[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE PRESIDENT'S
FISCAL YEAR 2012 BUDGET
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 15, 2011
__________
Serial No. 112-4
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
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COMMITTEE ON THE BUDGET
PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
BILL FLORES, Texas KATHY CASTOR, Florida
MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas PAUL TONKO, New York
TODD C. YOUNG, Indiana KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia
Professional Staff
Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, February 15, 2011................ 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 2
Questions submitted for the record....................... 66
Hon. Chris Van Hollen, ranking minority member, Committee on
the Budget................................................. 3
Prepared statement of.................................... 4
Hon. Jacob J. Lew, Director, Office of Management and Budget. 5
Prepared statement of.................................... 8
Responses to questions submitted for the record.......... 66
Hon. John A. Yarmuth, a Representative in Congress from the
State of Kentucky, questions submitted for the record...... 81
THE PRESIDENT'S FISCAL YEAR 2012 BUDGET
----------
TUESDAY, FEBRUARY 15, 2011
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:00 a.m., in room
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of
the Committee] presiding.
Present: Representatives Ryan, Simpson, Campbell, Calvert,
Akin, Cole, Price, McClintock, Chaffetz, Stutzman, Lankford,
Black, Ribble, Flores, Mulvaney, Huelskamp, Young, Amash,
Rokita, Guinta, Woodall, Van Hollen, Schwartz, Kaptur, Doggett,
Blumenauer, McCollum, Pascrell, Ryan of Ohio, Wasserman
Schultz, Moore, Castor, Tonko, and Bass.
Chairman Ryan. Director Lew, welcome back, I understand
there is a traffic problem that tied you up, those things can
happen. The President is fortunate that you agreed to a return
assignment at Office of Management and Budget. This one is
going to be a little different than the last one, I think,
because the fiscal situation is so much worse. You have come
under a darkening fiscal outlook. We are aware of the
challenges that you face in putting this budget together, and
we thank you for your hard work and for coming here today.
Having said all of that, the budget of the United States is
more than just about arithmetic. It is a statement of national
priorities. It is a gauge of our national health. Because we
face a crippling burden of debt, this year's budget in
particular presented the President with a unique opportunity to
lead our country.
The President has disappointed us all by declining that
opportunity. He punted. Instead of confronting our debt head-
on, the President has presented us with a budget that spends
too much, borrows too much, and taxes too much, and that costs
jobs and opportunities. His budget would double the amount of
debt held by the public by the end of this term, and triple it
on the 10th anniversary of his inauguration.
To be sure, our country was already on an unsustainable
fiscal trajectory before he took office. Our debt is the
product of acts by many Presidents and many Congresses over
many years. Both of our political parties share the blame in
where we have come to. Nevertheless, the President's policies
have accelerated us down this disastrous path. He has made our
spending problems worse with policies such as the failed
stimulus and a brand-new open-ended health care entitlement. He
has argued for massive tax increases that would stifle economic
growth and job creation, and make our fiscal picture worse. His
budget alone contains $1.6 trillion in higher taxes on American
families, businesses, and entrepreneurs. In our nation's most
pressing fiscal challenges, the President has abdicated his
leadership role.
First, he punted to a bipartisan Fiscal Commission to
develop solutions to the problem. Then, when his own commission
put forward a set of fundamental entitlement and tax reforms, a
commission comprised of a majority of Democrats, he ignored
them. He even failed to take the commission's advice on less
sensitive subjects, such as discretionary spending. His budget
would increase discretionary spending by $353 billion, relative
to his commission's proposals.
Former Clinton Chief of Staff, and co-chair of the Fiscal
Commission, a man who I have great respect for, a Democrat,
Erskine Bowles said, quote, The budget goes nowhere near where
they will have to go to resolve our fiscal nightmare. The
President's budget disregards the drivers of our debt crisis
and the insolvency of our entitlement programs. Every day that
passes without leadership on this crucial challenge is another
day of uncertainty for job creators, and a darkening economic
prospect for millions of Americans living in the shadow of our
growing and unsustainable debt.
The politically safe response, I suppose, is to do nothing.
I wonder about that, though. Unfortunately, this is the path
the President has chosen. We feel that it is our responsibility
to do things differently, to lead where he has fallen short,
and that is exactly what we plan to do.
With that, I will yield to Ranking Member Van Hollen for an
opening statement.
[The statement of Chairman Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
Director Lew, welcome back.
The President is fortunate that you agreed to a return assignment
to OMB under a darkening fiscal outlook. We are aware of the challenges
you faced in putting this budget together, and we thank you for your
hard work.
The Budget of the United States is about much more than arithmetic.
It is a statement of national priorities--and a gauge of our nation's
health.
Because we face a crippling burden of debt, this year's budget in
particular presented the President with a unique opportunity to lead
our country.
The President has disappointed us all by declining that
opportunity. He punted.
Instead of confronting our debt head on, the President has
presented us with a budget that spends too much, borrows too much and
taxes too much. His budget would double the amount of debt held by the
public by the end of his term--and triple it by the tenth anniversary
of his inauguration.
To be sure, our country was already on an unsustainable trajectory
before he took office. Our debt is the product of acts by many
presidents and many Congresses over many years. Both parties share the
blame.
Nevertheless, this President's policies have accelerated us down
this disastrous path. He has made our spending problems worse with
policies such as the failed stimulus and the new health care
entitlement.
He has argued for massive tax increases that would stifle economic
growth and make our fiscal picture worse--this budget alone contains
$1.6 trillion in higher taxes on American families, businesses and
entrepreneurs.
And on our nation's most pressing fiscal challenges, the President
has abdicated his leadership role. First, he punted to a bipartisan
commission to develop solutions to the problem.
Then, when his own commission put forward a set of fundamental
entitlement and tax reforms, he ignored them. Erskine Bowles, the
Democratic chairman of the fiscal commission, said the White House
budget request goes ``nowhere near where they will have to go to
resolve our fiscal nightmare.''
He even failed to take the commission's advice on less sensitive
subjects, such as discretionary spending: His budget would increase
discretionary spending by $353 billion relative to the commission's
proposals.
The President's budget disregards the drivers of our debt crisis
and the insolvency of our entitlement programs.
Every day that passes without leadership on this crucial challenge
is another day of uncertainty for job creators and darkening economic
prospects for millions of Americas living in the shadow of our growing
debt.
The politically safe response, I suppose, is to do nothing.
Unfortunately, this is the path the President has chosen.
We feel that it's our responsibility to do things differently--to
lead where he has fallen short. And that's exactly what we plan to do.
With that, I will yield to Ranking Member Van Hollen for an opening
statement.
Mr. Van Hollen. Thank you, Chairman Ryan, welcome Director
Lew. I know that President Obama, like President Clinton, will
be well-served by having you at the helm of Office of
Management and Budget. And I thank you for being here to
discuss the President's budget. And while we are still
reviewing some of the details, I want to commend the President
for putting forth a budget that reduces our deficit while also
investing in our future.
This is a tough-love budget. It cuts non-security
discretionary spending by $400 billion, taking that category of
spending to the lowest share of GDP since the Eisenhower
Administration. And starting this year, it steadily decreases
the deficit, and brings the budget to primary balance by the
year 2017. But the President's budget cuts the deficit while
making critical investments in areas like education, clean
energy, infrastructure, and scientific innovation.
Last week, Chairman of the Federal Reserve Ben Bernanke
testified before this committee about the importance of
targeted national investments to help grow the economy and keep
America competitive. He highlighted the need to pursue policies
to foster economic growth, quote, By encouraging investment in
the skills of our workforce as well as new machinery and
equipment, by promoting research and development, and by
providing necessary public infrastructure. This budget does
that.
As we debate the best way forward, our conversation must
include a comprehensive review of our national balance sheet.
It is simply short-sighted to think we can try to balance our
budget through cuts in domestic discretionary spending alone, a
category that represents only 12 percent of the overall budget.
We must look to other areas, including comprehensive tax
reform, and eliminating special interest breaks in the tax
code. The President's budget moves in the right direction by
putting an end to taxpayer dollars going to subsidies for big
oil companies at a time when gas is costing American families
more than $3 a gallon, and oil companies are making huge
profits; there is no reason to subsidize those companies and
short-change investments in education and Head Start, as some
of our colleagues are proposing to do today on the floor of the
House.
This budget extends tax cuts for middle class tax families,
but rejects tax breaks for those at the very top. It takes a
balanced approach, much like the budgets under President
Clinton. Under the Clinton Administration, the country enjoyed
real economic growth of 3.9 percent per year, and the economy
added 20.8 million private sector jobs. That balanced approach
allowed us to not only stop running deficits, but actually
achieve surpluses and begin to reduce our nation's debt.
Unfortunately, those surpluses disappeared under the previous
Bush Administration. They cut taxes for the wealthy and turned
a $5.6 trillion surplus into a sea of deficits, lost 653,000
private sector jobs over that eight year period.
In January, 2009, when the President raised his hand and
was sworn in, he was handed an economy in free-fall that was
losing 700,000 jobs a month, and a record $1.3 trillion
deficit. Unfortunately, some of the first acts of the new
Congress were to eliminate the PAYGO rule, and add $230 billion
to that deficit in connection with health care reform.
Having spent the first two years working to rescue the
economy, working with Congress and the American people, the
President's budget is now focused on strengthening the economy
with a plan of targeted investments and deficit reduction. It
stands in stark contrast, I might say, to the approach that we
are seeing by our colleagues on the floor of the House, which
is to slash important programs immediately, disregarding the
impact on the fragile economy and workers.
It is critical that our nation's budget strike the right
balance with both spending and revenue, and I believe the
President's budget makes an important effort to hit the right
note. It is a starting point. I must say, it is interesting to
hear many of our colleagues on the Republican side criticize
the President for not putting more of the ideas of the
Bipartisan Deficit-Debt Reduction Commission on the table, when
in the House, the representatives to that commission voted
against it.
That being said, and I am going to conclude, Mr. Chairman,
in order to tackle our longer-term fiscal challenges beyond the
10-year period of this budget, it is important that the White
House and the Congress, Republicans and Democrats, come
together to seriously discuss and consider the ideas in the
Commission's proposal. Compromise is not a dirty word. Getting
things done requires give and take. We should begin that
conversation now. Thank you, Mr. Chairman.
[The statement of Mr. Van Hollen follows:]
Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
Committee on the Budget
Thank you very much, Chairman Ryan.
Welcome, Director Lew. I know that President Obama, like President
Clinton, will be well-served by having you at the helm of the Office of
Management and Budget.
Thank you for being here today to discuss the President's budget.
While we are still reviewing some of the details, I want to commend the
President for submitting a budget that reduces our deficit, while also
investing in our future. This is a tough love budget. It cuts non-
security discretionary spending by $400 billion over the next decade--
taking that category of spending to the lowest share of GDP since the
Eisenhower Administration. And, starting this year, it steadily
decreases the deficit and brings the budget to primary balance by 2017.
But the President's budget cuts the deficit while making critical
investments in areas like education, clean energy, infrastructure, and
scientific innovation. Last week Federal Reserve Chairman Ben Bernanke
testified before this committee about the importance of targeted
national investments to help grow the economy and keep America
competitive. He highlighted the need to pursue policies to foster
economic growth 'by encouraging investment in the skills of our
workforce as well as new machinery and equipment, by promoting research
and development, and by providing necessary public infrastructure.'
This budget does that.
As we debate the best way forward, our conversation must include a
comprehensive review of our national balance sheet. It is simply short-
sighted to think we can try to balance our budget through cuts in
domestic discretionary spending alone--a category that represents only
12 percent of the overall budget. We must also look to other areas,
including comprehensive tax reform and eliminating special interest
breaks in the tax code. The President's budget moves in the right
direction by putting an end to taxpayer dollars going to subsidies for
big oil companies. At a time when gas is costing American families more
than $3 a gallon and oil companies are making huge profits, there is no
reason to subsidize big oil companies and short-change funding for Head
Start and education, as our Republican colleagues are proposing to do
today on the House floor. President Obama's budget also extends tax
cuts for middle class families, but rejects tax cuts for the wealthiest
2 percent of Americans. At a time of huge deficits, we cannot afford to
ask our children to pay for tax breaks for the folks at the very top.
The President's budget takes a balanced approach, much like the
budgets under President Clinton. Under the Clinton Administration, the
country enjoyed real economic growth of 3.9 percent per year and the
economy added 20.8 million private-sector jobs. That balanced approach
allowed us to not only stop running deficits, but actually achieve
surpluses and begin to reduce our nation's debt. Unfortunately, those
surpluses were squandered under the Bush Administration. The Bush
Administration cut taxes for the wealthy and turned a $5.6 trillion
surplus into a sea of deficits and lost 653,000 private-sector jobs
over eight years. In January 2009 the Obama Administration was handed
an economy in free fall that was losing over 700,000 jobs a month and a
record $1.3 trillion deficit.
Having spent its first two years working to rescue the economy, the
President's budget is now focused on strengthening the economy with a
plan of targeted investments and deficit reduction. The President's
approach stands in stark contrast to the House Republicans' plan being
debated on the House floor today. That plan would recklessly slash
important programs immediately--disregarding the impact to American
workers and our fragile recovery. The President's Bipartisan Commission
charged with reducing our national debt and deficit stated that 'in
order to avoid shocking the fragile economy, the Commission recommends
waiting until 2012 to begin enacting programmatic spending cuts.' The
Rivlin-Domenici Commission rendered the same advice. Deep cuts now will
not create a single job; in fact, Mark Zandi and other economists have
warned against deep spending cuts that would put thousands of American
jobs at risk. President Obama, on the other hand, has laid out a long-
term, responsible path to fiscal sustainability. He has proposed
significant but targeted cuts that stand in contrast to the House
Republicans' hatchet job on the budget that will cost many Americans
their jobs.
It is critical that our nation's budget strikes the right balance
with both spending and revenue, and I believe the President's budget
makes an important effort to hit the right note. It is an important
starting point. That being said, in order to tackle our longer-term
fiscal challenges--beyond the 10 year period of this budget--it is
important that the White House and the Congress, Republicans and
Democrats, come together to seriously discuss and consider the ideas in
the Commission's proposal. Compromise is not a dirty word. Getting
things done requires give and take. We should begin that conversation
now.
Chairman Ryan. Mr. Lew, the floor is yours.
STATEMENT OF JACOB J. LEW, DIRECTOR,
OFFICE OF MANAGEMENT AND BUDGET
Mr. Lew. Thank you, Mr. Chairman. Ranking Member Van
Hollen, members of the Committee, thanks for having me here
today to present the President's 2012 budget. It is a real
honor to be here again after 10 years, presenting the
President's budget, and I thank the Chairman and the Ranking
Member for the very kind personal words that they opened with.
I have a great deal of respect for each of them, and look
forward to working together in a bipartisan way as we move
through the long and difficult process.
After emerging from the worst recession in generations, we
face another historic challenge. We need to demonstrate to the
American people that we can live within our means and invest in
the future. We need to work our way out of the deficits that
are driving up our debt, and at the same time make the tough
choices to make sure that we are in a position to out-educate,
out-build, and out-innovate our competitors. That is what it is
going to take to return to robust economic health and to grow
jobs in the future.
