: n.a. = not applicable; * = less than 0.05 percent of GDP.

SUMMARY TABLE 4.—CBO BASELINE BUDGET PROJECTIONS, ASSUMING THAT DISCRETIONARY SPENDING EQUALS CBO’S ESTIMATES OF THE STATUTO

THROUGH 2002 AND GROWS AT THE RATE OF INFLATION THEREAFTER

[By fiscal year]

Actual

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 

IN BILLIONS OF DOLLARS

Revenues:

Individual income ............................................................................................................. 879 945 986 1,026 1,068 1,112 1,162 1,217 1,275 1,339 Corporate income ............................................................................................................. 185 189 189 187 190 194 200 208 216 225 Social insurance ............................................................................................................... 612 653 684 714 742 770 808 842 878 913 Other ................................................................................................................................. 151 158 158 169 177 187 192 198 202 210 

Total ............................................................................................................................. 1,827 1,945 2,016 2,096 2,177 2,263 2,361 2,465 2,572 2,686 

On-budget ................................................................................................................ 1,383 1,465 1,515 1,571 1,630 1,693 1,764 1,843 1,923 2,010 Off-budget ............................................................................................................... 444 480 502 525 547 570 597 623 649 676 

Outlays:

Discretionary spending ..................................................................................................... 575 603 578 571 585 600 615 630 646 662 Mandatory spending ......................................................................................................... 977 1,020 1,071 1,119 1,182 1,249 1,329 1,385 1,460 1,550 Offsetting receipts ............................................................................................................ ¥78 ¥79 ¥85 ¥91 ¥94 ¥93 ¥98 ¥103 ¥108 ¥113 

Net interest ....................................................................................................................... 230 224 217 204 183 162 139 115 92 77 Proceeds from investing excess cash .............................................................................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. ¥2 ¥16 

Total ............................................................................................................................. 1,703 1,769 1,781 1,802 1,856 1,918 1,985 2,027 2,087 2,161 

On-budget ................................................................................................................ 1,382 1,442 1,446 1,460 1,504 1,557 1,613 1,644 1,692 1,752 Off-budget ............................................................................................................... 321 327 336 343 352 361 372 384 396 409 

Surplus ...................................................................................................................................... 124 176 235 294 321 345 376 438 485 526 

On-budget ......................................................................................................................... 1 23 69 112 126 136 151 199 231 258 Off-budget ........................................................................................................................ 124 153 166 182 195 209 225 239 254 268 

Debt Held by the Public ............................................................................................................ 3,633 3,455 3,234 2,954 2,647 2,314 1,949 1,522 1,142 1,078 

AS A PERCENTAGE OF GDP

Revenues:

Individual income ............................................................................................................. 9.6 9.9 9.8 9.8 9.7 9.7 9.7 9.8 9.8 9.9 Corporate income ............................................................................................................. 2.0 2.0 1.9 1.8 1.7 1.7 1.7 1.7 1.7 1.7 Social insurance ............................................................................................................... 6.7 6.8 6.8 6.8 6.8 6.7 6.8 6.8 6.8 6.7 Other ................................................................................................................................. 1.7 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.5 

Total ............................................................................................................................. 20.0 20.3 20.1 20.0 19.9 19.8 19.8 19.8 19.8 19.8 

On-budget ................................................................................................................ 15.2 15.3 15.1 15.0 14.9 14.8 14.8 14.8 14.8 14.8 

21

Off-budget ............................................................................................................... 4.9 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Outlays:

Discretionary spending ..................................................................................................... 6.3 6.3 5.8 5.4 5.3 5.3 5.2 5.1 5.0 4.9 4.8 4.7Mandatory spending ......................................................................................................... 10.7 10.6 10.7 10.7 10.8 10.9 11.1 11.1 11.2 11.4 11.6 11.7Offsetting receipts ............................................................................................................ ¥0.9 ¥0.8 ¥0.8 ¥0.9 ¥0.9 ¥0.8 ¥0.8 ¥0.8 ¥0.8 ¥0.8 ¥0.8 ¥0.8

Net interest ....................................................................................................................... 2.5 2.3 2.2 1.9 1.7 1.4 1.2 0.9 0.7 0.6 0.5 0.5Proceeds from investing excess cash .............................................................................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. * ¥0.1 ¥0.3 ¥0.5

Total ............................................................................................................................. 18.7 18.5 17.7 17.2 16.9 16.8 16.6 16.3 16.0 15.9 15.7 15.6

On-budget ................................................................................................................ 15.2 15.1 14.4 13.9 13.7 13.6 13.5 13.2 13.0 12.9 12.7 12.6Off-budget ............................................................................................................... 3.5 3.4 3.3 3.3 3.2 3.2 3.1 3.1 3.0 3.0 3.0 3.0

Surplus ...................................................................................................................................... 1.4 1.8 2.3 2.8 2.9 3.0 3.2 3.5 3.7 3.9 4.1 4.3

On-budget ......................................................................................................................... * 0.2 0.7 1.1 1.1 1.2 1.3 1.6 1.8 1.9 2.1 2.3Off-budget ........................................................................................................................ 1.4 1.6 1.7 1.7 1.8 1.8 1.9 1.9 2.0 2.0 2.0 2.0

Debt Held by the Public ............................................................................................................ 39.9 36.1 32.2 28.1 24.2 20.3 16.3 12.2 8.8 7.9 7.2 6.3

SOURCE: Congressional Budget Office.NOTE: n.a. = not applicable; * = less than 0.05 percent of GDP.

22

CHANGES SINCE JULY

CBO’s current budget outlook is considerably more positive than the one described

in its July 1999 report. Since then, CBO estimates, the Congress and the President

have enacted legislation that increases projected spending over the 2000–2009 period by about $109 billion and reduces projected revenues by $18 billion, compared

with the levels in CBO’s July baseline (see Summary Table 5). The majority of that

legislative action occurred at the end of the session, when the Congress and the

President enacted the District of Columbia appropriation act and nine other acts enacted by reference—four regular appropriation acts (for the Departments of Commerce, Justice, and State; for foreign operations; for the Department of the Interior;

and for the Departments of Labor, Health and Human Services, and Education), a

miscellaneous appropriation act, and four additional acts. The effects of that legislation, however, have been more than offset by changes in CBO’s estimates of future

revenues and outlays that have added to projected surpluses.

SUMMARY TABLE 5.—CHANGES IN CBO PROJECTIONS OF THE SURPLUS SINCE JULY 1999, UNDER THE CAPPED BASELINE

[By fiscal year, in billions of dollars]

2000 2001 2002 2003 2004 2005 2006 2007 2008 

July Baseline Total Surplus 1 ..................................................................................................................... 161 193 246 247 266 286 334 364 385 

Changes:

Legislative:

Revenues .................................................................................................................................. 3 ¥6 ¥8 ¥2 ¥2 ¥1 ¥1**

Outlays 2 ................................................................................................................................... ¥33 ¥11 ¥9 ¥8 ¥7 ¥7 ¥8 ¥8 ¥9 

Subtotal ............................................................................................................................... ¥30 ¥17 ¥18 ¥10 ¥9 ¥8 ¥8 ¥9 ¥9 

Economic:

Revenues .................................................................................................................................. 23 41 52 54 53 53 54 56 60 Outlays 2 ................................................................................................................................... 2 ¥1 ¥3 1 8 13 19 24 30 

Subtotal ............................................................................................................................... 25 40 49 55 61 66 74 80 89 

Technical:

Revenues .................................................................................................................................. 14 12 8 9 13 14 15 16 18 Outlays 2 ................................................................................................................................... 6 7 8 20 14 19 23 34 43 

Subtotal ............................................................................................................................... 20 19 16 28 27 33 38 50 61 

Total Changes ................................................................................................................. 15 42 47 73 79 90 104 121 141 

January Baseline Total Surplus ................................................................................................................. 176 235 294 321 345 376 438 485 526 Memorandum:

Total Change in Revenues ................................................................................................................ 40 46 51 60 64 66 69 71 77 Total Change in Outlays 2 ................................................................................................................. ¥25 ¥4 ¥4 13 15 24 35 50 64 

SOURCE: Congressional Budget Office.NOTE: n.a. = not applicable; * = less than $500 million.1 Assumes that discretionary spending equals CBO’s estimates of the statutory caps through 2002 and grows at the rate of inflation thereafter. 2 Increases in outlays are shown with a negative sign because they reduce surpluses.

24

Most of the improvement in the budget outlook since July results from the continuing strength of the economy, which CBO estimates will produce higher revenues. The current revenue projections are more than $500 billion higher over the

10-year period because of changes in CBO’s economic forecast. Most of that increase

stems from higher projected levels of wage and salary income, which boost receipts

from individual income and social insurance taxes.

CBO projects that interest rates will be approximately 1 percentage point higher

in 2001 and 2002 than previously forecast and at least 0.3 percentage points higher

after that. Such changes boost anticipated interest costs (in the capped baseline) by

$56 billion through 2009. At the same time, higher revenue projections and other

factors lower the projected costs of servicing the Federal debt by as much as $31

billion a year by 2009 and by a total of $138 billion over the 10-year period.

Changes in factors other than legislation and the economic outlook (so-called technical changes) increase the surplus under the capped baseline by $366 billion over

10 years. Technical changes to revenue projections account for $141 billion of that

difference—mostly the result of an increase in projected realizations of capital gains

in the near term and other effects on social insurance taxes and individual income

taxes in later years. Technical changes to outlay projections (other than for debt

service) represent a similar amount—nearly all of it resulting from changes to

CBO’s estimates of Medicare spending. Continued emphasis on improving compliance with program rules and a larger-than-anticipated drop in the use of home

health care services have slowed the growth of Medicare spending, prompting CBO

to adjust its estimates downward.

REVENUE PROJECTIONS FOR 2000 THROUGH 2010

CBO estimates that total Federal revenues will exceed $1.9 trillion in fiscal year

2000 if current policies remain unchanged—marking the eighth consecutive year in

which the growth of revenues has outstripped the growth of gross domestic product.

Revenues are expected to grow more slowly than GDP through 2004 and then at

about the same rate as GDP through 2010. In that year, revenues are projected to

be $2.9 trillion, or about 19.8 percent of GDP.

Although revenues will continue to grow, CBO expects the rate of growth to slow

from the rapid pace of the past few years. From 1994 to 1998, revenues rose at an

average rate of 8.3 percent a year, much faster than GDP. Consequently, revenues

as a percentage of GDP increased from 18.1 percent in 1994 to 19.9 percent in 1998.

Although revenue growth slowed to 6.1 percent in 1999, it still exceeded GDP

growth and boosted the ratio of receipts to GDP to a postwar high of 20 percent.

In CBO’s forecast, receipts will increase slightly faster this year (6.4 percent) than

in 1999. They will also grow faster than GDP, pushing the ratio of revenues to GDP

to 20.3 percent, which is expected to become the postwar peak. Beginning next year,

however, CBO expects receipts to grow by roughly 4 percent a year through 2004.

That rate is projected to rise to about 4.5 percent a year between 2005 and 2010.

Although GDP will grow faster than receipts during that period, on average, the

ratio of receipts to GDP will stay close to its peak, remaining at 19.8 percent.