This is the seventh budget that I have worked on at the
Office of Management and Budget, and the most difficult. It
includes more than $1 trillion in deficit reduction, two-thirds
of it from lower spending, and it puts the nation on a path
towards fiscal sustainability so that by the middle of the
decade, the government will no longer be adding to our national
debt as a share of the economy. By the middle of the decade, we
will be able to pay our current bills and remain in primary
balance for many years after that.
The President has called this budget a down-payment.
Because we still have work to do to pay down the debt and
address our long-term challenges. But we can't start to pay
down the debt until we stop adding to it. And that is what this
budget does.
The budget lays out a strategy for significant deficit
reduction, the most deficit reduction in a comparable period
since the end of World War II. It will bring our deficit down
to about three percent of the economy by the middle of the
decade, and stay there for the rest of this budget window.
Changing the trajectory of our fiscal path is a significant
accomplishment, but to do this it will take tough choices, and
I would like to highlight just a few of them.
Our budget includes a five-year, non-security discretionary
spending freeze that will reduce the deficit by over $400
billion over the next decade, and bring spending in this
category of the budget to the lowest level since President
Eisenhower sat in the Oval Office. To achieve savings of this
magnitude, it is not enough to just deal with programs that are
outdated, or ineffective, or duplicative, though we do start
there. It is also necessary to make reductions in programs
that, absent the current fiscal situation, we wouldn't be
looking for reductions. Programs like low-income energy
assistance and Community Development Block Grants.
In national security, which we are not freezing, we are
also making real cuts. Defense spending over the past decade
has been growing faster than inflation, and we can no longer
afford that. The budget cuts $78 billion for the Pentagon's
spending plan over the next five years, which will bring
Defense spending down to zero real growth. It cuts weapon
programs that Secretary Gates and the military leadership says
we don't need, and we can't afford. We are also capturing
savings that come from bringing our troops home from Iraq,
which, when you add it in, brings defense spending down by more
than five percent, compared to the President's budget of last
year.
Of course, cutting discretionary spending alone can't solve
our fiscal problems. This budget also deals with mandatory
spending and with revenue, and it takes significant steps to
address our long-term fiscal challenges. For example, this
budget shows that we can pay for solutions to two problems that
we have been all too willing to kick down the road by putting
on the national credit card. One is preventing a nearly 30
percent reduction in reimbursements to doctors in Medicare, to
keep doctors in the system and treating patients. Another is
preventing an increase in taxes on middle class families
through the Alternative Minimum Tax, commonly known as the AMT.
In December, there was bipartisan agreement to pay for a
one-year extension of the so-called Doc-Fix, which was not
required by budget rules, but it was the right thing to do. In
this budget, we build on that, and we have $62 billion of
savings to pay for the next two years of this fix. And those
three years of paying for the Doc-Fix establishes a clear
pattern and creates a window so we can work together, so that
we can address this in the future without adding to the
deficit.
With regard to the Alternative Minimum Tax, we have offsets
in the budget to pay for three years of what is called a patch.
And we could pay for it by limiting the amount that those in
the highest tax bracket can receive for itemized deductions. It
is a big step towards cutting back on spending in the tax code,
and it is consistent with the Fiscal Commission
recommendations. If we continue on this path of paying for the
AMT patch after 2014, it alone will reduce the deficit by one
percent of GDP by the end of the decade. These both are down-
payments on long-term reform to reduce the deficit further, and
the administration looks forward to working with Congress to
permanently cover these costs once and for all.
Similarly, as the President said in the State of the Union,
we are eager to work together on a deficit-neutral corporate
tax reform that will simplify the system, eliminating special
interest loopholes and level the playing field, and lower the
corporate tax rate for the first time in 25 years. And while it
does not contribute to our deficits in the short or medium
term, the President has laid out his principles to strengthen
Social Security, has called on Congress to work in a bipartisan
fashion, to keep this compact with future generations.
As we take these steps to live within our means, we also
invest in the areas critical to future economic growth and job
creation: education, innovation, clean energy, and
infrastructure. And even in these areas, the budget cuts
programs in order to fund high-priority investments. For
example, in education, we maintain the increased maximum Pell
Grant level, which is enabling nine million students to pay for
college education, and we pay for it with a $100 billion in
savings that primarily come from eliminating summer-school Pell
Grants and eliminating the graduate student in-school loan
subsidy.
In the area of innovation, we support $148 billion in
research and development investments, including $32 billion for
the National Institutes of Health. And we need visionary goals
to bring about a new clean energy economy to help pay for these
investments. Lower priority programs are cut, and we eliminate
12 tax breaks for oil, gas, and coal companies, that will raise
$46 billion over 10 years.
And to build the infrastructure we need to compete, the
budget includes a proposal for a $556 billion surface
transportation re-authorization bill. Not only does this plan
include the consolidation of 60 duplicative, often-earmarked
programs into five, and it demands more competition for funds,
but we insist that the bill be paid for, and we look forward to
working in a bipartisan manner to do that.
Mr. Chairman, I am under no illusions how difficult it is
to make the tough choices needed to put us on a sustainable
fiscal path. As we make these choices, I believe that it is
important that we not cut areas that are critical to helping
our economy to grow, and making a difference for families and
businesses.
Finally, cutting spending and cutting our deficits requires
us to put political differences aside, and working together. I
look forward to working with you and crafting a set of policies
that enable us to live within our means and invest in the
future. And I look forward to answering your questions. Thank
you very much.
[The statement of Mr. Lew follows:]
Prepared Statement of Hon. Jacob J. Lew, Director,
Office of Management and Budget
Chairman Ryan, Ranking Member Van Hollen, and Members of the
Committee, thank you for inviting me to testify this morning about the
President's Fiscal Year 2012 Budget.
As the President has said, now that the country is back from the
brink of a potential economic collapse, our goal is to win the future
by out-educating, out-building and out-innovating our competitors so
that we can return to robust economic and job growth. But to make room
for the investments we need to foster growth, we have to cut what we
cannot afford. We have to reduce the burden placed on our economy by
years of deficits and debt.
This is the seventh budget I have worked on at OMB and the most
difficult. It is a budget of shared sacrifice across the Federal
government. It is a budget that makes tough choices to begin to tackle
our major fiscal challenges. It is a budget that transitions from
rescuing the economy to investing in our future. It is a budget that
lives within our means in order to compete effectively in the world
economy.
then and now
The world has changed since I last served at OMB. When I left OMB
in January 2001, we had balanced the budget and projected a surplus of
$5.6 trillion over the next decade. In fact, we projected that the U.S.
would effectively be debt-free by 2013. Unprecedented economic growth
was certainly a key driver of budget surpluses. But in a virtuous
cycle, a commitment by the President and the Congress to maintain a
surplus reinforced expectation of Federal fiscal responsibility, which
had a positive impact on interest rates and further helped to spur
economic growth. This surplus was the result of year after year of
fiscal discipline including budget agreements in 1990, 1993 and 1997.
Presidents and congressional majorities from both parties reached
across the aisle to make tough policy choices.
When I returned as OMB Director last November to a projected
deficit of $10.4 trillion--a sixteen trillion dollar swing in just over
ten years--the fiscal picture could not have been more different. Large
deficits were driven by two main factors: first, the worst economic
downturn in a generation and policy response necessary to rescue the
economy, and second, the decision in prior years to give two large tax
cuts without offsetting them and to create a Medicare prescription drug
benefit without paying for it.
Clearly, the challenges we face today are very different than those
we faced more than a decade ago, when many of us worked together to
balance the budget.
our record
Bringing the Economy Back from the Brink
It is useful to begin by reviewing the state of our economy,
because it shows how far we have come but also how far we need to go.
When the President took office the economy was in freefall. Real
gross domestic product (GDP) was dropping at an annual rate of 4.9
percent after falling at an annual rate of 6.8 percent the previous
quarter. The economy was losing an average of 783,000 private sector
jobs per month. A steep decline in the stock market combined with
falling home prices led to a significant loss of household wealth.
Between the third quarter of 2007 and the first quarter of 2009, the
real net worth of American households declined by 28 percent--the
equivalent of one year's GDP.
In the last year, we have seen some encouraging signs that the
trajectory has changed and that a recovery is beginning to take hold.
An economy that had been shrinking for nearly a year is now growing
again--over the past six quarters, through the first quarter of FY
2011, real GDP has grown at an average rate of 3.2 percent. After
nearly two years of job losses, more than one million private sector
jobs were added to the economy in 2010. Capital and credit markets are
functioning and gaining strength. And after teetering on the brink of
liquidation just two years ago, America's auto industry is posting
healthy gains and returning money to the taxpayers who helped it
through a period of turmoil.
What changed?
Just 28 days after taking office, the President signed into law the
Recovery Act to create and save jobs and to invest in an economy able
to compete in the 21st century. Approximately one-third, or $288
billion, of the Act's funds went to tax cuts for small businesses and
95 percent of working families. Another third, or $224 billion, was
used for emergency relief for individuals and state and local
governments. The final third was invested in projects to create jobs,
spur economic activity, and lay the foundation for future sustained
growth.
This investment had a powerful impact. The White House Council of
Economic Advisers (CEA) estimates that the Recovery Act raised the
level of GDP as of the third quarter of 2010 by 2.7 percentage points,
relative to what it would have been absent intervention, and raised
employment relative to what it otherwise would have been by between 2.7
and 3.7 million jobs in the same time frame.
And we have acted together to build on this growth. In March 2010,
the President signed the Hiring Incentives to Restore Employment (HIRE)
Act that provided subsidies for firms that hired workers who were
unemployed for at least two months and other job creation incentives.
In August, he signed into law $10 billion in additional aid to States
to prevent the dismissal of 160,000 of teachers, police officers, and
firefighters nationwide. In September, the President signed the Small
Business Jobs Act. At the end of 2010, the President signed into law a
bipartisan agreement on taxes that prevented a tax increase for middle-
class families, extended unemployment insurance benefits for millions
of Americans hardest hit by the recession, provided powerful incentives
for business investment and job creation, and temporarily reduced the
payroll tax which also would help spur macroeconomic demand. Economists
from across the political spectrum agree that this bill will boost
economic growth in 2011 by 0.5 to 1.2 percentage points.
From the Recovery Act to our financial stabilization plan, the
President's tough choices over the past two years have helped to save
the economy from a second Great Depression. But we are keenly aware
that the recovery is not happening fast enough for the millions of
Americans who are still looking for jobs, and our immediate task is to
accelerate economic growth and job creation to get our fellow Americans
back to work. That is why the President has proposed an up-front
investment of $50 billion in building new roads, rails, and runways to
upgrade our infrastructure and create new jobs. It is why the President
is making key investments in innovation, clean energy, and education
that will create jobs and make our workforce more competitive. And that
is why the President laid out a commonsense approach to regulation that
is pragmatic and evidence-based, and that will protect our health and
safety and help lay the groundwork for economic growth and job
creation.
restoring a sound fiscal policy
While taking steps to rescue the economy, the President has also
worked to restore accountability and fiscal responsibility. In his
first Budget, the President confronted directly the fiscal situation we
inherited, eliminating trillions of dollars in budget gimmicks. He made
a commitment to restoring fiscal responsibility, while recognizing that
increasing the deficit in the short term was necessary to arrest the
economic freefall. The President pledged to cut the deficit he
inherited in half as a share of the economy by the end of his first
term, a commitment this Budget keeps. He signed into law pay-as-you-go
(PAYGO) legislation that returned the tough budget rules of the 1990s
to Washington. The principle behind PAYGO is simple: all new, non-
emergency entitlement spending and revenue losses must be offset by
savings or revenue increases, with no exception for new tax cuts.
In addition, the President signed into law the landmark Affordable
Care Act (ACA), enacting comprehensive health insurance reforms that
will hold insurance companies more accountable, lower health care
costs, guarantee more health care choices, and enhance the quality of
health care for all Americans while reducing the deficit. According to
CBO analysis, the Affordable Care Act will save more than $200 billion
over the next ten years and will reduce the deficit by more than $1
trillion over the second decade. This is more deficit reduction than in
any legislation since the 1990s. At the same time, the ACA's savings
provisions tackle the single biggest contributor of our nation's long-
term deficits--rising health care costs.
While taking major steps to bring down our deficits, the President
also demanded that the Government spend every taxpayer dollar with as
much care as taxpayers spend their own dollars. The President proposed
legislation to create an expedited rescission authority so that
unnecessary spending can be struck swiftly and constitutionally.
Through his Accountable Government Initiative, the Administration has
launched a host of initiatives to streamline what works, cut what does
not, and eliminate wasteful spending. These initiatives include
focusing agencies on identifying and delivering on their top
priorities, a comprehensive strategy to reform Government contracting
that will save $40 billion by the end of 2011, an initiative to reduce
the amount of improper payments made by the Government by $50 billion,
a review and reform of information technology use and procurement, an
initiative to reduce administrative overhead by billions and improve
performance, and an effort to dispose of billions of dollars of
unneeded and under-utilized real property assets.
Each year since entering office, President has asked his
Administration to go line-by-line through the Budget to identify
programs that are outdated, ineffective, or duplicative. In his first
two Budgets, the President identified more than 120 terminations,
reductions, and savings, totaling approximately $20 billion in each
year. These terminations ranged from a radio navigation system for
ships made obsolete by GPS to new F-22 fighter jets. While recent
administrations have seen between 15 and 20 percent of their proposed
discretionary cuts approved by the Congress, the Administration saw 60
percent of its proposed discretionary cuts become law for 2010.
Finally, in April 2010, the President created the bipartisan
National Commission on Fiscal Responsibility and Reform, and charged
the Commission with identifying policies to improve the fiscal
situation in the medium term and to achieve long-term fiscal
sustainability. The Commission made an important contribution,
beginning the process of building a bi-partisan consensus on the nature
of the challenge we face and expanding the debate to include a broader
range of options. While the Administration doesn't agree with every
recommendation in the report, there are many areas of this budget that
reflect the work of the Commission.
living within our means and investing in the future
Now that the country is back from the brink of a potential economic
collapse, our goal is to win the future. But we cannot do so if we are
saddled with increasingly growing deficits. This Budget builds on
recent progress and lays out a comprehensive and responsible plan that
will put us on a path toward fiscal sustainability for the rest of the
decade--a down payment that will build a strong foundation to tackle
our long-term challenges.
The projected deficit this year is nearly 11 percent of GDP, the
highest level since World War II, reflecting the severity of the
recession and our temporary measures to generate jobs and growth. The
Budget lays out a path of rapid deficit reduction--the most deficit
reduction in a comparable period since World War II. In the second half
of the decade and beyond, debt is no longer growing as a share of GDP--
a key indicator of fiscal sustainability. Redirecting our fiscal path
on this downward slope is a significant accomplishment, one which will
take tough choices and shared sacrifice--and is essential for the long-
term competitiveness of the American economy.
The first step to reducing our deficit is maintaining a strong
economy, which is a key priority for the Budget. As the baseline
projections show, with economic growth we begin to make substantial
progress at reducing the deficit even before we make additional policy
changes. However, even with a sustained recovery, simply continuing
current policies does not get the job done--it would leave us with
deficits of between 4 and 5 percent of GDP--with debt growing at an
unsustainable rate through the end of the decade and beyond.
To stay on a path towards sustainable deficits on the order of 3
percent of GDP, we make tough choices across all areas of the Budget to
identify more than $1 trillion in savings--two thirds from spending
reductions. This requires decisions beyond just separating the good
programs from the bad. It means broadly sharing sacrifices in all areas
of the Budget in order to make critical investments in areas most
important to growth and competitiveness. And it means reducing spending
in areas where we continue believe there is still important work to do.
It cannot be achieved by simply looking at discretionary spending--we
need to look at mandatory and revenue policies as well. An overview of
key decisions in the FY 2012 Budget is as follows:
Non-security discretionary. The Budget proposes to freeze
non-security discretionary spending for five years, which saves more
than $400 billion over the next decade and brings this category of
spending to its lowest level as a share of the economy since Dwight
Eisenhower was in office.
Security discretionary. The Budget reflects tough
decisions in areas outside of the non-security freeze--bringing Defense
spending down from a long period of significant real growth to zero
real growth, saving $78 billion over the next five years relative to
last year's plan. Reflecting the winding down of military operations in
Iraq, the Overseas Contingency Operations (OCO) budget for DOD in 2012
will be about 26 percent lower than levels in the President's 2011
request. As a result, the overall defense budget, including OCO, will
be down by 5.2 percent from last year's request.
Health care. The Budget fully pays for a two-year
extension of current Medicare physician payment rates with $62 billion
in health care savings, preventing a payment cut of over 25 percent.
The Budget also proposes incentives for States to implement medical
malpractice reforms to further reduce the growth of health care costs.
Revenues. The Budget pays for three years of AMT relief by
cutting the value of tax expenditures for high-income taxpayers by 30
percent. The Budget also opposes any further extension of the
unaffordable upper-income tax cuts to two years.
Fiscal stewardship. The Budget includes several proposals
to reduce the risk of future liabilities. These include giving the
Pension Benefit Guaranty Corporation (PBGC) the ability to adjust
premiums to reflect all risks facing the pension insurance system and
proposing reforms to encourage State responsibility and improve the
solvency of the Unemployment Insurance Trust Fund.
shared sacrifices, hard choices
To be competitive in the 21st Century, the United States cannot be
weighed down by crippling budget deficits, ineffective programs that
waste tax dollars, and a government that is not accountable to the
American people.
Five-year non-security freeze. It would be short-sighted to cut
spending across the board and shortchange critical areas for growth and
competitiveness--such as education, innovation, and infrastructure--or
carelessly slash programs that protect the most vulnerable. This means
that some cuts must be deeper to make room for key investments. In his
2011 Budget request, the President proposed a three-year, non-security
discretionary freeze. As the economic recovery takes hold, the
President believes that it is important to go further and is now
proposing a five-year, non-security discretionary freeze. This is an
extension of the freeze proposed last year, based on 2010 enacted
levels. This freeze would be the most aggressive effort to restrain
discretionary spending in 30 years and, by 2015, would lower non-
security discretionary funding as a share of the economy to the lowest
level since Dwight D. Eisenhower was president. Over the decade, the
five-year freeze saves more than $400 billion.
Program terminations, reductions, and savings. In part to meet this
freeze, the Budget includes over 200 terminations, reductions, and
savings totaling more than $33 billion in savings for 2012 alone. On
their own, these cuts will not solve our fiscal problems, but they are
a critical step to creating a more responsible and accountable
Government and a key component of a comprehensive deficit reduction
strategy. It is never easy to end or cut programs; they all have
advocates. Some programs are duplicative, outdated and ineffective. But
we also had to choose programs that, absent the fiscal situation, we
would not cut:
Low-Income Housing Energy Assistance Program (LIHEAP). The
Budget cuts LIHEAP by more than $2 billion, returning LIHEAP funding to
2008 levels, prior to the energy price spikes. However, in this
difficult fiscal environment, we cannot afford to maintain the
expansion to the program.
Community Services Block Grant (CSBG). CSBG has helped to
support community action organizations in cities and towns across the
country. These are grassroots groups working in poor communities,
dedicated to empowering those living there and helping them with some
of life's basic necessities. These are the kinds of programs that
President Obama worked with when he was a community organizer, so this
cut is not easy for him. Yet for the past 30 years, these grants have
been allocated to virtually the same organizations, using a formula
that does not consider how good a job the recipients are doing. The
Budget proposes to cut financing for this grant program in half, saving
$350 million, and to reform the remaining half into a competitive grant
program, so that funds are spent to give communities the most effective
help.
Grants-in-Aid for Airports. The Budget lowers funding for
the airport grants program to $2.4 billion, a reduction of $1.1
billion, by eliminating guaranteed funding for large and medium hub
airports. The Budget focuses the traditional Federal grants to support
smaller commercial and general aviation airports that do not have
access to additional revenue or other outside sources of capital. At
the same time, the Budget would allow larger airports greater
flexibility to generate revenue with increased non-Federal passenger
facility charges.
These cuts are not limited to a few agencies. Rather, these cuts
reflect shared sacrifice across the Federal government--even for
agencies that are central to out-competing, out-building, and out-
educating in the 21st century. For example, the Department of Education
has made difficult decisions in order to maintain historic increases
for Pell Grants, which are critical to creating future generations that
are well-educated and globally-competitive. The Administration would
put Pell Grants on firm financial footing through steps that include
eliminating the in-school interest subsidy for loans to graduate
students and ending the new year-round Pell Grant, which offers
students a second Pell Grant in one year, but has cost ten times more
than anticipated. The Budget also eliminates 13 discretionary programs
at the Department of Education and consolidates 38 K-12 programs into
11 new programs that emphasize using competition to allocate funds.
Federal civilian employee pay freeze. Federal workers are patriots
who work for the Nation often at great personal sacrifice. They deserve
our respect and gratitude. But just as families and businesses across
the country are tightening their belts, so too must the Federal
government. On his first day in office, the President froze salaries
for all senior political appointees at the White House. In his Budget
last year, the President proposed extending that freeze to other
political appointees, and he eliminated bonuses for all political
appointees across the Administration. Starting in 2011, the President
has proposed and Congress enacted a two-year pay freeze for all
civilian Federal workers. This will save $2 billion over the remainder
of 2011, $28 billion over the next five years, and more than $60
billion over the next 10 years.
Savings in discretionary security programs. The President's Budget
also demands cuts and savings in security programs. DOD, in particular,
has seen an average increase to its base budget of 7.4 percent a year
over the past decade. Moving forward, DOD is pursuing a variety of
strategies to set the course for zero real growth in defense spending,
and saving $78 billion in its base budget (including $13 billion in FY
2012) relative to FY 2011's request for the next five years. Secretary
Gates will oversee a package of terminations, consolidations, and
efficiencies in operations to slow this growth, and these savings will
be used to fund programs and efforts critical to the armed forces and
the security of the Nation. Reflecting the winding down of military
operations in Iraq, the Overseas Contingency Operations (OCO) budget
for DOD in 2012 will be about 26 percent lower than levels in the
President's FY 2011's request. As a result, the overall defense budget,
including OCO, will be down by 5.2 percent from last year's request.
Administrative savings. Allowing waste is never right, and it is
especially intolerable in a time of tightening belts and tough
decisions. Continuing the President's Accountable Government
Initiative, the Budget cuts $2 billion in administrative overhead like
travel, printing, supplies, and advisory contract services; establishes
a process to quickly sell excess and under-utilized Federal real
estate; and embraces competitive grant programs based on the Race to
the Top model. This model is applied to programs from early childhood
education through college; to allocate grants for transportation; to
bring innovation to workforce training; and to encourage both
commercial building efficiency and electric vehicle deployment.
Reorganize government. We live and do business in a global economy,
but the organization of our government has not kept pace with the
private sector advancements of the 21st century. Many of our government
organizations have strayed from their original or core missions,
evolving out of inertia rather than in response to the changing needs
of the groups they serve. This has resulted in duplicative and
ineffective programs that persist and grow over time, and an
organization of functions that doesn't always make sense. For example,
as the President stated in his State of the Union address, there are
twelve different agencies that deal with exports. Americans deserve a
streamlined, efficient and well-functioning Federal government that is
responsive to the needs of its citizens and of the private sector.
The Budget reflects the President's commitment to reorganizing the
Federal government to ensure that our resources are being used
effectively and efficiently, with a particular focus on making the U.S.
more competitive. In the coming months we will be working to identify
where we can merge, consolidate and cut in order to better facilitate
the needs of all American companies, entrepreneurs, and innovators and
give these engines of economic growth a leg up in the global economy.
The President plans to submit a proposal to Congress to enact the
changes necessary to reorganize the Federal government in a way that
best serves the goal of a more competitive America.
investments in our future
The best antidote to a growing deficit is a growing economy, which
spurs expanded employment, higher revenue collection, and lower demand
for spending on safety net programs like unemployment insurance
nutrition assistance. Putting the Nation on a sustainable fiscal path
and getting our deficits under control are critical to making the
United States competitive in the global economy, and the Budget lays
out a strategy to do this. At the same time, it also recognizes that we
cannot cut back on investments that will fuel future economic growth
particularly since sustained and robust economic growth plays a very
significant, long-term role in reducing deficits. While the Budget
identifies cuts and savings and asks for shared sacrifices across the
government, it also invests in areas critical to helping America win
the race for the jobs and industry of the future.
We must target scarce Federal resources to the areas critical to
winning the future: education, innovation, clean energy, and
infrastructure.
Educate a competitive future workforce. In an era where most new
jobs will require some kind of higher education, we have to keep
investing in the skills of our workers and the education of our
children. This Budget continues to support the President's commitment
to once again have the highest proportion of college graduates in the
world by 2020, and continues the reform agenda not just by devoting
significant resources to where they are needed, but also by ensuring
that those funds are being invested in programs that deliver results
efficiently and effectively. This Budget calls for:
Maintaining the Pell Grant maximum award at $5,550. Since
2008, the Administration has increased the maximum Pell Grant by $819,
ensuring access to postsecondary education for over 9 million students
from low-income families.
Supporting reform of K-12 education with expanded Race to
the Top and other innovative, evidence-based programs that encourage
innovation and reward success, and expands the Race to the Top concept
to early childhood education with $350 million to establish a new,
competitive Early Learning Challenge Fund for States.
Establishing a Workforce Innovation Fund that will
encourage States and localities to break down barriers among programs,
test new ideas, and replicate proven strategies for delivering better
employment and education results at a lower cost per outcome.
Investment in R&D and transformational technologies. To compete in
the 21st century economy, we need to create an environment where
invention, innovation, and industry can flourish. That starts with
continuing investment in the basic science and engineering research and
technology development from which new products, new businesses, and
even new industries are formed. We must focus in areas that show the
greatest promise for job creation to position ourselves to get ahead of
our competitors and be a leader in emerging industries. This Budget
makes significant investments in clean energy technology and research
and development to nurture the United States as a world leader in
innovation. To meet these goals, the Budget calls for:
Providing $148 billion for research and development. This
level of funding continues the effort to double investments in basic
research at the National Science Foundation, Department of Energy
Office of Science, and the National Institute for Standards and
Technology (NIST); provides robust investment in biomedical research at
National Institutes of Health (NIH); and doubles energy efficiency
research and development.
Making the Research and Experimentation (R&E) tax credit
permanent to give businesses the certainty they need to make these
important investments. In addition, the Administration proposes to
expand the credit by about 20 percent, the largest increase in the
credit's history, and simplify it so that it is easier for firms to
take this credit and make the investments our economy needs to compete.
Bolstering economic rejuvenation in hard-hit areas of our
country with new Growth Zone program. Growth Zones will deliver
expanded tax incentives for investment and employment and a more
streamlined access to government assistance to 20 new areas facing
economic distress as well as growth potential.
Providing $8.7 billion for clean energy technology
research, development, demonstration, and deployment. This includes
more than doubling energy efficiency investments and increasing
renewable energy investments by over 70 percent. The Budget seeks to
reinforce new approaches to energy research by adding three new energy
innovation hubs and expanding investment in the Advanced Research
Projects Agency--Energy (ARPAE). In addition, the budget provides $5
billion for Section 48C tax credits for renewable energy manufacturing
facilities.
Build a 21st century infrastructure. To compete in the 21st
century, we need an infrastructure that keeps pace with the times and
outpaces our rivals, and for too long we have neglected our Nation's
infrastructure, its roads, bridges, levees, waterways, communications
networks, and transit systems. In the Recovery Act, the Administration
made the largest one-time investment in our Nation's infrastructure
since President Eisenhower called for the creation of a national
highway system. We need to continue to build on those efforts--and to
do so responsibly by paying for what we build. We cannot strengthen our
economy with a modern infrastructure if at the same time it weakens our
fiscal standing. To give America the world-class infrastructure our
economy needs, the Budget:
Proposes a six-year surface transportation reauthorization
that increases average annual investment by $35 billion per year, in
real terms, over the previous six year authorization plus passenger
rail funding in those years; this represents a total inflation-adjusted
increase of sixty percent over the life of the bill. To bring the trust
fund under budget enforcement mechanisms, the Budget proposes to
reclassify trust fund spending on surface transportation as mandatory,
subjecting it to PAYGO rules and closing score-keeping loopholes.
Provides $1.2 billion for the Next Generation Air
Transportation System, the Federal Aviation Administration's multi-year
effort to improve the efficiency, safety, and capacity of the aviation
system.
Invests in smart, energy-efficient, and reliable
electricity delivery infrastructure. The Budget continues to support
the modernization of the Nation's electrical grid by investing in
research, development, and demonstration of smart-grid technologies to
spur the transition to a smarter, more efficient, secure and reliable
electrical system.
Builds next-generation wireless broadband network to
provide access to 98 percent of the population, creates a Wireless
Innovation Fund, and establishes an interoperable broadband network for
public safety. These proposals will be fully paid for with proceeds
from proposed ``voluntary incentive auctions'' of underused spectrum
and other spectrum management measures, which will generate more than
$27 billion over the next decade. In addition to funding the programs
above, nearly $10 billion of these proceeds will be dedicated to
deficit reduction.
building on our progress
Now that the recovery is beginning to take hold, taking further
steps to ensure responsibility has to be a priority--not because fiscal
austerity in and of itself is virtuous, but because there is no way
that we can compete and win in the world economy if we are borrowing
without an end in sight.
The President's Budget is a down payment. It puts the government on
a path to reach sustainable deficits over the next ten years. This
means that for the first time in 10 years, the government will again be
fully paying for all of its programs and the debt will stabilize as a
share of GDP. This is an important milestone--but not the finish line--
on the path to a balanced budget.
We cannot achieve sustainable levels with ever deeper cuts in non-
security discretionary spending, which is simply not a large enough
share of the picture either to cause or to solve the whole problem. The
President has been clear that we must work on a bipartisan basis to
find long-term solutions across all areas of the Budget, including
Medicare, Medicaid, and tax reform.