Individual income tax receipts—bolstered primarily by higher realizations of capital gains, growth in real incomes, and especially rapid growth in income among

high-income taxpayers—fueled the rapid rise in revenues of the past few years.

Those receipts are also an important contributor to the slower growth of revenues

projected for the next few years. Higher realizations of capital gains stemmed largely from the sharp rise in stock prices. Effective tax rates rose because an increasing

number of taxpayers fell into the high-income category and were therefore taxed at

higher marginal rates. Furthermore, those taxpayers experienced higher-than-average growth in income. None of those sources of rapid growth in revenues are expected to persist indefinitely. As they play smaller roles in boosting receipts, revenue growth is projected to slow.

OUTLAY PROJECTIONS FOR 2000 THROUGH 2010

CBO expects Federal spending to total $1.8 trillion in fiscal year 2000. Under current policies, that figure is projected to rise to between $2.2 trillion and $2.5 trillion

by 2010, depending on the path assumed for discretionary spending.

Federal spending as a percentage of the economy declines from its current level

under all three of CBO’s alternatives for discretionary spending. Last year, federal

outlays totaled just under 19 percent of GDP. In 2000, they will drop further, to

about 18.5 percent. Over the next decade, CBO estimates, outlays will continue to

fall slowly, reaching between 15.1 percent and 16.5 percent of GDP in 2010, depending on which assumptions are used.

25

Within the overall picture, the mix of Federal spending has changed significantly

over time. Today, the government spends more on entitlement programs and less

on discretionary programs as a share of GDP than it did in the past. Spending for

entitlements and other mandatory programs (including offsetting receipts) rose from

4.9 percent of GDP in 1962 to 9.9 percent in 1999, while discretionary spending declined from 12.7 percent of GDP to 6.3 percent.

That trend continues in CBO’s baseline projections. By 2010, mandatory spending

(including offsetting receipts) is expected to reach 10.9 percent of GDP, as discretionary spending falls to between 4.2 percent and 5.3 percent. The growth of mandatory spending—at a projected rate of 5.6 percent a year—will be fueled by the two

major health care programs, Medicare and Medicaid, which are projected to grow

at average annual rates of 6.9 percent and 8.6 percent, respectively. Those growth

rates are faster than the ones experienced in the past 3 years but slower than those

of the early 1990’s.

Discretionary spending is projected to increase at various rates from 2000 to 2010:

the inflated baseline shows growth averaging 2.7 percent a year; the freeze baseline,

0.3 percent; and the capped baseline, 1.4 percent. Although total discretionary

spending was virtually unchanged between 1991 and 1996, nondefense discretionary

spending grew by 4.7 percent annually, while defense spending dropped by 3.6 percent annually. Over the following 3 years, nondefense spending increased by 3.8 percent, on average, and defense spending by 1.2 percent, leading to an average increase of 2.5 percent a year for total discretionary spending.

As a whole, Federal outlays (other than net interest outlays) are projected to rise

by between 3.5 percent and 4.5 percent a year during the next decade (depending

on which variation of the baseline is used). By comparison, total noninterest outlays

grew at an annual rate of 3.4 percent over the 1991–1999 period.

Under each of the alternatives for discretionary spending, the Treasury would

have enough cash on hand sometime between 2007 and 2009 to retire all of the federal debt held by the public. However, because some outstanding debt will not be

available for repurchase, the Treasury would not be able to devote all such funds

to that purpose. CBO’s baseline simply assumes that the Treasury would invest all

of its excess cash at an interest rate equal to the average rate projected for Treasury

bills and notes and would receive dividend or interest earnings from those investments.

THE ECONOMIC OUTLOOK

In 1999, the U.S. economy continued to expand far beyond expectations—yet without any meaningful acceleration in the underlying rate of inflation. Most analysts

expect the economy’s growth to remain strong but to slow at least moderately from

the 4.3 percent annual rate of the past 3 years.

CHANGES SINCE JULY

CBO’s current economic outlook is more optimistic about the prospects for real

growth than the one reported last July. Compared with the July projections, growth

of real GDP and labor productivity is significantly higher, inflation as measured by

the consumer price index (CPI) is unchanged, and interest rates are slightly higher

(see Summary Table 6). Private-sector assessments of the economy’s recent behavior

reach the same conclusion—that the sustainable trends in the growth of labor productivity and real GDP are higher than previously thought possible.

SUMMARY TABLE 6.—COMPARISON OF CBO ECONOMIC PROJECTIONS FOR CALENDAR YEARS 2000–2010

Estimated

1999

Forecast Projected

2000 2001 2002 2003 2004 2005 2006 2007 2008 

Nominal GDP (Billions of dollars):

January 2000 .................................................................................................................... 9,235 9,692 10,154 10,610 11,069 11,544 12,054 12,589 13,148 13,734 

July 1999 .......................................................................................................................... 8,964 9,351 9,751 10,159 10,583 11,027 11,508 12,017 12,554 13,113 

Nominal GDP (Percentage change):

January 2000 .................................................................................................................... 5.4 5.0 4.8 4.5 4.3 4.3 4.4 4.4 4.4 4.5 

July 1999 .......................................................................................................................... 5.3 4.3 4.3 4.2 4.2 4.2 4.4 4.4 4.5 4.5 

Real GDP 1 (Percentage change):

January 2000 .................................................................................................................... 3.9 3.3 3.1 2.8 2.6 2.6 2.7 2.7 2.7 2.7 July 1999 .......................................................................................................................... 4.0 2.4 2.4 2.3 2.3 2.3 2.5 2.5 2.5 2.5 

GDP Price Index 2 (Percentage change):

January 2000 .................................................................................................................... 1.4 1.6 1.6 1.7 1.7 1.7 1.7 1.7 1.7 1.7 

July 1999 .......................................................................................................................... 1.3 1.8 1.8 1.8 1.8 1.8 1.9 1.9 1.9 1.9 

Consumer Price Index 3 (Percentage change):

January 2000 .................................................................................................................... 2.2 2.5 2.4 2.5 2.5 2.5 2.5 2.5 2.5 2.5 July 1999 .......................................................................................................................... 2.2 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 

Unemployment Rate (Percent):

January 2000 .................................................................................................................... 4.2 4.1 4.2 4.4 4.7 4.8 5.0 5.0 5.1 5.2 July 1999 .......................................................................................................................... 4.2 4.3 4.6 4.9 5.1 5.3 5.4 5.5 5.5 5.5 

Three-Month Treasury Bill Rate (Percent):

January 2000 .................................................................................................................... 4.6 5.4 5.6 5.3 4.9 4.8 4.8 4.8 4.8 4.8 July 1999 .......................................................................................................................... 4.6 5.0 4.6 4.5 4.5 4.5 4.5 4.5 4.5 4.5 

Ten-Year Treasury Note Rate (Percent):

January 2000 .................................................................................................................... 5.6 6.3 6.4 6.1 5.8 5.7 5.7 5.7 5.7 5.7 July 1999 .......................................................................................................................... 5.6 5.9 5.5 5.4 5.4 5.4 5.4 5.4 5.4 5.4 

Tax Bases (Billions of dollars):

Corporate profits: 4

January 2000 ........................................................................................................... 840 829 833 829 839 860 885 919 954 991 July 1999 ................................................................................................................. 724 687 725 758 783 814 844 880 915 950 

Wages and salaries

January 2000 ........................................................................................................... 4,475 4,732 4,959 5,183 5,408 5,641 5,890 6,150 6,422 6,706 July 1999 ................................................................................................................. 4,410 4,632 4,810 4,995 5,207 5,431 5,670 5,922 6,187 6,463 

SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor Statistics; Federal Reserve Board.NOTES: Percentage changes are year over year. The projections for nominal GDP and the tax bases are not comparable because of definitional changes in the national income and product accounts (see Box 2–1 in Th

nomic Outlook: Fiscal Years 2001–2010).

n.a. = not applicable. 1 Based on chained 1996 dollars. 2 The GDP price index is virtually the same as the implicit GDP deflator. 3 The consumer price index for all urban consumers. 4 Corporate profits are boo

27

In CBO’s current projections, real GDP grows for the next 10 years at an average

annual rate that is 0.4 percentage points higher than was projected in July. Several

factors account for that increase: 0.2 percentage points stem from a reassessment

of how much of the recent surge in productivity will persist; slightly less than 0.1

percentage point results from a change in the projected growth of the labor force;

and the rest reflects revisions in the measurement of real GDP.

Compared with real GDP growth, the growth of nominal GDP and the categories

of income that are important for predicting revenues (corporate profits and wages

and salaries) did not change as much from the July projections. The reason is largely that CBO’s current projection of the growth of the GDP price index is lower. Furthermore, revisions to the historical data—along with revised outlooks for depreciation, net investment income from abroad, and corporate debt-service costs—have

also reduced the projected growth of those income categories relative to the growth

of GDP.

RECENT ECONOMIC PERFORMANCE

The economy has performed exceptionally well for several years, combining rapid

growth and very low unemployment with declining inflation. Since 1996, the growth

of real GDP has averaged better than 4 percent, compared with an average of about

3 percent since 1973. Because of those 4 years of rapid growth, the unemployment

rate has fallen to 4.1 percent, its lowest level since January 1970. CPI inflation, excluding food and energy prices, had been running at about 3 percent per year earlier

in the decade but was roughly 2 percent over the past year.

Much of the recent good news can be attributed to a surge in productivity growth,

which has allowed the economy to grow faster without raising the rate of inflation.

Low import and (until recently) oil prices, plus a number of other favorable but

probably transitory developments, have also helped suppress inflation. However, domestic demand grew even faster than productivity—boosting employment, tightening labor markets, and raising concerns that recent growth rates may not be sustainable without sparking a rise in inflation.

THE FORECAST FOR 2000 AND 2001

The economy retains considerable forward momentum, but at some point, a slowdown from the recent blistering pace seems inevitable. If tight labor markets push

up labor costs, the best news about price inflation may be in the past. Unless a faster rise in labor costs was offset by continued increases in productivity growth, consumer prices could move upward. Recovery in foreign economies could add to those

inflationary pressures by boosting commodity prices and by strengthening foreign

currencies relative to the dollar, which would raise import prices.

The Federal Reserve has already responded to the threat of accelerating inflation

by increasing the Federal funds rate by 0.75 percentage points since June. Although

those rate hikes may diminish the risk of inflation in the near term, financial markets seem convinced that further increases will occur this year.

For the next 2 years, CBO forecasts real GDP growth of about 3 percent, on average, and a slight rise in the underlying rate of inflation. That outlook would not

cause the unemployment rate to change much in 2000 or 2001 from its current low

level. The core CPI inflation rate (excluding food and energy prices) is expected to

edge up slightly over the next 2 years from its recent pace of 2.1 percent.

In CBO’s forecast, short-term interest rates average 5.4 percent in 2000 and 5.6

percent in 2001. The forecast assumes that the Federal Reserve will boost the federal funds rate by 0.5 percentage points during the first half of 2000 (in early January, financial markets expected at least that large an increase). Thus, the interest

rate on three-month Treasury bills is forecast to reach 5.6 percent by midyear and

remain there through 2001. The rate on 10-year Treasury notes is forecast to average 6.3 percent in 2000 and 6.4 percent in 2001.