Continue efforts to restrain the growth of health costs. Health
care comprises one-quarter of non-interest Federal spending, and it is
the key driver of future deficit growth. According to CBO analysis, the
Affordable Care Act will save more than $200 billion over the next ten
years and will reduce the deficit by more than $1 trillion over the
second decade. This is a pivotal achievement, and the President is
resolutely committed to implementing the ACA fairly, efficiently, and
swiftly. But the job is not yet done. The Budget builds on the ACA with
additional proposals to contain health care cost growth:
The ACA made important advances in the area of program
integrity, but there are other important opportunities to reduce fraud,
waste, and abuse in Medicare and Medicaid. The Budget includes ideas
pulled from external sources, including recommendations from the
President's Fiscal Commission and from legislation that has received
bipartisan support. The $62 billion in health savings in the Budget
focus on increasing program integrity, efficiency, and accountability--
not reducing beneficiary access or benefits. For example, the Budget
extends efficiencies from Medicare competitive bidding for durable
medical equipment to Medicaid, and prohibits brand and generic drug
companies from delaying the availability of new generic drugs (``pay-
for-delay '').
At the same time, these health savings pay for two years
of relief from the Sustainable Growth Rate (SGR) formula--preventing a
decrease of nearly 30 percent in physician payments that would hurt
Medicare. This paid-for extension is on top of the three previous paid-
for extensions of the SGR fix, including the one-year extension enacted
in December, establishing a pattern of practice that we hope to
continue as we work with Congress to achieve a permanent fix.
Fully implementing the Affordable Care Act achieves cost
savings and promotes efficient care, including reimbursing doctors and
hospitals as Accountable Care Organizations, and adjusting payments to
hospitals with high readmissions or hospital-acquired conditions.
Implementing the Act also has the potential to fundamentally transform
our health system into one that delivers better care at lower cost--a
potential that is not fully captured in the ACA savings estimates. In
particular, the Act incorporates the most promising ideas from
economists and leaders from across the political spectrum to control
health care costs.
The President's Budget includes $250 million in grants to
States to reform their laws on medical malpractice through various
approaches such as health courts, safe harbors, early disclosure and
offer programs, or other legal reforms. These grants would be awarded
and administered by the Bureau of Justice Assistance (BJA) in
consultation with the Department of Health and Human Services. The goal
of any reform would be to fairly compensate patients who are harmed by
negligence, reduce providers' insurance premiums, weed out frivolous
lawsuits, improve the quality of health care, and reduce medical costs
associated with ``defensive medicine.'' This proposal is in line with
the Fiscal commission's recommendation for ``an aggressive set of
reforms to the tort system.''
Make a Down Payment on Tax Reform. To foster a competitive economy,
we must have sensible and affordable tax policy that is consistent with
our overall objectives of deficit reduction and economic growth. Since
the last comprehensive overhaul nearly three decades ago, the tax code
has been weighed down with revenue-side spending in the form of special
deductions, credits, and other tax expenditures that do little for
middle income families, and burdened with generous upper income tax
cuts and more generous estate tax cuts for families making more than
$250,000 a year. To compete and win in the world economy, we cannot
sustain a tax code burdened with these unaffordable benefits. This is
why the President has called on the Congress to undertake a fundamental
reform of our tax system. As progress towards this goal, the Budget
calls for:
Allowing the 2001 and 2003 High-Income and Estate Tax Cuts
to Expire. The Administration remains opposed to the permanent
extension of these high-income tax cuts past 2012, as now scheduled,
and supports the return of estate tax to 2009 rates and exemption
levels. These policies save nearly a trillion dollars over the decade
including interest effects. We cannot afford these unpaid-for tax
breaks for the wealthiest Americans and we are committed to limiting
the current extension to two years.
Beginning the Process of Corporate Tax Reform. The United
States has the highest corporate tax rate in the world. Part of the
reason for this is the proliferation of tax breaks and loopholes
written to benefit a particular company or industry. The result is a
tax code that makes our businesses and our economy less competitive as
a whole. The President is calling on Congress to work with the
Administration on corporate tax reform that would simplify the system,
eliminate these special interest loopholes, level the playing field,
and use the savings to lower the corporate tax rate for the first time
in 25 years--and do so without adding a dime to our deficit.
Paying for the Alternative Minimum Tax (AMT). This Budget
provides for a three year extension of AMT relief, and is offset by an
across-the-board 30 percent reduction in itemized deductions for high-
income taxpayers. This is the first time an extension of AMT relief has
been fully paid for. While our base projections do not assume that we
continue to pay for AMT relief after 2014, the President is committed
to working with Congress to fully pay for AMT relief beyond this
window. Doing so reduces the deficit by an additional 1 percent of GDP
by the end of the decade relative to the deficit reduction in the
Budget.
Take Steps Now to Reduce Future Liabilities. Looming debts and
unfunded liabilities can put taxpayers on the line for bailing out
programs in the future. The Budget promotes fiscal stewardship by
restoring responsibility to key areas. First, the Budget proposes to
give the Pension Benefit Guaranty Corporation (PBGC) Board the ability
to adjust premiums and directs PBGC to take into account the risks that
different sponsors pose to their retirees and to PBGC. This will both
encourage companies to fully fund their pension benefits and give the
PBGC the tools to improve its financial soundness without over-
burdening the companies it ensures, saving $16 billion over next
decade. Second, the 2012 Budget provides short-term relief to States by
providing a two-year suspension of State interest payments on their
debt and automatic increases in Federal unemployment insurance (UI)
taxes. At the same time, the Budget proposes steps to encourage States
to put their UI systems on firmer financial footing and pay back what
they owe to the Federal government. Beginning in 2014, the Budget
increases the minimum wages states can subject to unemployment taxes to
$15,000. Finally, the Budget proposes to gradually reduce the loan
portfolios and eligible loan sizes of Fannie Mae and Freddie Mac and
end the conservatorship of these companies, scaling back government
support in a way that allows private capital to return without
undermining the housing market recovery.
Begin a Dialogue on Social Security Solvency. The President
considers Social Security to be one of our most successful programs,
and indispensable to workers, people with disabilities, seniors, and
survivors. The President has been clear that we need to strengthen
Social Security to make sure that Social Security is sound and reliable
for the American people, now and in the future. The Budget lays out the
President's principles: Reform should strengthen the program and its
protections for the most vulnerable, without putting at risk current
retirees and people with disabilities, without slashing benefits for
future generations, and without subjecting American's guaranteed
retirement income to the whims of the stock market. The President
believes that the best way forward is for leaders of both parties to
come together to discuss the way forward on a bipartisan basis.
Social Security is not contributing to our deficit any time soon.
Our goal is to make sure that current and future generations are
assured that the system will remain sound for the long term as well--to
provide the peace of mind that is one of the important benefits of
insurance.
a way forward
There has been a vibrant national conversation on fiscal
responsibility over the past several months. The President's Fiscal
Commission made important progress in launching a serious bipartisan
discussion last year, and I commend them for resetting the debate on
further deficit reduction. While the President has not embraced all of
their proposals, many of them are included in this year's Budget.
Federal employee pay freezes, medical malpractice reform, a call for
government reorganization, and the elimination of in-school subsidies
for graduate student loans are just a few examples. Our Terminations,
Reductions, and Savings volume includes numerous proposals that were
also recommended for termination or reduction by the Fiscal Commission.
And like the Commission, we make proposals to improve budget
discipline, including subjecting the Transportation Trust Fund to PAYGO
rules and providing for program integrity cap adjustments. We must take
serious steps to both cut spending and cut deficits. We must address
these issues in a bipartisan way. And we must do so in a way that is
consistent with our core values.
The Fiscal Commission was clear that that the only way to tackle
our deficit is to cut excessive spending wherever we find it--in
domestic spending, defense spending, health care spending, and spending
through tax breaks and loopholes. Now that the worst of the recession
is over, we have to confront the fact that our government spends more
than it takes in. That is not sustainable and we need a comprehensive
approach
The five year non-security freeze achieves significant savings with
a dramatic reduction in discretionary spending over the coming decade,
and it will require commitment from both the Administration and
Congress to live within that framework. But we have to remember that
this category of spending represents a little more than 12 percent of
our Budget. To make further progress, we cannot pretend that cutting
this kind of spending alone will be enough. Looking forward, we will
have to make hard decisions to further reduce health care costs,
including programs like Medicare and Medicaid, which are the single
biggest contributor to our long-term deficit. Health insurance reform
will slow these rising costs, which is part of why nonpartisan
economists have said that repealing the health care law would add a
quarter of a trillion dollars to our deficit. Still, we need to look at
other ideas to bring down costs, and the proposals in this year's
Budget are a first step. And we cannot afford a permanent extension of
the tax cuts for the wealthiest two percent of Americans if we are
committed to achieving a sustainable deficit.
This Budget builds on the work of the last two years, and makes a
down payment on a strong American future. Much work remains to be done.
We need to take steps to reduce our future liabilities. And we need to
work to shape our government into one that is more affordable, more
effective, and more efficient.
I look forward to working with both houses of Congress in the
coming months as we work to put our fiscal path back on a sustainable
course.
Chairman Ryan. Thank you. Mr. Lew, before I get into this,
how long do we have you for? I understand you have to testify
over in the Senate later this afternoon.
Mr. Lew. I believe we have until 12:30.
Chairman Ryan. But a little bit longer than that, since you
were a little late, how does that sound?
Mr. Lew. I apologize for being late. I hadn't allowed for
the new security rules.
Chairman Ryan. No, don't apologize. I am just trying to
manage time so everybody gets a shot at their questions.
Mr. Lew. Actually, Mr. Chairman, the issue was, the
gentleman in front of me in line had to take his shoes off as
he went through the metal detector, and it took a few minutes.
Chairman Ryan. Okay. I am reading in the Washington Post
today, an editorial board which is, you know, more often
thought as favorable toward the administration's point of view,
quote, the title of the editorial is, President Obama's Budget
Kicks the Hard Choices Further Down the Road, quote, The
President punted. Having been given the chance, the cover and
the push by the Fiscal Commission he created to take bold steps
to raise revenue and curb entitlement spending, President
Obama, in his fiscal 2012 budget proposal, chose instead to
duck. To duck, and to mask some of the ducking with the sort of
budgetary gimmicks he once derided.
We just heard from the Congressional Budget Office director
and the chairman of the Federal Reserve, one of the best things
we can do for the economy today is put in place a plan that
gets this deficit and debt under control. Why did you duck? If
George Bush brought this budget to the House, I would say the
exact same thing. You know the drivers of our debt, you
understand the issues. I think the fact that the President even
gave us this Fiscal Commission to start with acknowledged, we
agree on the size and the scope and the nature of the problem.
Why did you duck, why are you not taking this opportunity to
lead?
Mr. Lew. Mr. Chairman, I think the President's budget, if
you look at the bottom line, addresses the fiscal challenges
that we face in the short and the medium-term, and he has
called it a down-payment, acknowledging that we need to work
together in the long-term. If you look at what the mandate of
the Fiscal Commission was, it was to bring the deficit down to
three percent of GDP by the middle of the decade. Our budget
does that.
Surely there are things in our budget that we will have
disagreements about. I know that we are going to have a serious
debate about priorities. But the President's budget
accomplishes the goal. And I think if you look at the budget,
it does it with some very, very tough decisions. The spending
reductions are very real, the revenue provisions are very real,
and the mandatory savings are very real. There certainly are
other things that we will need to work on together to address
the long-term challenges, but if our goal is to get to a
sustainable deficit by 2015, I think the President's budget
puts down a comprehensive deficit reduction path.
Chairman Ryan. Okay, using your own table S-4 on page 176
of your budget, you don't get the primary balance in your own
numbers until 2017, and then immediately thereafter you have
more problems.
Mr. Lew. So, let us look at S-4. If you look at S-4, where
it starts, the deficit is 10.9 percent of GDP. It comes down to
3.2 percent of GDP in 2015. We then stay between 2.9 and 3.2,
3.3, in that area around three percent of GDP for the rest of
the decade, and if you had a series that went beyond, it would
go on for years beyond that. I think it is a mistake to think
of three percent of GDP as a bulls-eye. I think if you compare
10.9 percent to 3.2 or 3.1 or 3.0, it is a world of difference.
And I think we achieved primary balance in this budget.
Chairman Ryan. So let us get into what is behind that
primary balance, behind your claims of balance. And I can go
through the tables. Am I correct that the budget proposes
revenues that are $819 billion greater than your current policy
baseline, and that within your policy baseline, you have an
$807 billion, 10-year tax increase built into it, because it
assumes the expiration of the 2001 and 2003 tax cuts for higher
income earners, and assumes the estate tax reverts back to 2009
level? Am I correct that that is what your baseline assumes?
Mr. Lew. Mr. Chairman, our baseline assumes, consistent
with where there was bipartisan agreement in December, that we
would permanently extend the middle class tax cuts, and that we
would have estate tax relief. We did not have long term
agreement on the upper income rates, or on the richer estate
tax relief.
Chairman Ryan. I just wanted to make sure we have an equal
understanding.
Mr. Lew. Yeah. We tried to construct a baseline so that the
difference would be clear.
Chairman Ryan. So, adding the additions in the baseline
revenue increases, that is about $1.6 trillion in additional
revenues from where we are today, correct?
Mr. Lew. Well, the upper-income tax cut is $709 billion,
and the estate provision is $98, and then there is some debt
service on top of that.
Chairman Ryan. Right, so 1.6, okay.
Mr. Lew. It is 953, actually, I believe.
Chairman Ryan. What about debt service?
Mr. Lew. It is 709 for the upper-income, 98 for the estate,
and 147 in debt service.
Chairman Ryan. So, let me get to this because you have to
go, and I have a lot of questions, and I am going to send you
more. Your economic assumptions, which are how you achieve
primary balance, which is how you achieve the claims you are
making. I want to walk you through this and ask you why you
make these economic assumptions.
You are expecting very robust growth in the coming years.
Your forecast calls for real GDP growth well above four percent
in 2013 and 2014, much, much higher than the private sector
Blue Chip consensus or Congressional Budget Office, but I find
it interesting that 2013 also marks the year where you are
calling for a big rise in taxes across all segments of our
economy. You basically are raising taxes on successful small
businesses, on investment, as part of the expiration of the
2001-2003 tax cuts and the health care tax cuts. Specifically,
there is a new 3.8 tax increase on investment. As of 2013, the
top income tax rate will rise from its current level of 35
percent all the way to 44.8 percent. The tax on dividends could
triple from its current level of 15 percent to 45.4 percent.
And the tax on capital gains will rise from 15 percent to 23.8
percent.
But you are calling for robust economic growth in that very
year. Do you think that the tax increases that you are planning
on in 2013 on mostly successful small businesses in the
investment community in America, on job creators; you think it
is not going to impact the economy? You think that is the year
when the economy takes off? Because if it doesn't, then you
never reach primary balance, as you are claiming.
Mr. Lew. Mr. Chairman, there was, in December, an agreement
that we should extend certain tax provisions for two years. And
there are some provisions that do take effect, or go out of
effect, because of that. I think if you look at our economic
assumptions, the economic assumptions in the short-term are
actually a little bit more pessimistic than some of the outside
observers. In the long-term they are a little bit more
optimistic, and it is driven by one key difference, which is an
important conceptual difference. The question is will we
recover from this recession the way we have recovered from past
recessions?