PROJECTIONS FOR 2002 THROUGH 2010

CBO projects that real GDP will grow at an average annual rate of 2.8 percent

during the 2000–2010 period. That growth compares with the slightly higher growth

of 3.1 percent for potential output. Since the current estimated level of real GDP

exceeds its potential level, actual GDP must grow at a slower pace than potential

GDP to close the gap.

CPI inflation averages 2.5 percent a year after 2001 in CBO’s projections, and the

unemployment rate averages 5.0 percent. Short- and long-term interest rates are

projected to average 4.8 percent and 5.7 percent, respectively, during that period.

28

UNCERTAINTY OF THE PROJECTIONS

CBO’s baseline projections represent the midrange of possible outcomes for the

economy and the budget, assuming that current policies are not changed. Actual

budgetary outcomes, however, could be considerably different from those projections.

Economic performance and other assumptions that deviate from CBO’s baseline will

surely lead to results that diverge from the numbers presented in this report. Policy

changes will also occur that will alter outlays and revenues; CBO’s projections do

not attempt to take such changes into account.

Experience shows that although CBO’s projection of the surplus for the coming

fiscal year is likely to be within 1 percent of GDP in most cases, discrepancies can

become more substantial over a 5-year horizon. CBO’s 10-year projections have only

been made since 1992, so it is too soon to assess their accuracy. But 10-year projections are likely to be less accurate than 5-year projections.

Many observers believe that a major structural change has taken place in the

economy, and that belief influences CBO’s projections. However, any transition to

a ‘‘new economy’’ would have occurred only in the past few years, which means that

little data about it are available from which to make projections for the next decade.

Moreover, those data are insufficient to say for sure whether a structural shift has

occurred or whether the economy has merely deviated temporarily from its underlying trends, as it has many times in the past. Under those circumstances, projecting

the economy and the budget is even more uncertain than usual.

To illustrate the possible effects of differences from the baseline assumptions,

CBO has produced budget projections under two alternative scenarios that make different assumptions. One (the optimistic scenario) assumes that the robust performance of the past few years will continue indefinitely and that Medicare and Medicaid spending will grow at a rate 1 percentage point slower than in the baseline. The

other (the pessimistic scenario) assumes that the economy has simply experienced

a temporary divergence from stable, long-term trends and will soon return to those

trends—including even faster growth in Medicare and Medicaid. The projections

that result from those two scenarios suggest a very wide range of possible outcomes

for the budget: for example, the total surplus or deficit in 2010 could deviate from

the baseline projections by $700 billion to $800 billion.

Under the assumptions of the optimistic scenario, the budget outlook would improve dramatically. If discretionary spending grew at the rate of inflation but there

was no other action to cut taxes or increase spending, the annual on-budget surplus

under that scenario would exceed $800 billion by the end of the decade, and the

total budget surplus would exceed $1.1 trillion. Projected surpluses that large would

imply that the Federal Government was holding huge amounts of nonfederal assets

(more than $4 trillion). If discretionary spending was held to the lower levels implied by the statutory caps through 2002 or was frozen at the level enacted for 2000,

surpluses would be even larger.

Under the pessimistic scenario, the on-budget surpluses that CBO is projecting in

its baseline would never emerge. Instead, the on-budget deficit would rise to more

than $290 billion a year by the end of the decade. The total budget deficit would

be smaller; if discretionary spending was constrained for the whole decade to the

level enacted for 2000, that deficit would stay under $100 billion.

CONCLUSION

The budgetary picture is bright. Projected surpluses are much larger than the

ones that CBO projected last July. The improved picture largely results from CBO’s

updated economic outlook. But actual budgetary outcomes could be considerably different from the projections. Economic performance and other assumptions that differ

from CBO’s baseline will lead to results that diverge from the projections. Policy

changes will also occur that will alter outlays and revenues; CBO’s projections do

not attempt to account for such changes.

Although the improved budget outlook over the next 10 years brightens the longterm outlook, problems lie not far beyond the 10-year horizon. Between this year

and 2030, the number of retirees will grow by 80 percent, but the number of workers will increase by only about 10 percent. Ultimately, it is not the size of the balances in the trust funds that will limit the ability to meet long-term obligations but

the size of the economy.

Chairman KASICH. Let me just then ask you, Mr. Crippen, we

were in the hearing with Mr. Lew. I was making the point that

there are no programmatic changes in either Medicare or Social Security that extends the life of these programs; is that correct?

29

Mr. CRIPPEN. I believe so, but again, we have not examined the

President’s budget thoroughly, so I cannot tell you what all of the

programmatic changes are.

Chairman KASICH. Let me ask you this: If you put IOUs in the

funds, does that extend the life of these programs?

Mr. CRIPPEN. No, it does not. The trust funds may look better,

but it does not change the program or the important variable of

how much of the economy is being dedicated to those programs.

Chairman KASICH. Your report really reflects—let’s talk a little

bit about this demographic situation in terms of Social Security

and Medicare. How about putting into perspective what happens

the longer you wait—just kind of paint the picture of Medicare and

Social Security, understanding that—I kind of look at Social Security as a program where you can do a reform, where you can slow

the growth in benefits, but on the other side, if you give people private accounts, they have the opportunity over time to more than

make up for what they lost in government promises, which are

empty anyway.

But there is a good news story there. Minority people really get

hurt at all, I think that is a silly thing to even say. The only people

that get a little bit less, at least under the plan I have that I think

will ultimately be—what will be adopted to fix Social Security, this

narrow range of baby boomers, because their private accounts cannot—well, they could actually grow fast enough to make up for the

slowing in the growth rate in benefits, but for anybody, you know,

under the age of 40, they are going to make out like bandits, and

if you are young, you are going to do terrific under Medicare.

So there is a good news story, but I can’t figure out the good

news story under Medicare because the population growths are

high, and I don’t know how you balance these out.

Why don’t you talk about the difference, the need to get onto

those programs, and what we are really facing. Paint a picture for

us.

Mr. CRIPPEN. Maybe one way to think about it, Mr. Chairman,

is that if we are truly going to fund Social Security and maybe

Medicare, our generation should pay twice: once for our parents

and once for ourselves. By paying twice, we would save enough so

that the economy could grow enough to keep us from commanding

more from our children in the future than we are paying to our

parents today. At some point, some generation will need to pay

twice.

Now, we can spread that out. We can certainly leave more of the

burden on our kids by borrowing and not reforming the programs

any time soon. We could try and shift some costs onto our parents

by cutting current benefits, but no one is talking about that. Essentially, the question is, where do you want to place that burden for

finally paying twice and funding Social Security?

Chairman KASICH. Can’t we just grow out of this?

Mr. CRIPPEN. No. Part of the problem is that in order to grow

at all, we need to save more, which means our generation has to

save more now and cut current consumption. Be it public consumption through the government or private consumption, we need to

cut consumption now and save more so the economy can grow faster.

30

Chairman KASICH. Isn’t it true also if you have a Social Security

System that pegs you to wages and prices, that, in fact, the faster

we grow, in a way the deeper the hole is we get ourselves in? Is

that not correct?

Mr. CRIPPEN. It is certainly correct because we index Social Security’s initial benefits to real wage growth, although there is a lag,

which helps, of course, in the process. You could change the objective of the Social Security System from one of maintaining a certain share of earnings to one of preserving purchasing power. If, for

example, you changed the indexation of the initial benefit from real

wage growth to price increases, you would pretty much solve the

problem of the long-term actuarial balance in the Trust Funds.

Chairman KASICH. That is precisely the proposal I have, but it

is also offset, however, by the fact that you can have a private account that you would be able to earn money in, and the longer you

get that account, the more money you earn. The longer it takes us

to enact it, the less money you earn. So that is why we ought to

get about it today.

Mr. CRIPPEN. The more you can increase savings, whether private or public, the faster the economy will grow and the better the

fraction that I described will look.

Chairman KASICH. Tell me about Medicare a little bit.

Mr. CRIPPEN. Medicare is a different story, of course, because Social Security is both simpler on its face and also a lot easier to

project into the future. We know that everyone who is going to collect Social Security in the near term is alive today. And we know

roughly how long they are going to live and what their wage patterns are going to be. Projections are thus much easier to make,

and the program is also relatively stable. In that sense, there are

only two or three variables or levers that you would pull for policy.

In the case of Medicare, and to a lesser extent Medicaid, we not

only have growth in the number of recipients driving the numbers,

as is the case with Social Security, but we also have the growth

in prices of medical care, a rate that is often higher than that of

the general economy, and changes in medical technology and utilization of medical resources. So you have three big components driving Medicare spending and only one, in effect, driving Social Security. And it is those two other components—utilization of resources

through technology, or intensity of use, and the prices of medical

care and pharmaceuticals that are hard to predict and that drive

spending for the program. And it is those components that will

cause Medicare to eventually spend more money than Social Security, and it is those that, as you are suggesting, are probably necessary to get us through to programmatic reform. Simply changing

one of those three streams—namely, trying to control prices—does

not do you much good in terms of controlling the overall cost.

Chairman KASICH. Mr. Spratt.

Mr. SPRATT. Dr. Crippen, you told the Senate Appropriations

Committee, I believe, on January 26 that to have a freeze on appropriations for a period as long as 10 years would require, in your

words, unprecedented restraint. Let’s take two of the paths you

have plotted for discretionary spending and see if there is any

precedent for the level of expenditure of cuts that each of these

paths would take.

31

For example, you assumed—you really had to assume because

you are pretty much bound to assume that Congress will follow its

own law, that Congress would track the BBA or return to the balanced budget agreement and in 2001 drop spending, discretionary

spending, to the level of the cap set by the BBA. As I recall your

report, you indicated that outlays this year, discretionary outlays,

by your calculation was $603 billion. If we return to the caps, outlay caps, in 2001, what sort of outlay cut would be required between this year and next year?

Mr. CRIPPEN. Roughly $30 billion.

Mr. SPRATT. Roughly $30 billion.

And BA, budget authority, that would be, I take it, probably 10

or 15 billion more.

Mr. CRIPPEN. I think because of the advance appropriations, it

may actually be slightly less this time.

Mr. SPRATT. Around $30 billion for both then.

Now, is there any precedent for that?

Mr. CRIPPEN. I was just looking back, Mr. Spratt, to one of the

few times we have had absolute cuts—in 1981 or 1982—and I do

not think it was quite that much. So probably there is no precedent.

Mr. SPRATT. That was one year.

Mr. CRIPPEN. Yes.

Mr. SPRATT. Now, the next year, from 2001 to 2002, if we were

to track the caps, we would have to go down again in outlay terms

by about $10 billion more because the cap drops from around 580

to around 570 in 2002.

Mr. CRIPPEN. Yes.

Mr. SPRATT. That would mean we would have to take a $40 billion reduction in 2002, and there is no precedent for that then, not

even 1981.

Mr. CRIPPEN. Probably not to that extent. Total discretionary

budget authority and outlays have never gone down as much as

you just described, although nondefense discretionary spending

dropped in the 1981–1982 period by about those same magnitudes.

Mr. SPRATT. If we had a freeze in discretionary spending over a

period as long as 10 years, what would be the effect on real spending, real discretionary spending, at the end of that period of time?

Mr. CRIPPEN. It would be a diminution of about 25 percent in

real terms.

Mr. SPRATT. Twenty-five percent.

Mr. CRIPPEN. Yes.

Mr. SPRATT. If we held defense spending constant against inflation, harmless against inflation, over that 10-year period of time,

what would be the real spending decrease in nondefense spending

at the end of the 10-year period of time?

Mr. CRIPPEN. Outlays in 2005 would be 21 percent lower. Over

the 10 years, it would be much more than that.

Mr. SPRATT. Our calculation was roughly 40 percent. Does that

sound right to you?

Mr. CRIPPEN. Yes.

Mr. SPRATT. Is there any precedent for that kind of cut in discretionary spending?

32

Mr. CRIPPEN. Not that I am aware of—certainly not for the cut

over the 10-year period.

Mr. SPRATT. We have done a calculation of nondiscretionary

spending over the last 20 or 30 years, and we found that it has

grown at a pretty constant rate, real and nominal, over that period

of time. Even when there were caps, as there have been since 1990,

there has been a fairly steady incremental growth in discretionary

spending, so it would truly be unprecedented restraint to have that

level of cut in nondiscretionary spending.

Mr. CRIPPEN. It is certainly true, Mr. Spratt, that, on average,

over the period you were citing—say, from on—has discretionary

spending grown. But growth has not been consistent; there is no

steady increase. In some years, spending has been down, in some

years up. We have had cuts in nondefense discretionary spending,

as I said, in 1981 and 1982 of as much as 12 percent in real terms.

So the pattern is variable. I think it helps to reiterate that this is

discretionary spending; it does change from year to year, with no

overall pattern. So that is why in my testimony I said that none

of these baselines are really very satisfying because they do not tell

you what your needs are going to be for next year, nor do they tell

you what programs no longer deserve your support. It is really not

a particularly satisfying exercise to have a 10-year baseline for discretionary spending. Discretionary means just that, and I think the

history of such spending shows that it has, indeed, been used that

way.

Mr. SPRATT. With respect to Medicare, which I mentioned a

while ago, you have assumed continued cost growth, but at a restrained or lower level than historically has been the case with

Medicare. Do you have some concern about the maintenance of this

historically low rate of growth in Medicare and Medicaid, the two

big health care entitlements?

Mr. CRIPPEN. Our concern is not about our projection; obviously,

we can be wrong about the final numbers. But if we begin to add

spending in the intermediate term, that is, in the next 10 years,

it is going to change those programs in ways that we cannot determine today. Again, utilization rates for pharmaceuticals, for example, and technological changes are very hard to predict. My guess

is that actual rates of growth for Medicare and Medicaid will be

higher than the baseline rates of growth we have projected. But we

are not too concerned that the roughly 6.6 percent growth, on average, over the next 10 years would be exceeded greatly under current policy or current laws.

Again, growth in those programs is going to be driven not so

much by my generation’s retirement but by increases in utilization

and prices. So, although those are harder to project, we are not uncomfortable saying that the 6.6 percent is going to be twice that or

half that. After my generation starts to retire, those numbers will

be much, much different, of course.

Mr. SPRATT. Do you think the projection is firmer now than it

has been in the past because more of the categories of benefits are

in prospective payment form rather than reimbursement form?

Mr. CRIPPEN. That has certainly helped; it makes it a little easier

to project more accurately. History is a guide, not an absolute. Last

year, we had a 1 percent reduction in Medicare spending. Nobody

33

believes that that drop is going to be repeated this year or any time

in the future, but nobody predicted it was going to happen either.

If we based our projections solely on last year’s experience, we

would have obviously a very bad prediction of what future costs are

going to be. That is why we use a number of years of program

spending in determining our projections. Our current outlook of 6.6

percent annual growth—we are comfortable with that.

Mr. SPRATT. Still a little iffiness in that assumption, too?

Mr. CRIPPEN. Absolutely.

Mr. SPRATT. Finally, with respect to Social Security, we have had this discussion before. The President proposes taking $300 billion

out of the general fund and over time putting it into the Medicare

fund. Mr. Kasich calls these IOUs. Legally, they are bonds backed

up by the full faith and credit of the United States Government,

and so you might call them an IOU, but the Administrator, instead

of being a political supplicant when his cupboard runs bare, is a

secured creditor. He has got the strongest claim against the Treasury that you can have in our country. That makes it more than just

an IOU. But economically if this is a net addition to national savings, if that $300 billion contribution is an offset against money

that would otherwise be spent and is instead used to pay down national debt or to buy equities in the stock market, invest in the

markets, doesn’t that do something for the life insolvency of Social

Security?

You said for us to grow out of the problem, we have got to save.

If we save more, we can grow more. Wouldn’t this be a net addition

to national saving that might promote growth and therefore help

Social Security?

Mr. CRIPPEN. In the way you have put the question, absolutely.

You are assuming that it is a net addition to the reduction of debt

held by the public. If that is the case, it would certainly add to national savings and could enhance economic growth. It would help

the denominator of that fraction I mentioned, by helping to grow

the economy.

What we have seen in the past, as in last year’s budget, is a situation in which the transfers do not really contribute to a net reduction in debt held by the public. The question is, does the transfer

contribute to a reduction in debt? If so, then it helps with saving.

Mr. SPRATT. Thank you very much.

Chairman KASICH. We have got a vote on—this is the 10-minute

warning. We will go over and vote, come back right away, and finish the hearing. Thank you. We will stand in recess.

[Recess.]

Chairman KASICH. Why don’t we go ahead and start. I would like

to recognize Mr. Smith for 5 minutes.

Mr. SMITH. Mr. Chairman, thank you. And I think maybe the

question, Mr. Crippen, with the combined challenge of Social Security, Medicare and Medicaid, has CBO calculated the increased obligation that will be put on future generations in terms of either

payroll or income tax increases, if we make no changes in Medicare

or Social Security?

Mr. CRIPPEN. By 2030, which is when roughly the end of the

baby-boom generation hits retirement, the amount required to fund

obligations to the elderly will be twice what is needed today—that

34

is, 14 percent of GDP instead of 7 percent. What does that mean?

In today’s terms—if that was the situation you were facing as you

write next year’s budget—it would mean that you would have only

$400 billion left to spend on everything else. To put it another way,

you would have to raise taxes by $600 billion next year to fund

those obligations. We would go from taking 7 percent of the total

output of the economy to taking 14 percent. You could also raise

taxes, increase borrowing, or cut benefits. The policy that is chosen

will affect which generation is paying for what. As I said, one way

to think about it is that my generation needs to pay twice, once for

our parents and once for ourselves. In order to do that, we obviously have to save a lot more and forgo consumption, whether it

is through the government or by ourselves. Of course, we can put

that burden on our kids by ignoring the problem for as long as we

can or by borrowing more. It really has to do with which generation

you want to pay for those benefits.

Mr. SMITH. A combination of your office and Social Security actuaries show that without any program changes, within 40 years we

would have to approach a 40 percent payroll deduction to pay for

Social Security, Medicare, and Medicaid. I am sorry Mr. Spratt

isn’t here. With your permission, Mr. Chairman, I am going to just

shout. Mr. Spratt suggested that it is inconceivable that we can

have a freeze and that we should increase spending with inflation.

But it is obvious that we don’t increase spending consistent with

inflation. Actually we see a downturn in spending compared to the

red line of inflation.

Mr. Spratt, I was just saying that maybe your point that it is

going to be tough to have a freeze, and saying that we should automatically increase spending consistent with inflation is unnecessary. What I was pointing out on this chart is that we haven’t increased spending with inflation and it isn’t necessary to increase

spending with inflation.

Mr. Crippen, I would like to ask you a question on an issue that

is coming up before Rules Committee today, and that is a biennial

budget. With our performance record on not doing a good job guessing what the revenue is 2 years down the road, plus the increased

power that it gives the administration, would you say that having

a biennial budget tends to shift some power over spending from the

legislative branch to the executive branch?

Mr. CRIPPEN. I would have to confess that I have not really

thought about it in those terms. I think it does shift power within

the Congress, among the budget committees, the appropriations

committees, and the authorizing committees, although I am not

quite sure how.

My first reaction is that I do not think that a biennial budget

would shift power much. Presumably, the administration would

present a budget every 2 years instead of every year, so congressional activity in the second year would be enhanced. One of the

things I was talking about with some of your folks earlier was that

the result of biennial budgeting will probably be determined by

what the media decides to cover or what becomes interesting and

newsworthy. In the second year of the cycle, you could see a lot of

oversight by appropriators and authorizers, and that would be the

35

news, as opposed to the President presenting his budget or the

State of the Union address.

Mr. SMITH. Are we good enough guessers on revenues 2 years

ahead of time to accurately have a 2-year budget?

Mr. CRIPPEN. Clearly, we would have to update the outlook at

the halfway mark if you wanted to make adjustments at that point.

We have had trouble in the recent past projecting revenues for a

2-year period, but last year was almost dead on. This year, we are

hoping we will be pretty close, too.

Mr. SMITH. Last year was dead on on revenue projections?

Mr. CRIPPEN. Very close.

Mr. SMITH. Whole 12 months ahead of time?

Mr. CRIPPEN. Not the whole 12 months ahead, but closer to the

end of the year. We are now doing 10-year policy-based projections

where we used to do 5-year ones. We are more comfortable with 2

years than we are with 5 and 10. So I think our projections are accurate enough to do a 2-year budget. Are they going to be precise?

No. You are going to want to review and perhaps adjust things 12

months down the road.

Mr. SMITH. Thank you.

Chairman KASICH. Ms. Rivers, you are recognized.

Ms. RIVERS. I was listening very carefully when you were answering Mr. Smith’s questions about Medicare and Social Security

and the long-term solvency of them, and you said at one point we

better by saving a hell of a lot more now than we are. If you look

at it from that perspective, what would the effect of, say, the $1.7

trillion tax cut Governor Bush is proposing or even the $8 trillion

proposed by Republicans in the House, what would the effect of

that be in our efforts to deal with Medicare and Social Security

over the long haul?

Mr. CRIPPEN. It would depend on what your assumption is about

the alternatives.

Ms. RIVERS. Loss of revenue; what would the loss of that kind

of revenue do?

Mr. CRIPPEN. If it were to be spent on something else, it might

have no effect——

Ms. RIVERS. If it were not, if it were going to be used to pay

down the debt.

Mr. CRIPPEN. If we saved all of it, as I said in my testimony, by

the end of the decade we could pay off the debt, and the additional

savings would help Social Security.

Ms. RIVERS. So having a tax cut would make it harder, and not

having a tax cut and not spending the money would make it easier

to deal with Medicare and Social Security?

Mr. CRIPPEN. Let me retreat into economist talk. The one thing

most economists agree on is that if you save the surpluses, the

economy will grow faster. If the economy grows faster, it will be

easier to pay the obligations owed to my generation. After that,

there is a division of the house. A tax cut of one kind might help

economic growth; a tax cut of another kind might not. As the

Chairman pointed out, there may be spending programs that help

economic growth, and there are certainly those that probably do

not. You cannot make a broad-brush statement—or, rather, I am

unwilling to make the broad-brush statement that you just made.