If you look historically, financially-led recessions have
had slightly longer periods of recovery, but in the end we get
back to where the economy would have been. We assume that that
is the case. We are within the range of recoveries from past
financially-led recessions, and we think that they are very
prudent, reasonable assumptions. Undoubtedly, and I apologize I
am a lawyer not an economist, so I could get into a level of
detail here which is probably beyond my own training. But
economists can disagree about what year it would happen and
they can disagree about whether or not we will get back to what
was the potential GDP before. We think it is the right thing to
do, to get our economy back. That is one of the reasons we have
put forward a budget that invests in the things that it takes
to keep growing the economy; and we think that education,
innovation, and infrastructure are key to it.
Chairman Ryan. Here is what does not add up to me; you are
saying, in 2013, you are going to have economic growth 1.3
percent higher than what the Congressional Budget Office
believes, 1.4 percentage points higher than what the Blue Chip
believes, and you are claiming this explosion of growth in a
year where you are raising taxes across the board on
entrepreneurs, small businesses, investors, investment.
History doesn't square with your comments. And if we are
right and you are wrong about this, then you will never reach
primary balance. The $1.7 trillion you are claiming in extra
revenue because of the higher economic growth, you are claiming
above and beyond what the Congressional Budget Office claims,
doesn't materialize then, and we are in a world of trouble.
And I will just finish with this. What is so frustrating
about this is, you know the drivers of our debt are the
entitlement programs. And yet, you are doing nothing to address
that. We are in different parties; that is fine. But when
people elect a President, they expect a President to lead, to
take on the country's biggest challenges before they become
actual crises. And we all know that this debt is becoming a
crisis. And you are not even touching these programs. You are
assuming the economy is going to take off in a year in which
you are raising taxes everywhere, all over the economy. And if
your math doesn't add up, then we are all in a world of hurt,
and this will cost us jobs.
Mr. Lew. Mr. Chairman, if you look at tax provisions, the
vast majority of the revenues that you are talking about are
associated with the tax rate at the top end; the tax rates for
people who earn $250,000 a year or more. I would just note
that, during the last administration I served, and during the
Clinton Administration, at those tax rates we had the longest
period of uninterrupted growth in American history. So they are
not tax rates that have been historically challenging to
growth. If you look inside our budget, where there are new
proposals, we have a lot of tax cut proposals that are designed
to promote the kinds of investment that we need in this
country. And we, net, have $360 billion of new revenue. So it
doesn't amount to a large amount in 2013.
Chairman Ryan. Yeah. I don't know where you are from, but
where I come from, most of our jobs come from successful small
businesses. In Wisconsin, you drive to any city, and there is
going to be an industrial park with a Sub-S, a LLC with 100,
maybe 200, 300 employees. They file taxes as individuals. Most
of the top tax rate is actually small businesses. And when we
are taxing our small businesses at rates above 50 percent in
most states, like Wisconsin, 44.8 percent in this country,
where most of our competitors are taxing their businesses at
rates lower than we are, how do we expect to win global
competition? How do we expect to create jobs when we are taxing
the engine of economic growth and job creation, small
businesses, at rates in excess of 50 percent in most states?
Mr. Lew. I think that if we look at who are the taxpayers
in that class, at $250,000 or above, and where the revenue
goes. I am from New York, a lot of it goes to finance and a lot
of it goes to law. And I think that it is not the case that the
top rate is something that is principally a small business
issue. I think that we have a lot of tax proposals that would
make taxes easier for small businesses. The right way to target
small business is to make sure that we do the things that are
targeted to investment, and not to the kinds of income that
drives people into that top bracket, in the most cases.
Chairman Ryan. All right. Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman. Director Lew, as I
indicated in my opening statement, I think it is an important
achievement that in this budget you reach primary balance by
the year 2017 and begin to stabilize the problem. But I also
indicated that I think we all need to work together, especially
to take actions, now, to deal with what are going to be
projected deficits in the next 20 years, and I think that
conversation should begin now.
But I do want to point out that this is not easy to do when
you have dug yourself as a country in a deep hole, digging
itself out, that there are other alternatives out there. And
the Chairman of the Committee has put forward an alternative
road map, in good faith, in a sincere effort to reduce the
deficit. So it is in that spirit that I just want to point out
that when the Congressional Budget Office, last January, scored
that budget proposal, that deficit proposal, that they
indicated that in the year 2020, the deficit would be 3.7
percent of GDP. And that the budget would not be in primary
balance under that plan, as of that day. And that, in fact, if
you go out another 20 years, until 2040, the deficit in percent
of GDP is 4.5 percent, and the budget is just then getting into
primary balance.
And I point that out, Mr. Chairman, to show you how hard it
is. As some criticize the President's effort, just recognize
that other sincere efforts that were made actually brought the
deficit into primary balance later than the President's budget.
And there are going to be conversations about different
assumptions, but my point is, these deficit numbers were the
result of a good faith effort, and I think the President has
made a good faith effort. We do all need to get together.
Now I want to discuss the longer-term outlook. I want to
discuss what is happening today on the floor as it draws
contrast with the approach that the Obama Administration is
taken with respect to the deficit. As you indicated, you are
talking about significant cuts in domestic discretionary
spending. As you know from listening to many of my colleagues,
these are going to have a real impact, and a painful impact on
many people's lives. But you have decided that, in order to get
deficit under control, we are going to have to make these tough
decisions, and we agree.
At the same time, today on the floor, there are proposals
to cut immediately and deeply. I just want to read to you a
statement from the President's Bipartisan Deficit Commission,
that we are hearing lots of positive things about, from our
colleagues, about their recommendations and approach. Here is
what they said, and I quote, In order to avoid shocking the
fragile economy, the commission recommends waiting until 2012
to begin enacting programmatic spending cuts.
Another bipartisan commission, the Rivlin-Domenici
Commission, rendered the same advice. Mark Zandi and other
economists have indicated that deep, immediate cuts, in
contrast to responsible and planned cuts over a period of time,
those deep, immediate cuts, could harm the fragile economy, and
hurt job growth. If you could please comment on the proposals
today, for very deep and very immediate cuts and the impact
they would have on the economy and job growth, in your opinion.
Mr. Lew. Mr. Van Hollen, I think we have a tough balance
that we have to strike. We agree that it would be a mistake to
do drastic deficit reduction in this year that we are in,
beginning in next year. We had bipartisan agreement in December
on the tax bill, largely because of the concern that we needed
to keep the economy moving, that we couldn't afford the drag
that a tax increase in January would have had. At the same
time, we need to focus on reducing spending, we need to focus
on making decisions that will turn the corner on the deficit,
and we can't really wait years to do that.
I think our budget has a frame that we think is the right
frame for making the tough trade-offs. And we are going to have
to work, as we go through the remainder of the legislation for
fiscal year 2011, and then as we work together on next year, to
come up with the right balance. I think it is important that we
have the right balance. You don't need to make the kinds of
cuts that you are describing in order to get on the right path,
but you do need to tighten the belt, which is what our budget
is saying.
And we are watching carefully as the House continues work.
We will be working with the House and the Senate, and then
ultimately together, to do the responsible thing and fund the
government. But I think it is a question of not mixing too many
things together. The long-term challenge is what we have got to
keep our eye on. When I say long-term, in this window of the
next 10 years, we have got to look to the middle of the decade.
And are we on a path towards getting down to a deficit where we
stop adding to the debt? That is what we have tried to do with
the budget.
Mr. Van Hollen. Some of our Republican colleagues have
indicated that, if they don't get their way, in terms of these
very deep and immediate cuts that could harm the economy, that
if they don't get their way on those cuts, that they would shut
down the government. Now, we have seen this movie before, I
know you have. If you could just make clear what some of the
impacts of that would be on things like the Social Security
Administration and other essential functions of government.
Mr. Lew. Well, I take the Congressional leadership at their
word, that we all want to avoid a situation like that. It is
not the right way to run the government, and I think we have a
broad agreement that we have to keep essential services going.
When the government shut down in the mid-1990s, it was very
unpleasant. It was unpleasant when people needed to apply for
passports because a relative was ill or passed away overseas,
and they couldn't get a passport. People started to appreciate
things that they just took for granted, but when the government
shut down, they stopped.
I hope we don't get to the point where we have to go
through that again. And I think if we all work together in a
bipartisan way to look for the things we can agree on, and take
some of the things that we can't agree on, and put them off to
the side, we can accomplish a great deal.
Chairman Ryan. Thank you, Mr. Van Hollen. I will just
simply say for the record, it is not our desire to see the
government shut down, but equally we don't want to rubber-stamp
these elevated spending levels. We want to see a beginning of a
down-payment on spending reductions. With that, Mr. Simpson.
Mr. Simpson. Thank you, Mr. Chairman, and I would just
reiterate what you just said. It is nobody's desire to shut
down the government; what we want to do is reduce spending. And
that is what we are trying to do with the budget that we are
bringing to the floor. Everybody talks about draconian cuts.
You have got to remember, this is on top of enormous increases
that have occurred over the last couple of years, so it is not
as draconian as a lot of people would like. But I appreciate
your testimony; I appreciate your hard work on this budget. I
know it is hard to put together a budget, even if it is one
that most people, I want to say this respectfully, but most
people don't take seriously.
Most people don't think this is ever going to be enacted.
All the right words are used. I think the Ranking Member said,
this is a tough-love budget. If this was the tough-love that my
father had shown me when I was young, I would still be a
juvenile delinquent. Some people think I still am; I understand
that.
I have heard that we have to make tough choices; they are
going to be necessary. We have to live within our means. Let me
ask you, this budget, theoretically, goes to balance in, what,
16 years?
Mr. Lew. Well, it is going to take a long time to go to
balance, we first have to stabilize the debt.
Mr. Simpson. Is there ever a balance projected out there?
Mr. Lew. To get to balance will require a set of decisions
that are beyond what anyone is discussing right now.
Mr. Simpson. Why is no one discussing that?
Mr. Lew. Well, I will tell you the last time I testified
before this committee, I presented a balanced budget with a
surplus. I understand what it takes to get to a balanced
budget. We have gone through 10 years of a combination of
things that have driven the deficit up. We have had an economic
crisis, but we also had decisions to not pay for what we were
doing. We now have to deal with the results of that, and it is
not going to be a quick process. I know that I left things in
pretty good shape 10 years ago, and I look forward to leaving
things in better shape when I am done this time.
Mr. Simpson. I do not deny that you did. We have a tendency
in this committee to sit and look back at certain indicators
that prove our point of view. All of those don't really matter.
What matters is where we are today, and where we are going to
be in the future. And what the American people are saying is,
get your fiscal house in order. I don't see this getting our
fiscal house in order. I have noticed that everybody says, Well
we are going to have $400 billion in cuts and savings in this
budget, like that is some big deal. Four-hundred billion
dollars, yeah it is a lot of money, that is over 10 years,
right?
Mr. Lew. Yes.
Mr. Simpson. That is like $40 billion a year. The budget
this year's proposal is $3.73 trillion? Forty billion in
savings? Less than one percent, or around one percent in
savings? This is not tough-love. This is continuing the path we
are currently on with no future balanced budget ever, in this
proposal, and the American people are rejecting it, frankly.
Mr. Lew. Congressman, let me just say a couple things.
First, we have put what we believe to be a very serious
proposal, it is comprehensive, forward. We don't think we have
a monopoly on all knowledge and wisdom; we look forward to
seeing the ideas that are put forward. And when you put forward
a budget that reduces the deficit, I am sure there will be
things in it that we can agree on, there will be things that we
can't agree on. This is the first step in the process. I know
that it is easy for pundits on the outside to dismiss the
starting point, but the President's budget is the starting
point. It is a frame, it is a comprehensive frame. And I think
that it does achieve something very important, which is it
stabilizes the deficit at three percent of GDP by the middle of
the decade, and while I totally agree that we need to be on a
path that goes beyond that, and I wish we were on a path where
we could, together, talk about balance. Until we stop adding to
the national debt, we can't talk about getting to balance, and
this budget would get you there.
We won't agree on all the details. And I know that some of
the actions that have been taken in this House do cut spending.
I haven't seen the actions yet that reduce the deficit. And I
look forward to that. I know that it is the beginning of the
process, and we will work together when we see your proposals.
Mr. Simpson. Well we all understand that you are not going
to get to balance by simply cutting spending. The spending is a
portion of how you get there. You also have to look at the
entitlement programs which this budget totally left out, in
terms of reform of the entitlement programs. And everyone, I
think the American people understand, that we have to address
entitlement reform, and leadership has to come from the White
House to do that, quite frankly.
Mr. Lew. Congressman, we agree that we need to reduce
spending. I think if you look in this budget, this is possibly
the toughest budget that certainly a Democratic President has
ever put forward, cutting things that are very, very important
priorities, things that many of us have worked for decades to
grow. We have said we have got to tighten our belt; we have got
to do what every American family does and make the tough
choices. So I think there are real tough choices in this
budget. I don't think that it is fair to say that we haven't
dealt with entitlements. We certainly haven't dealt completely
with entitlements, but $62 billion of savings to pay for
Medicare in the next two years is something. It is real, it is
a first step, it is a down-payment.
I think that if we are going to work together on
entitlements, we also have to acknowledge that Social Security
is not driving the deficit between now and 2021. You know, I
worked on Social Security Reform. In 1983 I was working on the
reform bill. So I deeply, deeply believe that we have an
obligation to current workers, to future retirees, to current
retirees, to have a system that is sound and reliable for
decades and decades to come. But it is not contributing to the
short-term deficit. We should do it because it is the right
thing to do.
Mr. Simpson. Right. Appreciate it, thank you.
Chairman Ryan. Ms. Schwartz.
Ms. Schwartz. Thank you very much. Good to have you here
and thank you for your good work on this first budget that you
are presenting. And I appreciate, and it was more in your
written remarks than what you said here, but you reference, you
did reference how we got here. And I don't want to dwell on
this, but I appreciate the fact that you laid out very, very
clearly that the national debt and the economic crisis that the
President inherited. And the work that the President and the
Democratic Congress did in the last two years to bring us out
of what was obviously a really deep, really broad, and in many
cases, devastating recession for this country. But being clear
that the President inherited a $10 trillion debt; this didn't
all happen in the last two years. And of course, the recession
actually meant that there were few people paying taxes, too; so
this reduced our revenues.
The President's budget really does, I believe, make very
clear that we can't accept the status quo; that where we have
gotten to is a better place. We are beginning to see a growth
in the economy, beginning to see some growth in jobs, which is
good, and we just can't sit on our hands. Nor do I think that
we, and I think you have rejected this, the notion that we can
get to a place where we can balance the budget and grow the
economy simply by spending cuts. My Republican colleague did
acknowledge that, and I appreciate that, because that is their
proposal right now. The only thing we can do is spending cuts,
and actually tax cuts, but that alone is not going to get us
there. And that is what is being presented by the Republican
majority.