36

Ms. RIVERS. The other question I have, this is my sixth year, and

I was in State government before that, and the idea that we can

bring down spending by large amounts by ferreting out waste,

fraud and abuse, which is one that gets floated all the time. Do we

have any historical data that suggests how successful these efforts

have been in the past?

Mr. CRIPPEN. We have no data that you would find satisfying;

they are not very precise. Let me use one example from recent history, and that is in Medicare. It is quite apparent that the efforts

the Clinton administration has undertaken to increase compliance

with Medicare regulations have had a profound effect on spending.

How much is open to question because we do not know exactly how

much of the drop in spending is due to those efforts and how much

is the result of a change in——

Ms. RIVERS. But we also know that the legacy of that broadbased account, that sort of meat-axe approach, was that home

health care providers, hospitals that were doing nothing wrong,

that were not operating in any way in a wasteful, fraudulent or

abusive manner, found their overall costs cut, and they were unable to deliver services. So when you have a flat cut as opposed to

ferreting out specific problems, don’t you create other kinds of consequences?

Mr. CRIPPEN. You can; however, the waste, fraud, and abuse effort—and I use those terms advisedly—for Medicare was not really

the same thing as the cuts in payments implemented by the Congress and the Balanced Budget Act. The payment cuts had a different purpose—some were intended to save money and some to

change the payment policy. The assault, if you will, by the administration on noncompliance in Medicare did not have anything to do

directly with the BBA’s changes. The things they have done to enforce compliance have become quite public.

Let me give you an example. Medicare had a long history of aggressive billing by hospitals for particular conditions—that is, the

more expensive conditions were showing up more often. After the

administration began their compliance efforts, that trend reversed.

Ms. RIVERS. My understanding is the cuts in home health care

were specifically directed at abuse in a minority of States, and that

there was a meat-axe approach used to cut funding across the

board for everyone in an effort to deal with these specific States,

which is sort of what is being proposed for the budget. Make a big

cut, everybody has to live with it, and maybe we will get the fraud

and waste and abuse; and if we don’t, well, we will still save some

money. Isn’t that analogous?

Mr. CRIPPEN. There could be some unfortunate outcomes when

spending is cut across the board. But spending restraint does not

have to mean an across-the-board cut. For instance, our freeze

baseline variation, or even the capped baseline version, is only a

top-line amount. It does not assume that spending for every program is frozen at this year’s level. It just assumes that in total,

when you add up all spending for the year, that it is frozen roughly

at the 2000 level of spending. That is why we call such spending

discretionary, so that it can go up and go down for particular programs. Our frozen baseline variation is just a top-line assumption;

it does not assume across-the-board cuts in individual programs.

37

Ms. RIVERS. The last question I have, since I have always had

reservations about the projected surplus, I wonder if the cartoon

you chose to bring us today is to remind us we shouldn’t be too

sure about your projections either?

Mr. CRIPPEN. That is certainly true. I brought it because I

thought it was somewhat appropriate to our discussion. In the volume we just released, ‘‘The Budget and Economic Outlook: Fiscal

Years 2001–2010,’’ Chapter 5 is entitled ‘‘Uncertainties.’’ In it, we

highlight a number of the factors that we are unsure about and,

in fact, develop two different scenarios of assumptions about spending and the economy that could produce surpluses greater than we

are now projecting or smaller than we anticipate. The farther out

you project, the more uncertainty there is; 10 years is a long time

to project anything—the economy or government policy.

Ms. RIVERS. As we look at decisions that have long-term consequences, how firm is the footing on which we are making decisions that are going to play out 5 and 10 years from now?

Mr. CRIPPEN. Well, let’s take Social Security as an example. We

know a little more about Social Security in the future than we do

about many other programs because we know, for instance, roughly

how many people are now alive and are going to retire. And we

know about factors that will influence spending growth in such programs over the long term. But short-term projections of spending

and tax revenues are more uncertain. Discretionary spending has

gone up, then gone down; taxes have gone up and gone down. Of

course, the politics of an issue might make it difficult to reverse directions or do something else, but clearly, the history of the budget

shows that we have had both tax increases and tax cuts, spending

increases and spending cuts—for example, the BBA’s home health

care.

Now, I am not saying that you should hesitate to do something

because 10 years from now we do not know what the situation is

going to be. There may be current spending needs that should be

funded or tax cuts that would be appropriate and that indeed,

might help long-term programs by growing the economy more

quickly. The uncertainty of the projections, although they might

suggest the need for caution, obviously should not prevent you from

taking action you think is appropriate.

Ms. RIVERS. Thank you very much.

Thank you, Mr. Chairman.

Chairman KASICH. Mr. Hoekstra is recognized.

Mr. HOEKSTRA. Good morning.

Mr. CRIPPEN. Good morning.

Mr. HOEKSTRA. Words make a difference. Benchmarking makes

a difference. I chair a subcommittee of oversight, and we have oversight over the Education Department, about $35 to $40 billion of

discretionary spending annually. They also manage a loan portfolio

that runs into the billions of dollars. In 1998, they couldn’t audit

their books. I don’t know if you factor that kind of information in

or not when you put these numbers together, but you have got an

agency out there that makes up $35 billion of your discretionary

number, and they can’t really tell us how much money they spent

or where they spent it.

38

If we benchmark that Department against the Pentagon, it is

kind of like, hey, they are doing a great job. If we benchmark them

against the private sector, and we just met with Ernst & Young

yesterday, they said their performance for 1999, while improved,

would still be somewhere in the C minus to D minus range, and

if they were listed on the Securities and Exchange Commission,

they would be—or if they were listed—they would be in trouble

with the Securities and Exchange Commission for that kind of performance.

The question I have is your CBO baseline budget projections, assuming that discretionary spending is frozen, there could be another title on there, it saying that perhaps you could deliver the

same services at these dollars or if you had roughly a 2, 21⁄2 percent productivity enhancement; is that correct?

Mr. CRIPPEN. Yes, absolutely.

Mr. HOEKSTRA. Because one of the things that—I have got a lot

of automotive suppliers in my district, and I can tell you that none

of them build in discretionary—excuse me—build in automatic inflationary increases to any of the automotive companies. A lot of

them actually go in the other direction. If they are building a product today that they are getting a dollar for, they have got contracts

into the future that say next year you will deliver an improved

product with enhanced features, and you will do it for 95 cents, and

in the third year of the contract you are going to be doing it for

92 cents.

So how do you—the Education Department, I take a look at them

and they tell me how they try to keep their books, and it sounds

like a monastery with monks copying Holy Scripture in 500 or 600

A.D. They close their books and they bring in outside contractors

to manually reconcile their books and bring it together, and, again,

when you benchmark that against the private sector, it is like,

wow, why do you use the term ‘‘freeze’’ instead of ‘‘productivity enhancement’’? Could they be identical?

Mr. CRIPPEN. Sure. If you had an adequate productivity increase,

you could have the same output even though spending was frozen.

It is a nomenclature that we did not just develop this year—it has

been around for a while. Let me piggyback some comments on what

you said. I mentioned earlier that we do not account for any productivity increases, although I suspect there are some in the public

sector. They may not be as great, perhaps, as the private-sector examples you are citing, but there should be some. I can look around

CBO and see increased productivity in the fewer clerical support

people we need and the better use we are making of resources in

other areas.

But a freeze does not tell you about the programs that should or

should not be funded; it just suggests a number to look at. And

what we are doing with a baseline is trying to give you a set of

numbers that over 1 year or 5 or 10 years gives you a sense of

where we are headed. It is just very hard to do with discretionary

appropriations because you change them from year to year, which

is the nature of the beast and should be.

The question is, what is the best measure, or benchmark, for discretionary appropriations? It may well be that the freeze baseline

variation, which holds spending to last year’s enacted appropriaVerDate 11-SEP-98 20:45 Mar 23, 2000 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\106-8\HBU047.000 HBUDGET1 PsN: HBUDGET1
39

tions, is the best benchmark, at least for the near term, because

it gives you the most recent programs you funded, presumably deservedly, and it also gives you the last analysis anybody did of the

existing system.

I think any baseline projecting discretionary appropriations over

10 years is a very iffy proposition. But whether you start with last

year’s appropriation levels as your base or whether you assume

some productivity increases, it is important to recognize that underneath that big number we give you are lots of programs that

you need to examine, presumably on an annual basis. That is why

they are discretionary.

Mr. HOEKSTRA. When I take a look at—only in government

would we think that benchmarking off of last year and putting in

an automatic inflationary increase is the most reasonable way to

go. That is not the world that my constituents live in in the business world. They take a look each and every year. They take a look

at new technology and say, hey, if we incorporate this new technology, we will be able to deliver a better quality product at a higher service level at a lower cost, and so overall we can give a better

degree of service to our customers, and we will lower our costs and

our prices at the same time.

Mr. CRIPPEN. The Congress enacted a program—I think, 7 years

ago—under the Government Performance and Results Act that has

spent the past 7 years developing program objectives and ways to

measure whether those objectives are being met. I believe the first

round of reports from the agencies are due to the Congress at the

end of next month. So there should be ample material there for the

Congress to take a look at to see how well the programs are performing, what are their objectives, how are they doing. You could

also have the departments come up and talk to you about the programs. In that sense, you have, I think, a very new and very good

opportunity to do what your private-sector constituents do.

Mr. HOEKSTRA. Thank you.

Mr. GREEN [presiding]. Mr. Minge, questions?

Mr. MINGE. Thank you, and thank you, Mr. Crippen, for being

here. I would like to focus on the question of debt reduction and

how that factors into the projections and the activity that is currently taking place here in Congress. And it is my understanding

that you and Chairman Greenspan really—the consensus position

of the economists and public policy experts that have been analyzing the Federal budget is that the surpluses that we are beginning

to realize have contributed to holding down interest rates to economic growth and to the soundness of our economy, and I am assuming that you share this position.

Mr. CRIPPEN. Yes.

Mr. MINGE. It is also my understanding that you recognize the

risks inherent in multiyear forecasts, especially 10-, 15-year forecasts, and I understand if a 10-year forecast like we are talking

about at this point is off by 1/10 of a percent each year, that the

cumulative effect over that 10-year period on the Federal budget

would be in excess of $200 billion. So either we would have $200

billion more or, heaven forbid, $200 billion less. And we have seen

some fairly significant swings here in the forecast, as you already

recounted, in the last 7, 8 years, and it has all been on the upside,

40

so it gives us reason for optimism, but you have tried to maintain

some sort of pessimistic estimates in your own forecast.

My concern is that if we were to come up with a bold new entitlement program as opposed to even just a modest expansion of the

current program and lock that in place in reliance on this 10-year

forecast, you would probably caution us that that is not a prudent

move if we are committed to having a surplus over this 10-year period of time. Would I be correct in that?