But I also will agree, those made by the Republican side,
that budgets are about priorities and values, and I think this
is something that the President has made very clear: that we
cannot only focus on deficit reduction. We need to reduce the
deficit, but if we are going to grow the economy, put people
back to work, then we have to invest in the future. And that is
what I wanted to ask you about. I wanted to acknowledge, of
course, that the budget does reduce the deficit by $1.1
trillion, and that is real money for most of us. And it is not
easy to get there. And it brings fiscal stability to the nation
in 2017, primary balance, again none of this is easy.
But the budget also does make strategic investments in the
future. For many of us in our districts across the country, if
we are going to see growth in this economy, the focus on
energy, on innovation, on education, on infrastructure, is
important. And every business I talk to says to me, We need, we
look at, we locate, do we have incentives for innovation? Do we
have the kind of infrastructure that allows us to move our
products and our workforce? Is there an educated workforce?
They ask about taxes, too. But they want to know, and it starts
with, where is the infrastructure? Where are the advantages for
innovation?
And so, I think we need to talk about that. Because
otherwise we are really just looking at a slash-and-burn,
willy-nilly, let us just cut spending right now. And again, the
Budget Deficit Commission said, not a good idea in a fragile
economy. So I would like you to elaborate a bit on the tax
credits that are available to businesses to incentivize
research and development, key to our growth. Because it is the
private sector in this country that does create the new
discoveries, the new technologies, the new products. But they
often look to us for that helping hand.
Mr. Lew. Thank you. I think that, if you were to ask most
businesses that are in the high technology area, what is the
single thing we could do that would give them stability looking
forward, it would be to make permanent the R&D Tax Credit. The
uncertainty from year to year is a very difficult way to do
business. And while, in Washington, there is a kind of
conventional wisdom that we know it will be extended because it
has to be extended, if you are a business person trying to make
a decision, trying to go get financing, trying to get
investors, having that ambiguity out there can be life or death
as far as your business is concerned. So I think, putting in
our budget a permanent extension in the context of a fiscal
policy that pays for it, is very important.
I think it is also important to remember that there is a
role for government-funded programs and tax support in R&D.
Basic research in this country has really been very much
enhanced by what we do at the National Institutes of Health,
what we do in the National Science Foundation, what we do in
the Department of Energy, and what has made us the leaders in
innovation is that the technology that is discovered in places
where, frankly, the risk should be shared by all of us, it is
then handed off to a private sector that has the capacity to
implement it more effectively than any other in the world. And
we have tried to balance that.
Chairman Ryan. I hate to cut you off, but I just want to
make sure that every member gets a chance, and it is way over
the five minute limit.
Ms. Schwartz. I appreciate your comments; we will keep
working together on that. Thank you.
Chairman Ryan. Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman, and welcome,
Director Lew.
Mr. Lew. Thank you.
Mr. Campbell. In your budget, you propose to increase
federal civilian employment outside of the Department of
Defense by 22,400 people in the coming fiscal year, 2012.
Seriously, you want to increase the number of federal employees
now?
Mr. Lew. Well, we have an awful lot of agencies that are
going down. The increases are very much concentrated in areas
where there are new missions, and they are missions that, I
think, are shared concerns. If we put in place new screening
procedures at our airports, and we put in the machinery so that
we can make sure that no one gets on an airplane with an
explosive. We also need to have the inspectors there, who run
the machines, who know what is in them. I think if you go
through the increases, they are very heavily in areas where
there are new missions that we are undertaking, and I am happy
to get back to you after and go through some of them.
Mr. Campbell. Okay, so you do propose to increase by
22,000?
Mr. Lew. No, in general, if you look through the budget,
there are a lot of agencies that go down, so we don't have a
general approach.
Mr. Campbell. Twenty-two thousand, four-hundred is the net
increase outside of defense. Another question, Your
predecessor, Dr. Orszag, before this committee on several
occasions, said that the current fiscal trajectory of the
country was unsustainable. Do you share that view?
Mr. Lew. I think this budget stands for the principle that
we have to get our fiscal house in order, and that we have to
take seriously stopping the practice of treating deficits like
they don't matter. And we have put a plan forward that would
get us to primary balance by the middle of the decade. That was
the challenge that he was describing ahead of us at the time.
Mr. Campbell. Absent this budget, you agree that the
current trajectory is unsustainable?
Mr. Lew. If you look at what is driving the deficit down,
part of it is getting the economy moving again.
Mr. Campbell. Director Lew, I understand you are a lawyer,
but is it unsustainable? That word is used by a lot of people.
Mr. Lew. I was going to answer your question; I just need
to break it into the pieces in order to answer your question.
We need to keep the economy growing in order to not have an
unsustainable deficit, because the kind of financial crisis we
are in, the recession, creates enormous problems in our fiscal
policy. We have got policies in place to do that, but then we
can't stay at deficits that are five percent of GDP, which is
roughly where we would be if we didn't make policy. We need to
make policy to bring it down so we can get to primary balance.
We have done that, and I do think that that is what we have to
do to have a sustainable fiscal policy.
Mr. Campbell. So is this budget sustainable? Does it solve
the problem?
Mr. Lew. Those are two different issues. Sustainable is a
step along the way; I think the problem is bigger than that. I
think that, you know, I preferred sitting in this seat when I
could project surpluses in healthy economic times. We are a
long way from being able to do that on either side of the
aisle. We are going to need to work together to get to the
point where we stop adding to the problem, and then we are
going to need to work together to solve the rest of it.
Mr. Campbell. Earlier I believe you did use the word
sustainable with this budget. So do you believe that if we did
this budget, it was enacted for the next 10 years exactly as it
is on this paper, that we would move along fine, we don't have
a debt problem, we don't have a problem?
Mr. Lew. No, I think this budget produces a deficit that is
sustainable for a period of time so that we can then work
together. It is a down payment, and then we need to work
together.
Mr. Campbell. Afterwards the deficit goes up, after the 10
years of this budget.
Mr. Lew. It starts to creep up, but as you get 20 years out
it starts to be a problem again. There is more work ahead of
us. I totally agree with the notion that we cannot just look at
the next five or ten years, but I am saying we have to start by
looking at the next five or 10 years.
Mr. Campbell. So we do have to deal with the entitlement
programs?
Mr. Lew. The President said in the State of the Union, and
in his budget, that we have to look to the short-term and the
long-term. We need to work together on that.
Mr. Campbell. Why not propose something now?
Mr. Lew. Well, this budget proposes a great deal to get us
to primary balance. It gets us to a place that is sustainable.
And it extends the offer, as the President did in the State of
the Union, to work together. We have tried to leave options on
the table, we have tried to create an environment where we will
be able to work on things that have historically been
challenging, and I think we need to do both.
Chairman Ryan. Mr. Doggett.
Mr. Doggett. Thank you very much, Mr. Chairman, and thank
you for your service. And I want to draw attention to the last
time you came before this committee, because it was an unusual
time in which you did not just talk about a balanced budget,
but as you made reference in an earlier comment, you, working
with President Clinton and this Congress, produced a balanced
budget, something that no Republican President, before or
after, has done in decades. And the unfortunate thing is,
having produced that balanced budget, our Republican colleagues
in the Bush-Cheney administration, when they took over, instead
of building on that success, squandered on that success. They
never met a tax break they didn't like, they believed in the
alchemy that every expert who came here, Republican and
Democrat alike, told them that those tax breaks wouldn't pay
for themselves, they abandoned pay-as-you-go government, they,
in addition to all the tax breaks that they advanced, they
advanced one increase in spending after another, increasing
government spending at an incredible rate, but not wanting to
pay for it.
And so after eight years of running our debt up and our
economy down, they are complaining today that you haven't
solved all the problems that they created in eight years fast
enough. And I think that is basically the circumstance in which
we find ourselves. With reference specifically to this question
you were just asked about the 22,000 increase in government
employees, isn't a large part of that related to the honesty
that this administration brings to federal employment, that you
can contract out and create the appearance that you are
reducing the size of the government, but many of these
contracting out experiments of the last eight years just ended
up costing tax payers more and producing less?
Mr. Lew. That is part of it. And the other kinds of
examples that I have used explain the other part of it. We also
have a very, very large work force, and this is a very small
percentage of the total.
Mr. Doggett. And then I want to ask you about one type of
entitlement spending that I am encouraged to see, and I want to
explore with you a minute about it, that the administration
again seems to be focusing on for the first time, something
prior administrations have not done; and that is the whole area
of tax expenditures, because they really do amount to
entitlements since they are entirely out of the budget process.
You have, for the first time since 1993, of any President,
revised that section of your budget, and it would appear that
tax expenditures, which now rival direct discretionary
expenditures, will receive some type of thorough evaluation by
the administration, and I just ask you first to comment
generally about what you see going forward, and whether perhaps
we will eventually have a tax expenditure budget to allow a
more thorough comparison of the tax expenditures and the direct
expenditures?
Mr. Lew. Congressman Doggett, the issue of tax expenditures
is a very important one. If you look at the work the Fiscal
Commission did, one of the places where I think they made a
real contribution was in having a conversation about spending
on both the revenue and direct spending side. If you look at
the President's budget, the proposal that I described as the
way we pay for the alternative minimum tax extension is a prime
example of how we begin to get that spending on the tax side.
It says that we have a host of provisions in the tax code that
are of more value as you get into a higher and higher tax
bracket, and that we should limit it so that someone who has a
family at 250,000 and above gets the same value as people at
250,000 and below. It doesn't take the deduction away, it
starts to trim the value of it. We think that is a measured way
to start getting at this issue of spending in the tax code. And
we think it is something that ought to be the basis for being
able to begin a serious conversation.
Mr. Doggett. Have you envisioned, during the coming year, a
thorough and careful evaluation of these tax expenditures, and
implementing what you say in your budget appendix?
Mr. Lew. The President has proposed in his State of the
Union and the budget that we begin to work together on
corporate tax reform and that we have a general bipartisan
consensus.
Mr. Doggett. Just on that point specifically, I am very
pleased that the President, in his State of the Union, and
Secretary Geithner indicated that must be revenue neutral. I
think it actually ought to be revenue increasing to help deal
with this problem, but that is a non-negotiable position in the
administration. We are not going to see us borrow from the
Chinese in order to give tax cuts to corporations, are we?
Mr. Lew. So the principle the President set forth was that
we should broaden the base, lower the rates, so we can be more
competitive, and it is really, principally, a way to drive our
international competitiveness. That is going to be challenging
because once we have all agreed on that broad principle,
broadening the base means that you take away special interest
tax provisions.
Chairman Ryan. Thanks. Mr. Calvert.
Mr. Calvert. Thank you, Mr. Chairman. I just want make a
point; my friends on the other side of the aisle took over the
Congress in 2007, and that is when you see significant spending
increases, and as I understand it, Congress does have something
to do with spending around here. And that is certainly a big
part of it. I want to thank our guest for coming out today, I
understand the traffic was bad, I saw it out there, it was
pretty difficult. A couple of things you pointed out to drive
people to investment. I am a small businessman, was a small
businessman; how do you drive people to investment if you have
significant increases down the road in capital gains rate?
Mr. Lew. I think that the responsibility that we have,
first and foremost, is to keep a healthy, growing economy where
there is demand and there is business activity out there. So I
think that, going to our big frame, the most important thing we
can do to promote investment is to be responsible in the way we
conduct our fiscal policy. Within that, we have made the kinds
of choices that we think are where the government can really be
helpful in terms of driving the economy of the future. When you
talk to business leaders, in my job I fairly frequently talk to
business leaders, I hear over and over again where they have
problems right now is hiring people with the right skills,
engineering skills, technical skills. By producing the
workforce that our businesses need, we are helping to promote
business in this country.
Mr. Calvert. Reclaiming my time, I find it difficult to
believe that--the folks that I did business with--finding
capital gains rates going up significantly is going to make it
easier for them to do business. But I have another question I
want to ask. My other job--I am on the Defense Appropriation
Committee--and I wanted to understand this new account that you
have to cover the diplomatic and development costs of the U.S.
involvement in Iraq, and Afghanistan, and Pakistan. As you
know, in past years that was handled in the regular base-
budget. And I want to know what standards were used to
determine what costs were appropriate for inclusion in this
account, and can you send us a written guidance for the account
for the record?
Mr. Lew. I am happy to get back for the record, but I can
give you a brief answer if you would like. The funding for
military operations overseas are funded through what are called
overseas contingency operations funding. It has not
historically been an issue for the civilian side, but with
things like the withdrawal of troops in Iraq, and the build-up
of a civilian mission that is quite labor-intensive, security-
intensive, it creates the same challenges that the military
does. The simple rule that was used in putting it together was,
to the extent that we have activities that wouldn't carry on
once we normalize our diplomatic footprint, those should be
handled in the base. To the extent that we have activities that
are more like the military surge, they should be in the
overseas account.
Mr. Calvert. I would like to have that. Also, the budget
request, $117 plus billion for Department of Defense's account
for conduct of the war in Iraq and Afghanistan; and that is
obviously dependent on U.S. troop level in Iraq and
Afghanistan, and as you understand, under the SOFA agreement,
the Status of Forces Agreement, we are reducing the force in
Iraq at the end of this calendar year, and Afghanistan has
announced policy to a troop withdrawal in July, 2011, though
the size of that withdrawal is still yet to be determined. On
your assumption, what troop level are you assuming for
Afghanistan and Iraq in this funding request?
Mr. Lew. In Iraq we have a clearly stated policy to
withdraw our troops on schedule, and the funding levels reflect
that policy. In Afghanistan, our policy is that we will begin
to withdraw troops. We have not used the budget as the place to
project specific numbers. That will have to be worked through
by the national security team.
Mr. Calvert. Okay, yet to be determined. Last question, you
expect an additional war supplemental to be asked for here in
the short term?
Mr. Lew. We have requested funds that we know to be needed
for the coming fiscal year. We have not yet seen what the
appropriations are for fiscal year 2011, and we obviously don't
know what the appropriations will be for fiscal 2012, so I
can't give you a guarantee, not knowing what will be
appropriated, but I know we have estimated, to the best of our
ability, what the costs will be.
Mr. Calvert. Thank you, Mr. Chairman.
Chairman Ryan. Ms. McCollum.
Ms. McCollum. Thank you, Mr. Chairman. Mr. Lew, thank you
for being here today. Now, we have three challenges facing us
and they need to be all addressed simultaneously. We need to
reduce the deficit, at the same time we need to grow the
economy, and create jobs that will keep America competitive.
Now, as far as I am concerned, the best way to reduce the
deficit is to get American back to work. But we have tough
choices to make. The big difference between making sound
investments and smart cuts, as President Obama has proposed, or
the path that our Tea Party Republican colleagues are taking on
the fiscal year 2011 budget with ideology, mean-spirited, or
just plain dumb, cuts. Now, Mr. Lew, over the past years,
Congress has provided tax breaks, tax cuts, tax loopholes, and
special tax perks, estimated to reduce revenues by more than $1
trillion. In December's legislation to extend the Bush tax
cuts, some of the beneficiaries of these tax break earmarks
were NASCAR racetrack owners, Caribbean rum manufacturers, at
the cost of hundreds of millions of dollars in foregone
revenues.
The last point I would like to make before I ask you three
questions is: The discretionary defense spending over the next
five years will approach $3 trillion, not including the cost of
the wars in Iraq and Afghanistan. Yet this budget proposes only
a $78 billion reduction in defense spending, which is nothing
more than a rounding error. Now, I know Congress is part of the
problem. Despite the Pentagon's objections, I am aware the
Republicans have included an alternative engine for the F-35
Joint Strike Fighter and the F-11 CR at the cost of $45
million. Now, this is a total waste of taxpayer dollars, and an
example of Congressional pork, and it should be eliminated.
So, Mr. Lew my questions are; the defense discretionary
spending is dwarfing all other domestic investments, keeping
our community safe, and strong, and prospering. Where can
greater defense spending reductions take place over the next
decade? Can you also elaborate on the administration's plan to
close tax loopholes, and end special tax perks, and cut off the
special interest tax giveaways that are adding hundreds of
billions of dollars to the deficit. And then, if you have time,
could you explain more on some of the President's ideas on how
to grow this economy and create jobs?
Mr. Lew. Thank you, Congresswoman McCollum. Let me start on
Department of Defense. We, I think, share on a bipartisan basis
the belief that we have a core responsibility to provide for
national defense. Over the last 10 years, the spending on
defense has been considerably above inflation, and it wasn't
subject to the same kind of rigor that other things were, and
we were also going through extraordinary times.
This is not a judgment being made about the past, but as we
look to the future, this budget says that we have to start
pulling back, but not pulling back in a way that sacrifices our
national security. The policy in this budget says that the
Department of Defense will tamp down its increases so that it
will have no real growth in the five-year window. That is $78
billion of savings compared to their five year plan for the
last year's budget. We think that is a very important step.
It is an important step which requires tough choices. It
means you can't afford the second engine that you don't need
for the Joint Strike Fighter, it means you can't afford the
Marine Expeditionary Vehicle. There are tough decisions that
have to be made, and I think we have a Secretary of Defense and
a leadership in our military, that is prepared to make the
tough choices, and we look forward to working with Congress.
But they are hard--it means that there are things that are made
now that won't be made in the future, and that is what it is
going to take to start getting our defense budget under
control.
On the question of closing loopholes, the President's
budget includes a number of specific proposals, I mentioned the
oil, gas, and coal provisions in my opening remarks, but we
also have provisions that would take away the tax benefits that
come to companies that export jobs, and we think that it is
important to have policies in our tax code be designed to
reflect what we need to do in our economy. So, in our economy,
for the future, we need to develop the new renewable energy
technology industry. That is going to create jobs in the
future. I am kind of getting to your third question by
answering the second within the five minutes. Ware going to
build the new economy in renewables and in clean energy, and
that is where we need to put our investment. So if you look at
the withdrawal of a special provision for oil, gas, and coal,
and the investment in new technologies, it kind of tells a
story about how we think you invest in the future.
Chairman Ryan. Mr. Akin.
Mr. Akin. Thank you, Mr. Chairman. Just a couple of
thoughts. Years ago, I was taught what was called the Harvard
Case Study Approach to solving problems, and it was taught in
business schools, and the idea was that you are given this
complicated situation, and you could see all sorts of things
that would be a good thing to do, and you got this-this-and-
this, you have all these good ideas, but part of the discipline
was, pick the number one thing. What is the very first and
essential element that you have got to deal with? And that was
frequently the situation then that would determine whether a
company was going to succeed or fail.
As I take a look at many of the things we have discussed
even here this morning, and that you are dealing with in the
budget, we are dealing with, to some degree, some peripheral
things, but it seems like there has been pretty good emphasis
that the elephant in the room is the tremendous growth of
entitlements. I just heard references to the fact that maybe
the defense budget is really the bugaboo here.
But if you take a look at defense as a percent of GDP,
going back to maybe 67 or so, you are looking at close to nine
percent of GDP being spent on defense, it is now dropped to
four-something. And one of the few people on this committee
sitting on armed services; we talk about, Well, we are going to
cut this Expeditionary Fighting Vehicle for the Marines. The
only problem is, if you really believe in Marines, you have got
to get them from the ocean to the shore. So, I am not so sure
that you have already cut the percent of GDP for defense not
quite in half, and in the meantime entitlements have gone from
about 2.5 percent, if you go beyond Medicare, Medicaid, Social
Security, to the other entitlements, you are well up at
whatever it is, 12 percent. And you put entitlement and debt
service together, and all of a sudden, voila, that is what our
revenue is.
So it seems to me that the elephant in the room is the
entitlements, and courageous leadership is going to acknowledge
that fact and say, Okay, now let us have the conversation, and
talk about what we are going to do with those. Because all of
us know we are talking about some heavy cuts in discretionary,
but that is just the tip of the iceberg. So I guess it is
disappointing not to say, Hey, let us at least make this the
main subject the main subject. The second thing that I don't
quite understand is the idea that we are somehow going to shock
the fragile recovery by cutting discretionary income. I guess
that is assuming that that discretionary income, by spending
all that money, it helps the economy. If you could enlighten me
on that line of reasoning, because I don't understand that.
Mr. Lew. Thank you, Congressman. I have a soft-spot for
those business school case studies; I paid my way through
college by working on producing those case studies, so they
have played an important part in my life. The first thing I
would do, looking at a university class on how do you solve the
problem, is say, Where do we need to be on the bottom line? And
bottom line is we need to have a three percent of GDP deficit
in order to say we are not adding to the debt. Then I would
ask, What are you doing to get there? And we have put forward a
plan that gets there. And then, I would say, you separate the
question of what do you need to do for the long term. And that
is exactly what we have done in this budget.
So, I think we are dealing with the short-term and the
medium-term, we are saying in a very direct way that we need to
work together on the long-term, and we are trying to leave as
much open for discussion so there is an environment where we
can actually reach agreement. The easiest thing to do is kind
of polarize the environment. We are deliberately leaving room
for that conversation.
Mr. Akin. Let me just jump in. In order to come up with the
numbers that you have come up with, some of the assumptions
strike me as being a little odd. For instance, some of my
Democrat colleagues have talked about how, when President Bush
took office, everything was rosy and perfect, but I recall
there was quite a recession going in 2000, 2001. I do remember
the numbers in May, 2003 we did three unpopular tax cuts,
capital gains, dividends, and death tax. They weren't popular
because we were tarred-and-feathered as sticking up for the
rich guy. But the trouble was it was those rich guys that owned
the businesses that hired people. And if you destroy the
businesses by overtaxing the owners of small business, then you
don't have any jobs.
So, I took a look at those numbers after capital gains,
dividends, and death tax, and what we saw was that first of all
the GDP jumped, and it had the kind of growth that you want to
make the budget numbers work, but we did it by cutting those
taxes on the small business and the investors. We also saw that
the employment turned right around. We went from un-employing a
lot of people to jobs being created. And last of all, according
to just what Laffer predicted, the government revenues actually
jumped up when we cut the taxes, because of the fact that the
economy got back going. So I don't understand how you make it
work with growth and still raising taxes.
Mr. Lew. I would love to respond but I suspect from the
tapping I don't have time.
Chairman Ryan. Mr. Pascrell.
Mr. Pascrell. Thank you, Mr. Chairman. Thank you for your
service.
Mr. Lew. Thank you, Congressman.
Mr. Pascrell. I find it remarkable, and I say this with
fondness, Mr. Chairman, I am glad you smiled. I say this with
fondness. You have become an existential party. You have
amnesia about how the past and how we got to this place, and
you don't want us to invest in the future. We are stuck with
the here and now. I don't think we are stuck. I think this is a
pretty credible blueprint. And it is not going to be like this
when we finish, but it is a credible blueprint to begin with.
There is a simple juxtaposition going on here. The President's
budget, correct me if I am wrong Mr. Lew, the President's
budget achieves substantial deficit reductions, and achieves a
sustainable debt of three percent of the GDP by 2015. Is that
correct, or incorrect?
Mr. Lew. I would only correct you that it is the deficit.
Mr. Pascrell. I am sorry. A sustainable deficit; that is
what I meant to say. Second question is, isn't it true that in
this President's budget, there is $5 billion in small business
tax cuts for 2012, and if you add up the 10 years there is $116
billion in real tax cuts for small businesses. Is that correct?
Mr. Lew. There are substantial incentives for small
business. They do add up to a number like that. I don't have
the exact number in front of me. I assume you have the correct
number.
Mr. Pascrell. Okay. Here is my second question then, some
of my colleagues, who I admire, and respect, and that is
nothing to smile about, I mean it. I don't have to agree with
them, right? Some of my colleagues criticized the President's
budget that it does not cut entitlement programs like Medicare.
In fact, Mr. Chairman and I went outside for water, and the
President was providing us with his address at 11 a.m. about
the budget, and that was his first question. Why didn't you
show leadership,--I think those were your words yesterday--Why
didn't you show leadership in going after Medicare and Social
Security?
We know Social Security has very little to do with the
deficit. We would agree with that, correct? I personally
believe we can balance the deficit without cutting Medicare for
seniors. That is my own personal belief. You could do other
things. However, is it not true, Mr. Lew, that federal health
care reform adopted many recommendations from Congress own
independent advisory commission, the Medicare Payment Advisory
Commission, we established that, did we not?
Mr. Lew. Correct.
Mr. Pascrell. And that by having a Medicare Center for
Innovation, Medicare now can test and use new payment models.
We fought to have that in there for a very specific reason, to
not only improve patient care, but lower our national spending
on health care. Would you just respond to that, please?
Mr. Lew. Congressman, I think there are many, many things
that we have done in the last couple years that are very
important in health care. We have real savings in the 10 years,
bigger savings beyond that, and we have put in place mechanisms
like the ones you have described, which give us the ability to
get the best practices, which are the way we are going to
reduce spending overall going forward. A lot of those things
don't score easily, because there is a question about when they
will have results. We believe that they will have results, and
we have to stay on the course of implementing it that we make
sure we get the benefit.
Mr. Pascrell. And many of those were not even scored.
Mr. Lew. Correct. That doesn't mean they are not real. It
just means you first have to demonstrate it.
Mr. Pascrell. Why should we be paying for police to patrol
the streets of Kabul and Baghdad? Why is that exempt when we
say defense appropriations? Why is that exempt, but not cops on
the beat in Patterson, New Jersey, or Camden, New Jersey, or
anywhere? Why?
Mr. Lew. I want to start by saying that we provide funding
to make sure we can keep cops on the street in Camden, New
Jersey, as well. So we don't believe that the choice is you
either do one or the other. One of the things we have tried to
do is preserve funding for the cops program. I think he short
answer to the question of why we should be supporting the
training of the police in Afghanistan, is that in order for us
to get to the point where we can withdraw American troops,
Afghanistan is going to need to have the ability to protect
itself so that we are not put at risk, and that is part of our
plan.
Mr. Pascrell. I was talking about the security in our own
country. Thank you, Mr. Chairman.
Chairman Ryan. A lot of our problem here is we have
witnesses in high demand. I want to make sure every member gets
his chance, so I ask unanimous consent that we reduce our four
minutes each, so that we can make sure that we can accommodate
everybody and still allow Mr. Lew his chance to go over to the
Senate to testify. Without objection. Mr. Cole.
Mr. Cole. Well, I was going to object, because it was my
time. My friend Mr. Price and I think we either need to get
taller or you guys in the front row need to get a lot shorter,
it is very hard to see you there.
Mr. Lew. This has actually changed since the last time I
was here. I find myself leaning forward a lot more.
Mr. Cole. But since my time is short, I have got three
areas I would like to ask you about. The first is, just looking
at your budget; you basically keep 80 percent of the Bush tax
cuts for about 95 percent of the people that received them.
Does that suggest, one, that you don't think those went to the
rich particularly, and two, that you see them as having been,
and continuing to be, beneficial to the economy?
Mr. Lew. You know, we believe that the tax cuts for the
middle class are a good thing, and there was too high a tax
rate burden, and we should continue to do what we can to
minimize the tax burden on the middle class. One thing I would
just point out is that we don't take the benefits of those tax
breaks away from anyone; even if they are above 250,000, we
just say there shouldn't be additional tax breaks.
Mr. Cole. No, I understand that, and again, I applaud the
President for embracing, literally 80 percent of the Bush tax
cuts, something that seems to be forgotten around here
sometimes. We can disagree about 20 percent, but 80 percent we
actually do agree on. Second question, and this gets maybe to
your philosophy, the administration's philosophy, in your
deficit reduction plan over several years, you have some tax
increases, you have some spending restraints. Roughly, what is
the balance that you strike between tax increases and spending
cuts or restraints?
Mr. Lew. Well, I apologize that it is a little bit of a
complicated answer, just because baselines make how you measure
complicated, and I want to be clear. We start with a baseline
that assumes that the tax rate in the top bracket stays where
it will be when the provisions enacted last December expire.
From that baseline, we have net $360 billion of additional
revenue. But I say net because we have $392 billion of tax
cuts, so after you pay for the tax cuts, net $360 billion of
new revenues.
Mr. Cole. And how much in spending restraint?
Mr. Lew. We have $751 billion in mandatory and non-security
discretionary savings, and we do count debt service as spending
because we have to pay for debt service.
Mr. Cole. Obviously we would probably disagree over whether
letting those tax cuts run out amounts to a tax increase or
not, but let me put that aside. Let me get to the last point I
wanted to ask you about and this really does get down to,
actually, some questions my friend Mr. Akin raised. Look, we
all know entitlement spending is going to be a major focus.
As an appropriator I will be thrilled the day we finally
move to tax expenditures and entitlement expenditures, because
that is where the problem is. But since you have expressed a
lot of the President wants to do this, doesn't want to take
options off the table. I am like everybody else, I am really
disappointed we haven't seen more, at this point, but can you
tell me when that discussion would begin, is the President
going to propose a format in which it would take place, does he
think he should lead with a proposal of his own, or wait for
Congress to put one on? I am sort of mystified about how we get
to the elephant in the room that Mr. Akin was talking about.
Mr. Lew. The President has put quite a lot on the table in
the budget that we presented yesterday, and it is the first
step in the process. We have a lot of work to do together, both
in terms of finishing the work on 2011, getting to work on
2012. I have to tell you from my own personal experience,
having watched and been part of the deficit reduction efforts
in the late 70s, 80s, 90s, when we have had real success in a
bipartisan basis, it is come from people working together
behind the scenes and in an environment where there could be
the kinds of open conversations where there is trust. And I
think if we concentrate on developing that kind of a
conversation, we will again produce the best results for the
American people.
Mr. Cole. Thank you gentlemen. Thank you, Mr. Chairman.
Chairman Ryan. Ms. Castor.
Ms. Castor. Thank you, Mr. Chairman. Welcome. I would like
to show you a chart, here.
I understand you were the head of Office of Management and
Budget in the last few years of the Clinton administration,
where there were burgeoning debts and growing deficits, but at
the end of the Clinton administration, is it true that you left
when we had a projected 10 year surplus of $5.6 trillion?
Mr. Lew. I would just correct that I was director of Office
of Management and Budget three years in a row when we had
surpluses. We didn't have deficits, we had surpluses. We were
paying down the debt, so that is what that chart says.
Ms. Castor. I stand corrected. And then when President
Obama took office, we were facing an $8 trillion, 10-year
deficit. It must be entirely frustrating to you, it must have
been frustrating, during that eight year period, to watch what
happened to the surpluses left at the end of the Clinton
administration.