Mr. CRIPPEN. I think so. It depends on the size and the nature

of the entitlement program you are talking about. If the range of

expenditures was $10 billion to $100 billion a year, you would have

to worry about it. If expenditures were pretty well circumscribed—

$10 billion to $15 billion a year, for example—and you could predict

with some certainty that that spending would not grow quickly to

$100 billion, you would have a different story. If you were proposing a new entitlement program that would spend $100 billion a

year, you would certainly have to be very cautious about how much

of the surplus you would have left to dedicate to paying down debt.

Mr. MINGE. And certainly many of us share that concern, and I

know this is a part of the debate over prescription drug coverage,

can it be contained, will it grow, how can you contain it and so on.

And one other aspect of this is on the revenue side, and I expect

that you would share that same concern if a new tax approach was

locked in, what is the impact on that over a 10-year period of time

on the revenues that are needed to finance Federal operations.

Mr. CRIPPEN. As I said to Ms. Rivers earlier, the one thing most

economists do agree on is that paying down the debt is generally

helpful for the economy. After that, there is no consensus on

whether cutting taxes or increasing spending would be just as or

more helpful. In fact, there may be spending on education, for example, that could help the economy grow more than would paying

down debt. There could be tax cuts that might help the economy

grow more. But economists as a group do not have a clear view of

exactly how that would go.

One thing I did say to Ms. Rivers, too, is that because of the uncertainty——

Mr. MINGE. I was here when she asked those questions, so rather

than revisit those, what I would like to conclude with is an observation based upon what I have seen at the State level. In Minnesota, and I expect in many other States, as these surpluses have

rolled into the State treasuries, they have established rainy day

funds, first to make sure that they have a hedge against a bad

year, if they have a bad year the next year or two, and then secondly, they have had some modest program expansion. Third, they

have had tax refunds, which have been curious to me because instead of making changes in the tax code that would be carried forward from year to year, they start by having a rebate. And I am

just wondering if you could give us any observation on whether or

not what the States have been doing is something that we should

be paying more attention to as opposed to spurning that and insisting on long-term changes in the Tax Code itself, and certainly before these surpluses have even begun to roll in.

Mr. CRIPPEN. It is an excellent point but not, unfortunately, one

that I know much about. We may well have some folks in CBO’s

41

State and local budget analysis section, though, who pay more attention to it. I have read that States are anticipating cutting taxes

again this year, because, as you say, surpluses are growing. I have

not thought about the different effects of rebates versus changing

the Tax Code, but we could certainly take a look at that.

[The information referred to follows:]

TAX ACTIONS TAKEN BY STATES IN TIMES OF SURPLUS

INTRODUCTION

Facing sluggish economies in the late 1980’s and early 1990’s, states took a number of actions that bolstered their finances and created opportunities for present

surpluses. States established rainy-day funds, or some variation of them; they cut

spending and reformed many of their programs; and a number of states increased

taxes. Because of the danger of overextending themselves in the future, states did

not take dramatic actions to reduce early surpluses. Instead, they hedged against

overcommitting themselves by using surpluses in limited, yet productive ways-by increasing rainy-day funds, spending funds for one-time infrastructure improvements

or program formulation, and enacting limited or phased-in tax reductions. However,

with surpluses occurring year after year, states began to reduce taxes in various

ways, including multiyear cuts in tax rates and other adjustments to deductions and

exemptions. In 1999, 31 states cut income taxes in some way; 28 states will reduce

them in 2000. Some states have also continued to provide periodic tax relief through

rebates.

TAX REBATES AND ONE-TIME RATE REDUCTIONS

Tax rebates can provide a one-time tax reduction without changing the underlying

structure of state taxing authority. Through rebates, states give money back to taxpayers, although they may create a Federal tax liability for people who itemize their

deductions if they return the money through a state income tax rebate. Consequently, some states base their rebates on sales taxes. Such rebates take a number of forms but are usually available to all state residents and, on occasion, to some

out-of-state residents who can prove that a sales tax liability occurred. Sales tax rebates are often tiered amounts, ranging from $30 to $500 in some cases, depending

on the state and the total amount designated for rebates; they are provided to most

adult residents of the state. In most instances, states use their own income tax data

to provide the rebates, although on occasion, they may use additional Federal databases from the Internal Revenue Service or the Social Security Administration. For

rebates based on income taxes, the state may require a simple form, or it may determine the amount on the basis of existing records. However, income tax rebates are

not always based solely on income tax liability; marital and household status may

be a factor as well. Six states will provide tax rebates or one-time rate reductions

in 2000 for prior tax years.

Constitutional Rebates. In Missouri and Colorado, provisions of the state constitution require rebates when revenues exceed either estimates or some other defined

level or cap. Missouri will rebate $178 million in taxes because revenues exceeded

a cap on growth established in state law. Colorado will rebate $679 million because

of constitutionally established limits on revenue and spending growth. Oregon may

have rebates in the upcoming year, but because the state budgets biennially, rebates

would not occur until the end of the 2-year budget cycle.

Legislated Rebates. Three other states have provided rebates through annual legislative action, despite no governing requirement in existing law or in their state

constitutions. Connecticut, Minnesota, and Wisconsin have rebated $118 million,

$1.3 billion, and $700 million, respectively. To avoid a Federal tax liability for taxpayers and an adjustment to a prior year’s itemized deductions, the states returned

that money in the form of sales tax rebates. (Another rationale for providing sales

tax rebates is that they can reach a larger part of the population.) Before its most

recent rebate, Minnesota had provided tax rebates based on the amount of property

taxes that an individual had paid. A person could claim the rebate by completing

a line on his or her income tax form.

42

TAX REBATES

[In millions of dollars]

State Rebate year 1999 Type 1 Rebate year 2000 Type 1

Colorado .......................................................................................... 530 I 679 I*

Connecticut ..................................................................................... 102 I 118 S

Minnesota ........................................................................................ 468 P 1,300 S

Missouri ........................................................................................... 319 I 178 I

Oregon (Biennial) ............................................................................ 167 I n.a. n.a.

Wisconsin ........................................................................................ n.a. n.a. 700 S

1 I = income tax rebate (for Colorado in 2000, this amount also includes a business personal property tax rebate, as indicated by the as- terisk); S = sales tax rebate; and P = property tax rebate.

One-Time Rate Reduction in Ohio. Ohio adjusts its income tax rates annually on

the basis of prior-year surpluses, a unique way of providing tax relief on an annual

basis. After meeting a number of funding requirements for rainy-day funds, special

reserves, and spending priorities, the state determines the total surplus accruing at

the end of the year. That surplus is returned to taxpayers by adjusting baseline tax

rates. Each tax bracket is reduced by the percentage that the prior year’s surplus

exceeds projected revenues for the upcoming year. By that method, Ohio will provide

$293 million in tax relief by reducing its baseline tax rates by 3.6 percent. That approach accomplishes the same goal as more common rebate programs; however, it

can create problems with public perceptions. A large surplus one year might necessitate a large cut in the tax rate, whereas a lower surplus the following year would

cause tax rates to increase-even though those rates are lower than they would have

been under the baseline estimate.

Unlike permanent reductions in tax rates or changes to exemption status and deductions, tax rebates do not automatically recur. Rather, they depend on excess revenues and most often require some form of legislative action. They also allow lawmakers to provide a form of tax relief without raising the possibility that tax rates

will have to be increased at some later date when spending pressures increase or

revenues fall.

OTHER TAX CHANGES

Although tax rebates may offer states greater flexibility in the future compared

with permanent changes to their tax systems, recurring surpluses over the past few

years have led many states to make such changes. Fifteen states made significant

net tax cuts in 1999, after 21 states took similar action in 1998. Since income and

sales taxes provide the majority of state revenues, it is not surprising that those

taxes saw the greatest reductions. Nine states cut income tax rates for the 2000 tax

year, and seven states raised exemptions or the amounts allowed for standard deductions. Twenty-three states made some type of reduction in sales or use taxes.

TRACKING CHANGES IN STATE TAX POLICY

Both the National Association of State Budget Officers and the National Conference of State Legislatures publish annual updates on state tax and budgetary actions. The Center for the Study of the States (located at the State University of New

York at Albany) also publishes regular summaries of states’ revenue experiences

and changes in their tax laws.

Mr. MINGE. I would appreciate receiving some advice and guidance from CBO on this because the States have had these surpluses for several years, and so they have struggled with this, and

at this point they are beginning to change their tax codes. But at

least the first couple of years my observation is that they were focusing on rebates and other approaches to this, and similarly they

were cautious about embracing new programs which under at least

current leadership it doesn’t appear we are at much risk of doing.

So that, I think, would be helpful. The States, so to speak, are a

laboratory for experimentation, and we can certainly learn from

watching what they have done and whether or not it has been successful.

43

Mr. CRIPPEN. Fortunately for the citizens of Alaska, they have

been giving back revenues for a long time. We have some examples.

Mr. MINGE. Thank you very much.

Mr. GREEN. Mr. Gutknecht, please.

Mr. GUTKNECHT. Thank you, Mr. Chairman.

Thank you, Mr. Crippen. It is always good to have you here. I

do check your Web site from time to time, and I am sorry I haven’t

checked it for the last month or so, but the first 2 months of the

fiscal year, revenues were running ahead of last year by 7 percent.

Are we roughly at that level today?

Mr. CRIPPEN. We are still above what we had projected at this

point, but these early months are quite variable compared with

some of the others. So it is clearly too soon to tell, but we are

above, not below, what we had anticipated.

Mr. GUTKNECHT. Under your model—and I know everybody likes

to look out 5 years and 10 years, and frankly, as the weatherman,

they don’t do a very good job predicting what is going to happen

tomorrow let alone what is going to happen 5 years from now. This

year what are you assuming for economic growth?

Mr. CRIPPEN. I believe it is 3.3 percent. I could check that for

you.

Mr. GUTKNECHT. But that is—you are still being relatively conservative compared to what we are seeing?

Mr. CRIPPEN. Yes.

Mr. GUTKNECHT. I want to go back to another point, and this is

as much a comment as a question in response to what some of my

colleagues have said. I think we need to change the whole way we

look at this, and our job as a budget committee, as far as I am concerned, is to bake the bread like the little red hen. We have got

to create the surplus. I have said if we could simply do this, if we

could limit the growth in total Federal spending to no more than

the average growth in the average family budget—in other words,

the Federal budget should grow no faster than the average family

budget, and that is running a little over 3 percent right now, and

I think actually next year we can do a little bit better than that.

We can actually come in under that number. I believe if we do that,

we are going to guarantee strong economic growth and significant

surpluses as we go forward.

I want to go back to a point. When people say we can’t limit the

growth in Federal spending or we can’t freeze Federal spending, we

are going to have a meeting tomorrow, and I hope all of my colleagues will come and take a look at how much, as far as I am concerned, waste is still in this Federal budget.

Let me just throw out a couple of things. Last year we spent $1

billion on construction projects in Europe for the Army, the military, to defend Europe from whom? I mean, at some point we have

to ask who are we defending Europe from? Last year we spent over

$9 billion in the Balkans. Again, there was supposed to be burdensharing between us and our allies. I haven’t seen it.

We are currently, just in Medicare alone—let me just give you

a few numbers, Mr. Crippen. We sometime have to start calculating this. Let us take one drug, Coumadin. If you buy it in the

United States, the price is $35.25. If you buy that drug in Europe,

it is $2.85. I can go on to a long list of what we pay for prescription

44

drugs in the United States, and ultimately it costs the taxpayers—

right now, back in the envelope calculations we could save $1.8 billion in Medicare alone, not even including what we pay through the

VA for drugs, if we just simply could get somewhere close to the

world price of prescription drugs.

Let me talk about some other areas where I think there is just

enormous waste. As my colleague from Michigan said, the Education Department is a $38 billion company, which, for the second

year in a row, our own General Accounting Office says their books

are unauditable. At some point we on the Budget Committee have

to demand some accountability.

I raised the issue last year when the representatives from the

Pentagon were here, because I have heard this and it has yet to

be refuted. We currently have more generals and admirals than we

had at the peak of World War II when we had 16-1/2 million Americans in uniform. We have become so top-heavy, and yet we can’t

find any savings. In my opinion—and this report is filled with even

more examples. The Pentagon is still spending, one example,

$75.60 for set screws that American consumers would buy for 57

cents.

I mean, I think we on this committee have to take a very tough

stand, and the argument that we can’t balance the budget or we

can’t provide tax relief or we can’t freeze spending, discretionary

spending, I think, is outrageous, and I think when the American

people begin to realize how much, whether it is the Pentagon, the

Department of Education, do we need 6,000 people in the Department of Housing and Urban Development, I think that is a legitimate question, and somebody ought to be asking it, and I think it

ought to be the members of this committee, because if we do, and

if we get better answers and better accountability, I think we can

balance the budget. I think we can save Social Security. I think we

can pay down debt. And I think we can have tax relief that helps

families keep more of what they earn.

That is an editorial statement, but, Mr. Chairman, I hope more

of the Members will be here tomorrow to go through this report

and just see how much waste and mismanagement is still embedded in this Federal budget, and I think once they do, they will

come to the same conclusion. We can balance this budget, and we

can freeze discretionary spending if we have the courage to say no

to some of this waste.

I yield back my time.

Mr. GREEN. I think the session tomorrow will be very interesting.

Before we proceed, I would like to ask unanimous consent that

any questions may be submitted for the record.

Mr. GREEN. And without objection, we will proceed on questions.

Mr. Bentsen.

Mr. BENTSEN. Thank you Mr. Chairman.

Mr. Crippen, good to see you. I thought for a second my colleague

from Maine, Mr. Allen, was my colleague from Minnesota, Mr.

Minge, when he was talking about drug prices and whether or not

we ought to impose some price controls, maybe some European

Union-type model or something, but I won’t go any further on that.

I want to reference my questions back on the discussion of what

the baseline is and what our future fiscal policy should be because

45

that is really what we are talking about. I would reference you

back to last year’s markup of the fiscal 2000 budget resolution,

which ended up going nowhere. I am going to bring this up all

year, but I did offer an amendment last year that would have frozen spending at the caps per the 1997 BBA and dedicated all surplus, on- and off-budget surplus, to debt retirement. That amendment was not unanimously, but almost unanimously, rejected by

Republican and Democrat alike. So when my colleagues talk about

us being able to do this, I would remind them that they were given

an opportunity and failed.

CBO uses a criteria dealing with behavioral compliance in the

Medicare baseline. In a second, I will talk about the Medicare baseline, but right now I want to talk further about the table that our

Chairman put up there. If you were to apply that type of formula

to congressional action in your budget projections and extrapolate

what the trend has been for Congress over the previous 3 to 5

years in discretionary spending, what would your baseline look

like, because according to your testimony it certainly wouldn’t be

a freeze. In some instances, it would certainly be somewhere at or

above the rate of inflation, is that correct?

Mr. CRIPPEN. It depends on which 3 or 5 years you choose.

Mr. BENTSEN. Let’s just talk about, say, fiscal 1995 through fiscal

1999.

Mr. CRIPPEN. Because spending in 1995 was lower, you probably

have essentially a freeze since then.

Mr. BENTSEN. Nominal freeze?

Mr. CRIPPEN. Yes, nominal. This shows the sensitivity of what

base you use. Because there was an absolute reduction in discretionary spending in 1995, by including that year you show that a

freeze is possible. By leaving out 1995, you may suggest that a

freeze is not possible, which belies the variability in the underlying——

Mr. BENTSEN. You said a nominal freeze. A nominal freeze assumes the rate of inflation.

Mr. CRIPPEN. No. Nominal without inflation.

Mr. BENTSEN. So it did assume the rate of inflation.

Mr. CRIPPEN. It did not.

Mr. BENTSEN. So are you talking about a real freeze.

Mr. CRIPPEN. Again, if you choose a different time period, you

will get a different answer. The point I would like to make is simply that discretionary spending has gone up, and it has gone down.

Over the past several years, it has gone up.

Mr. BENTSEN. But the valley was hit in 1995, and since then, we

started to ramp back up, right?

Mr. CRIPPEN. Yes.

Mr. BENTSEN. So, if you looked at the behavioral experience of

Congress on the discretionary side, then you would say it is less

than likely that they are going to follow a real freeze in the future.

Now, through your testimony you show a rampdown, a dramatic

rampdown in discretionary spending as a percentage of GDP from

1960 to today, dramatic rampdown certainly from 1980 to today,

and a dramatic increase in mandatory spending. I would just note

that for all that we hear about how government is strangling the

American economy and how terrible things are as a result of it, it

46

is ironic that you look and see how little discretionary spending is

of the gross domestic product, particularly nondefense discretionary

spending. I might add that it is hard to find the period of economic

growth that compares to the current recovery cycle, certainly in the

postwar period and even in the last century. So it certainly has not

caused a recession or a depression or controlled growth to such an

extent that it is killing the American economy. I think maybe we

should also not just focus so much on what we would do on the discretionary side, because, as I see it, our experience on the discretionary side of trying to achieve a real freeze is not particularly

good.

But in Medicare, as I read it, the Medicare baseline from 1997

to today has changed dramatically. Since the Balanced Budget

Amendment in 1997, the baseline has decreased by about $100 billion over 5 years and is projected to decrease even more. First, I

want to know how did CBO miss that reduction, because we relied

upon you when we formulated the BBA in 1997?

Second, virtually all of us on this committee have heard from

hospitals about the cuts, I probably have more hospitals than anybody else in a district. Last year we had the BBA give-back bill,

and we put back about $15 billion over 5 years. What is to say that

Congress won’t at some point put back more of the BBA? There are

about a dozen bills that have been filed, including bills from very

influential committees. Should we not, when we look at these surplus figures, be taking a very hard look as to whether or not Congress may decide to go back to what the projected 1997 BBA baseline was for Medicare?

Mr. CRIPPEN. There are two questions here. One is, what happened to CBO’s 1997 estimates? The second is, how much of that

is factored in or should be factored in for the future? The 1997 estimates may well be accurate. That is to say, the change in policy

that the BBA instituted may produce roughly the savings that we

estimated at that time. Other things have changed as well since

then, a principal change being what has happened with the initiatives by the administration to increase compliance with Medicare

law and regulations.

As I mentioned earlier, we are getting some effects out of the

compliance efforts that we did not expect in 1997 and that does not

have anything to do with the BBA. So it is not just that the policy

changed in 1997. There are other things that have happened that

are causing Medicare to spend less than we projected in 1997.

Home health care was mentioned earlier. The law that you passed

limited the average payment per beneficiary under the interim payment system. What many home health providers did was cut off

services to patients who reached the per-beneficiary limit, which

lowered average payments below the allowable limit. So the implementation had a little different effect than anyone had anticipated.

The primary point, though, is that other things happened in addition to your policy changes. So it is not——

Mr. BENTSEN. But if we were to reverse the policy——

Mr. CRIPPEN. You would not get all of that spending back.

Mr. BENTSEN. Any we get back obviously is going to adjust the

Medicare baseline, and it is going to take it out of the hide of the

47

projected surplus. We should be cognizant of that, given our earlier

actions.

Mr. CRIPPEN. Right.

Mr. BENTSEN. Thank you, Mr. Chairman.

Mr. GREEN. Ms. Hooley, questions.

Ms. HOOLEY. Yes. Thank you.

Thank you for coming today. I am looking forward to your coming in another month when you have actually finished your job.

Mr. CRIPPEN. So am I.

Ms. HOOLEY. I come from the State of Oregon, and I can remember in 1979 when we were going great guns in our economy, and

all of a sudden without any warning in 1981 the bottom fell out

of our economy, and we made huge cuts. It was a tough time in

our State, and we spent about 6 years getting back on track. So

I have—when I see huge new proposals that would really have

huge impacts for future on the budget, I get very nervous about it,

knowing how quickly your surplus can disappear.

And I think there is agreement in this group and with you that

paying down the national debt should be a priority, and you talk

about it would promote private investment and therefore increase

our productivity and spur faster economic growth. I think the problem is just how much do we need to do to pay down that debt.

The President has proposed that we should use the bulk of the

surplus to pay down the debt. Greenspan has argued, and you saw

it up on the chart, that we need to pay down our debt. My question

is do you agree that using the bulk of our surplus to pay down the

debt should be our number one fiscal priority, and how much would

you use?

Mr. CRIPPEN. Relative to your first question, as economists, we

would say yes, we think paying down the debt will help economic

growth and therefore long-term budgetary problems. I have no answer as to how much. If we look at Social Security, for example,

or the Nation’s long-term obligations, it is clear that even if we

saved all the projected surpluses, they would not be enough to fulfill the obligations that we now have on the books to my generation. We are still going to be taking more out of the economy in

2030 than we are today for retirement and other programs for the

elderly.

But that is not to say that you may not find priorities that are

more important than economic growth. You may find other ways to

grow the economy that have little to do with saving—with paying

down the debt. This is not an absolute in which you can say saving

$2 trillion is enough, or saving $3 trillion is more than enough. In

some absolute sense, all of it is not enough. It depends on what

your objective is.

Ms. HOOLEY. Your analysis concludes that if we maintain a zero

real growth spending level over the next 10 years, that our onbudget surplus will be a little over $800 billion, right?

Mr. CRIPPEN. Right.

Ms. HOOLEY. If we adopted a zero growth spending on the discretionary budget, do you think we could continue to make substantial

progress in paying down the national debt?

Mr. CRIPPEN. No matter which of these baseline variations you

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pluses in Social Security alone. That means that if we do not cross

this line we have established between on-budget and off-budget

surpluses, we will have at least $2.3 trillion in debt paid down.

Anything above that is obviously helpful as well. So no matter

which of these variations you want to assume, you will have substantially paid down $3.6 trillion in debt, $2.3 trillion out of Social

Security alone. I do not know if that has been responsive to your

question.

Ms. HOOLEY. Representative Minge brought up looking at some

of the States’ programs and what they have done. We have a

unique program in our State, and some people would think it is

good, and some people not good, but it really depends on the projections, whether they come true and whether or not there is a refund

or not a refund. And it is a way of—because of the uncertainty with

any projection, it is a way of dealing with the budget, giving the

money back to the people without changing your tax code. And

again, I am going to recommend that you—that someone on your

staff maybe look at some of those programs out there that States

have been successful in doing that. Thanks.

Mr. GREEN. Mr. Gutknecht.

Mr. GUTKNECHT. Mr. Chairman, I want to come back to a point

that was raised. I won’t debate who has more hospitals in their district, I or Mr. Bentsen. My hospitals have been quite noisy regarding the Medicare cuts. And one of the questions I had for them was

how much were you cut, and the answer I keep getting is, I don’t

know, but it was a lot.

So we went to the Health Care Finance Agency and said, well,

how much in aggregate were hospitals cut? And their answer was

something like, well, we don’t think they were cut, that they actually got about a 6 to 6-1/2 percent increase. I said, well, just give

me the numbers. They can’t give me the numbers. They don’t have

the numbers.

Do you have the numbers? Can you help us get the numbers?

There was a debate that raged during the Middle Ages in terms

of exactly how many teeth a mule had. Finally one bright young

fellow said, let’s open its mouth and count them. You know, it

would be very helpful if we had an honest count here of how much

we are actually—I understand there are some unintended consequences, and there are some things that have happened with the

way the reimbursements are made and so forth, but at the end of

the day it would be helpful if we at least knew how much hospitals

were reimbursed in fiscal year 1999, how much they are being reimbursed in fiscal year 2000 and so forth. And I think you could

be the person who helps us count those teeth.

Mr. CRIPPEN. We have thought some about this, as you might

guess. Part of the problem is the data lags at the Health Care Financing Administration (HCFA). Traditionally, lags are 12 months

or 18 months.

Mr. GUTKNECHT. I think you are being very generous. This is

amazing to me that an agency that is responsible for paying bills,

I mean, that is basically what they do, and yet they don’t have data

for up to 18 months after the checks have been issued. Now, I

would not invest in a bank that did business that way.

I am sorry, that is an editorial.

49

Mr. CRIPPEN. We rely on other agencies to develop that kind of

data—we do not develop data on our own. In terms of HCFA, we

can do nothing until they produce the numbers, but we have talked

to our sister agency, the General Accounting Office (GAO), for example, which has studies under way and has actually gone into the

field. The question we need to ask is not only how much has been

cut but what effect that has had on beneficiaries. That is the important question—whether beneficiaries are receiving the services

they need.

GAO has been checking on that, but I do not know the status of

their research. We are kind of stumped. We think about these problems, but we have no answers for you.

Mr. BENTSEN. Would the gentleman yield on that point?

Your hospitals may want to talk to my hospitals, because my

hospitals certainly know how much is in their budget projections,

what the reductions mean, and the PPS update and the other reimbursements they get. And the impact is on that there are other

costs arising, their census of patients is rising, and so against that

they do feel a cut. And particularly for those hospitals which I

know——

Mr. GUTKNECHT. Is it 3 percent? Is it 4 percent? Is it 6 percent?

Is it 10 percent?

Mr. BENTSEN. CFO should be able to provide you with information. In dollar terms of what the impact is when they project what

their Medicare receipts will be on a per-patient basis against what

they perceive to be their per-patient cost.

Mr. GUTKNECHT. At this point I haven’t been able to get very

good information from anybody, and they are all talking about the

cuts, and they are saying it is devastating them. As a member of

the Budget Committee, I think we do want to try and rectify that,

but it is really difficult to get our arms around it if neither they,

nor you, nor the Health Care Finance Agency can give us some

numbers. Right now we have no numbers to work with.

Mr. GREEN. Since we allowed questions to be submitted for the

record, I would be interested to see Mr. Crippen’s response to the

number of teeth in a mule.

Next, Mr. Markey?

Mr. MARKEY. I thank you very much, Mr. Chairman. And like

that medieval theological debate, we have similar problems here

today because everyone can see what they want to see. You can see

a lower, a midcourse, or a higher surplus over the next 10 years,

depending on which way you want to turn the image. You can see

whatever you want to see. It is beautiful because each one of us

can then project our own theological beliefs, politically speaking,

into this surplus projection. But I know, as does the gentleman

from Texas, that when three hospitals close in your district in the

2 years after the Balanced Budget Act amendment is passed in

1997, that you don’t have to be a mining expert to know that the

canary died in the mine shaft. There is something wrong down

there. There just isn’t enough air to breathe.

So we have got a problem at the local level. And again, I believe,

as you know, this committee has the highest prevarication coefficient of any committee in Congress. The hardest thing to get numbers out of is CBO or even OMB back in 1997, because if we were

50

able to open up the mule’s mouth back then, we would have known

that the budget was already balancing itself by the end of 1997,

but, of course, they were told by this committee and by the administration not to give any new numbers while we were anticipating

the vote at the end of July on the Balanced Budget Amendment in

1997. So we didn’t have the updated numbers at that point in time

which would have revealed that this miraculous balanced budget

that was the target for the year 2002 was reached in 1998.

Isn’t that great, just by a single vote in 1997. We did the whole

thing in that year and started to see the projections. That is because the mule didn’t open his mouth. It was under orders from

both OMB and CBO. So that is a problem. These people just take

orders, so it is just the way it is.

So I am going to get away from that because that gets theological.

What I would like to do is to deal with the issues on Social Security. Again, it gets kind of hard to solve the problem for 7 years,

kind of gets outside people’s grasp, but Mr. Bartlett, Roscoe Bartlett, zero ADA rating, and Ed Markey, 100 percent ADA, kind of

joined together in a very simple plan which we think makes some

sense, and I would like to get your views on it. What it does is it

permits a portion of the Trust Fund to be invested each year in securities. It is no geniuses need apply. Investments will be under

index funds only to mirror the long-term growth of the market as

a whole, and additional political insulation would be provided by

requiring proxies to be voted to mirror the voting by nongovernment investors. And we would have multiple 10, 20 mutual funds

or other financial institutions each taking a relatively small percentage of the money so that no one investment firm would have

the control over that large sum of money.

What do you think about that as an idea, Mr. Crippen? Do you

think that would help to advance the solvency of the Social Security Fund?

Mr. CRIPPEN. The answer depends critically on exactly how you

just asked the question. Your idea could certainly raise the rate of

return and make the Trust Funds look better. The ultimate question, though, is, does the investment increase national savings and

therefore help economic growth? Because ultimately, the controlling factor is the size of the economy, not the balances in the Trust

Funds.

For example, you have a choice today. You could pay down debt

with, say, some of the Social Security surpluses now, or you could

buy equity securities. The two strategies would have the same effect essentially on national savings, so that would not change the

outlook for the economy. So if your plan would increase——

Mr. MARKEY. Do you think this plan would? The gridlock is that

a lot of the Republicans want to give the money to individuals, and

they would invest, and a lot of Democrats don’t want to give it to

anybody, even index funds. So we are trying to go up the middle

here.

Let’s just compare what we are doing here with IRAs, with individual accounts that the Republicans want. Would there be a difference in terms of the impact it would have on savings if it was

done this way as opposed through individuals?

51

Mr. CRIPPEN. Probably not, but it depends critically on——

Mr. MARKEY. If we could create similar incentives in both programs, you would still remain agnostic in terms of whether or not

it would enhance the savings?

Mr. CRIPPEN. I would.

Mr. MARKEY. So a lot of this discussion gets to that pivotal first

question, and you are not sure that anything we would do——

Mr. CRIPPEN. Very clearly, paying down debt held by the public

would enhance net national savings.

Mr. MARKEY. I’m talking about going to individual accounts——

Mr. CRIPPEN. It depends on how you do it. There are many

plans—yours may be included—that would actually enhance national savings and therefore help economic growth. What I am trying to emphasize is that the balances in the Trust Funds have little

to do with our ability to pay for the obligations we have.

Mr. MARKEY. If I gave you my plan, would you give me a written

response as to whether or not you think that that would enhance

national savings?

Mr. CRIPPEN. I will be happy to.

Mr. MARKEY. And contrast it with whether or not the Republican

plan that gives individuals the ability to take their own——

Mr. CRIPPEN. Which Republican plan?

Mr. MARKEY. The one that Dennis Hastert would split. How is

that? So we would take that. But just so—I just want to break this

cycle here. We have got to move to this marketplace, and I think

that the biggest obstacle that we have is that neither side wants

to give up either doing nothing or going all the way like individuals

do it. I don’t think either one of them is realistic. I think we have

got to get our foot in the water here. We have got to get people

used to it. If this is a way that enhances the savings goal and yet

gets us to get the benefit of the stock market long term, then it

would be a good way of going.

So I would appreciate it if you would give me a written response.

We will give you the details of the plan, and if you tell us that it

enhances national savings, then we would, I think, be able to build

a broader coalition this year toward advancing that goal.

Thank you, Mr. Chairman.

Mr. GREEN. Thank you, Mr. Markey.

Mr. Crippen, earlier when you were responding to a question

from Mr. Bentsen, I was intrigued by how you pointed out that discrepancies in forecasts have been less due to based on calculations

and more on other side events that have changed, the eddies and

currents have changed. As we go forward, as you know, we will be

looking at a variety of tax relief plans. In your view, what kind of

tax relief plans would project or would create greater economic

growth and would create a positive push on the surplus as opposed

to a cost, which some have suggested?

Mr. CRIPPEN. Let me answer you in two ways. First, if you, for

example, sent us a tax cut and asked not only what the revenue

effects would be—which the Joint Committee on Taxation provides—but also what would be the economic effects, we would say,

we do not know. Currently, when we prepare estimates, we do not

also assess the impact of the proposal on the economy or on ecoVerDate 11-SEP-98 20:45 Mar 23, 2000 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\106-8\HBU047.000 HBUDGET1 PsN: HBUDGET1
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nomic growth. We may do that someday, but we are not currently

doing it.

Second, what I can say in answer to your question is not our

view because CBO does not have an opinion on this matter. There

is a pretty extensive literature that suggests that changing incentives in the Tax Code for savings or for work—changing marginal

tax rates, for example—is the kind of things that is more likely to

increase output, work, and economic growth. But beyond that,

there is not much the literature—the empirical literature, in particular—can tell you about whether one kind of tax cut is better

than another.

Mr. GREEN. Well, for example, a—the marriage penalty reduction

that we just passed, what is your view as to the incentives changed

by that?

Mr. CRIPPEN. Again, CBO has no view. Probably, the view of the

economics profession would be that the change in the marriage

penalty will have relatively little effect on economic growth. The effect on incentives to work or to save would be limited because so

much of the tax savings from the cut would not affect taxpayers at

the margin.

Mr. GREEN. What about the type of State tax reduction that we

saw in last year’s tax bill that was passed? What is your view as

to the economic impacts from that?

Mr. CRIPPEN. Again, CBO does not have a view. I think the literature is mixed on the question but mostly suggests that there is

not much impact. I would have to check that, however. The last

time I looked, there was not much effect on economic growth.

Mr. GREEN. Are there other questions? Ms. Hooley, do you have

any further questions?

Ms. HOOLEY. No.

Mr. GREEN. Seeing no other questions, again, Mr. Crippen, we

thank you very much.

Mr. CRIPPEN. Thank you.

[Whereupon, at 12:30 p.m., the committee was adjourned.]

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