Mr. Lew. I don't exaggerate when I say it breaks my heart.
I think that you look at what drove the deficit up, some of it
was beyond our control, in terms of the economy. When there is
a recession, there is a loss of revenue and there is certain
spending that you have. Some of it was because of wars, which
you don't necessarily choose, but if you go to war, that is an
extraordinary circumstance. Some of it was because we just
suspended the basic common sense of paying for what we did. And
we had tax cuts and spending increases that weren't paid for,
and that is what has created the long-term problem we are
dealing with now. These other things correct themselves; the
economy is recovering, and we are going to see revenues and
spending get back to their more normal levels. The wars will
come to an end; we are pulling our troops home from Iraq. The
other creates a problem that we have to deal with.
Ms. Castor. And that is why I am grateful that you have
taken on this new challenge. We all agree, the government has
got to live within its means. But we must remain mindful that
we are coming out of the most severe recession in our
lifetimes, and we have got to build on the economic foundation
for the future, and that is why I am particularly focused on
job creation, and jobs, and our workforce. My district is home
to one of the largest universities in the country, and a lot of
community colleges, and private universities, and I am 100
percent behind you on what this budget does to maintain the
maximum Pell grant for students. It remains at $5,550 for
students. You all know that the Pell Grant helps over nine
million students across America afford college.
Now, over the last couple of days there is been a lot of
confusion in the press, however, over what is happening with
the Pell grant. It appears President Obama maintains the
maximum Pell grant, at $5,550 for 2012, for students, and you
pay for it by cutting the relatively new year-round Pell grant
that allowed some students to qualify for two Pell grants. I
wasn't aware that they could do that.
Are you also aware that in contrast to what the President's
budget is trying to do, right now on the floor of the House,
the Republican continuing resolution has proposed cuts in the
Pell grant by $845 per student for 2011? I think that is moving
in the wrong direction when we want to ensure that we have the
most competitive workforce across the globe. So could you
explain your budget and why you viewed this as a priority, and
your view of the Republican efforts to diminish support for
students, and how it will hurt our national goal of supporting
an educated workforce that can out-compete others?
Chairman Ryan. And I ask you to explain that in six
seconds, otherwise give the rest in writing, please.
Mr. Lew. We think Pell grants are an enormously important
program. We have taken the tough steps in this budget to pay
for it, and when you look at where some of the increases in
spending since 2008 and now are, Pell grants is one of the
biggest, and we think it is one of the best investments we can
make in our future.
Chairman Ryan. All members, if you ask your question at the
end of your time allotted, you are taking away from our fellow
colleague. So that is why I am being judicious with the gavel,
here, so everybody gets a chance. Mr. Price.
Mr. Price. Thank you, Mr. Chairman. Director Lew, thanks so
much for joining us. Some of our friends on the other side of
the aisle, one of them said on our side there is an amnesia
about the past. So I want to visit a little bit of the amnesia
that goes around to the other side. You said that the last time
you were before this committee it was a good time because you
had produced a balanced budget. What party was in control of
the House of Representatives at that time?
Mr. Lew. I am proud to say we worked on a bipartisan,
balanced budget agreement.
Mr. Price. But the answer to that would be Democrat or
Republican?
Mr. Lew. We worked with Republican leadership.
Mr. Price. Republican leaders. Thank you very much.
Mr. Lew. The Republicans and Democrats in Congress.
Mr. Price. Can you tell me, Director Lew, what the debt was
in this country at the end of 2006?
Mr. Lew. I would have to look that number up. I have a lot
of numbers in my head, I don't have that number in my head.
Mr. Price. If I told you that the debt at the end of 2006
when the Republicans ended their control of Congress--the House
of Representatives--was $8.4 trillion. Would you say that was
about right?
Mr. Lew. When we took office it was approaching $10
trillion.
Mr. Price. When Speaker Pelosi began her reign would be
about right in 2007, correct? And the debt right now, Director
Lew?
Mr. Lew. The debt right now, I can look that up.
Mr. Price. About $14 trillion?
Mr. Lew. $14 trillion.
Mr. Price. Somewhere in that range. So about $6 trillion in
the last four years under Democrat leadership in the House, is
that correct?
Mr. Lew. You know, I think that one can go through these
numbers, and we can look it up in the book, and we can
establish what the numbers are. I think one has to understand
what was going on in these periods.
Mr. Price. Absolutely.
Mr. Lew. We were going through the worst economic
conditions since the Great Depression.
Mr. Price. I will reclaim my time Director, I am sorry. I
only get four minutes. And as the elephant in the room has been
discussed, it is a remarkable, remarkable display that we
believe has come out of the administration. When I was a kid we
used to play kickball in the street or in the backyard, and
when we turned around and headed to our house, we knew that the
house was going to be there. The house is burning down, Mr.
Director.
And the fact of the matter is that the administration is
playing kickball and not attending to the work that needs to be
done. To put a budget before the American people that doesn't
address the entitlement issues is reckless and irresponsible.
And you talk about, To get to balance, a set of decisions needs
to be discussed, that no one is discussing right now. But I
will tell you who is discussing them, Mr. Director, and that is
our constituents. They are scared to death. And they don't see
any leadership coming out of this administration as it relates
to the entitlements. When does that discussion begin?
Mr. Lew. You know, Congressman, if you look at what was
going on during the period.
Mr. Price. When, Mr. Director, when does that discussion
begin?
Mr. Lew. I am happy to answer that discussion if you give
me a moment.
Mr. Price. I have got four minutes and the fact of the
matter is that you are not answering the question, and you
haven't answered the question.
Mr. Lew. The President has put down a budget that we think
takes the first, and very important, step of showing how we get
to a sustainable deficit by the middle of the decade. That is
an important step. And the President has also said that we need
to work together on a bipartisan basis to do what we need to do
in the long term, and I think we can't confuse the two issues.
Mr. Price. Does this budget deal with the entitlements that
[inaudible].
Mr. Lew. This budget begins to, but those entitlement
issues did not cause the increases that you have just
described. The worst economic recession since the Great
Depression drove those numbers. We need to get the economy
moving, and we need to take the steps that we have put forward
in this budget and then more, on a bipartisan basis, working
together.
Mr. Price. We look forward to that. As you well know, and
as you have stated here, this budget does not deal with the
entitlement issues. I want to turn my attention very quickly to
the tax issues. The assumptions under this budget assume that
the tax increases will occur for those making more than
$250,000 in two years; is that correct?
Mr. Lew. It assumes that the tax rates that are in current
law will remain in effect.
Mr. Price. So that a tax increase for small businesses
occurs within this budget window, is that correct?
Mr. Lew. It means that individuals, families that earn over
$250,000 a year will pay the same taxes that they did during
the end of the 1990s when the economy was growing at the
fastest rate.
Mr. Price. And the amount of tax increase in this budget is
about $1.6 trillion, is that correct?
Mr. Lew. Again, it gets to this question of measurement. I
have tried to be very clear that there is a portion that we are
not taking credit for because it is in the baseline, and I am
happy to work through those numbers.
Chairman Ryan. Thank you, we already established the 1.6
number. Mr. Tonko.
Mr. Tonko. Thank you, Mr. Chair. Director Lew, thank you
for joining today.
Ms. Moore. Mr. Chair, excuse me. What happened to me? I
just want to know.
Chairman Ryan. Ms. Moore, as you know, the rule is in the
order in which you show up, so we have Tonko, Bass, Moore,
Wasserman Schultz, Ryan, and Blumenauer on your side of the
aisle.
Ms. Moore. Okay, I just wanted to make sure I hadn't
disappeared.
Chairman Ryan. No, you are still there, Gwen.
Ms. Moore. Okay, got you.
Mr. Tonko. Thank you for providing insight on the
President's proposed budget. Also, I am aware that you are a
fellow New Yorker. Last month, members of the New York
delegation in the House, myself included, wrote to you about
extending the Federal-State Health Reform Partnership. As you
know, this innovative partnership between New York and the
federal government has led to significant modernizations and
improvements for several hospitals and health systems.
Established by former Governor Pataki and Secretary Leavitt to
improve New York's outdated health care system, the funds have
been allocated already, but not all the projects that have been
authorized by the agreement have been finished. The New York
delegation also wrote to urge you and Secretary Sebelius to
extend the waiver for three years, and my concern is that be
agreed to here. It is a common-sense thing to do, and do you
know if the Office of Management and Budget extends the waiver
before it expires late this year?
Mr. Lew. Congressman, I know it is under review. There are
actually two waivers that are under review. I have been at the
Office of Management and Budget for eight weeks, it is one of
the things that I have actually looked at; it hasn't come to me
for a decision yet, we will continue to work with the state as
we review it.
Mr. Tonko. Great. We look forward to working with you on
that. And also, the President's budget, I am very concerned
about the investment in R&D and basic research, and happy to
note that the President's budget proposes to invest some $148
billion in R&D, in energy efficiency, and key basic research,
contrasted with the Republican spending plan that would slash
R&D. The President's budget also proposes robust investments in
the National Institutes of Health, where doctors and scientists
work to cure cancer, heart disease, and diabetes. Alzheimer's
and other diseases that together claim the lives of millions of
Americans every year are also impacted by that budgeting. The
GOP spending plan on the floor today cuts the National
Institutes of Health budget by about a billion, and medical
research has proven to extend life expectancy, for instance,
from 50 years in 1911 to nearly 80 years now in 2011. Can you
explain the approach taken with R&D and research, basic
research in the President's plan? Some call it spending, others
reference it as investing.
Mr. Lew. I am happy to. We have taken a very close look at
the R&D budget and we have looked kind of beyond some of the
traditional boundaries. There has been a broad consensus that
biomedical research is important. We agree with that. We have
an increase in biomedical research. But we have looked at areas
like energy research, and we have put significant resources
into developing the technologies that will make us the most
competitive country with the technologies of the future. We
have put money into basic research. I think that we have to
have a comprehensive research agenda in order for us to be in a
place where, as the President says, we can out-innovate other
countries.
It has been an area, historically, of enormous strength in
the United States. Even today, we spend more as a country,
public and private combined, on research than any other country
in the world. There are certain aspects of it which don't
happen in the private sector alone, because there is too much
risk, too many experiments and things that aren't going to
become commercially viable, but you need to go through that
process in order to get the material, the knowledge, out there.
And I think we have had a history of very effective partnership
in this country of transferring research from government-funded
research to private-sector development, and we have tried to
put together a budget that will continue what we think is the
best of the American tradition.
Chairman Ryan. Thank you. Mr. McClintock.
Mr. McClintock. Mr. Lew, welcome. I want to join Ms. Castor
and others for complimenting you on the job you did under the
Clinton administration. You guys did an absolutely magnificent
job managing the nation's fiscal affairs. You cut spending by a
miraculous 4 percent of GDP during your years; historic reform
of entitlements ending welfare as we know it; what amounted to
the biggest capital-gains tax cut in American history; four
years of budget surpluses. It is true it was a Republican
Congress, but give credit where credit is due. You guys did a
great job. But I look at this budget, and it seems to be
exactly the opposite.
Mr. Lew. I wanted to just say thank you.
Mr. McClintock. No, with all sincerity, thank you. It was a
great job. But I look at this budget and it is exactly the
opposite: record increases in spending, biggest peacetime
deficit in American history, no effort to address entitlements,
which have grown significantly more challenging over the last
several years. Wouldn't you call this the anti-Clinton budget?
Mr. Lew. No, Congressman. I am very proud of the work I did
in the Clinton administration and I would point out that one of
the reasons that spending was falling as a percentage of GDP is
the economy was growing so fast because we had a good fiscal
policy that promoted confidence and economic growth. I think if
you look at the projections today, spending now and in the
future, we are projecting the retirement of the baby boom. We
are seeing more people become 65 and claiming their benefits.
Mr. McClintock. Actually, that is my very next question. I
want to get to your long-range projection.
Mr. Lew. And I think that it is part of the reality of
projections that even if we cut spending in the policies that
we are making, as we pay the benefits that people are due,
there will be areas of the budget where spending goes up. I
don't think any of us would want to be saying that people
shouldn't be able to collect their Social Security benefits
when they are 65, but that and Medicare for people retiring is
really driving those aggregate spending levels. On the
discretionary side, we are cutting spending.
Mr. McClintock. Exactly right, which is why we are all
baffled that you haven't tackled entitlements that are driving
our long-range projections right off a cliff. But speaking of
those long-range projections, I look at the claims that you are
reducing the deficit in the long-term. You know, we have enough
trouble projecting 10 quarters into the future without
projecting 10 years, but I look at what you are doing here and
you take the current year's war-funding level of $165 billion
this year, pay for operations in Iraq and Afghanistan,
including the surge, you then take this level and project it
out for 10 years and this represents your current policy
baseline. You then assume a policy or placeholder $50 billion
for the war from 2013 to 2021, and then you count the lower
funding in your budget relative to this current policy baseline
as a $1.1 trillion spending cut over 10 years. You take the
related debt service, that is another $1.3 trillion. Are you
guys really planning to stay in Iraq at current levels and to
continue the surge for the next 10 years? It has either a yes
or no question. Yes or no?
Mr. Lew. No, the budget reflects our withdrawal from Iraq.
Mr. McClintock. And you are claiming that as savings. You
take a baseline assuming of $165 billion a year, including the
surge, and then you count everything below that as savings.
Well we are planning to do that anyway.
Mr. Lew. I am happy to respond. We are almost out of time.
The overseas contingency operation account is something that
really solved a problem that the Obama administration
inherited, which was there was no orderly way to fund war
operations, and supplemental appropriations were very much in
disrepute as being a way of not having honest budgeting.
Mr. McClintock. In the five seconds I have got left, that
is an intellectually dishonest way of presenting the budget,
particularly when the other part is $819 billion of tax
increases.
Mr. Lew. That is an important issue, and I would love to be
able to respond in more detail on it.
Chairman Ryan. How about in writing, because I would love
to hear the answer to that one too. Ms. Bass.
Ms. Bass. Thank you. Director Lew, thank you for your
testimony.
Mr. Lew. Thank you.
Ms. Bass. You and the President should be commended for
crafting a $1.1 trillion deficit-cutting budget that strikes
the right balance, frankly, between spending reductions and
targeted investments in infrastructure, innovation, and
education. Prior to Congress, I served in the California
Legislature where we had to make tough choices, such as
eliminating Pell Grants for summer school to sustain the
maximum award for all eligible students.
Having said that, I do want to take a moment to draw
attention to the choices made in the continuing resolution that
will be debated this week. Not only does the spending plan make
devastating cuts to critical programs that families depend on
to get back on their feet, but the continuing resolution would
result in lost jobs of 1,300 police officers, 2,400
firefighters, and 16,000 private-sector construction jobs from
cutting $1.7 billion from the federal building fund.
The most promising new source of economic growth and job
creation is in our public infrastructure system, from roads and
bridges to broadband and air-traffic control systems to a new
energy grid. I am pleased to see that the budget invests in
these key areas that will spur job creation, and based on this,
what do you believe are the potential numbers of jobs that
would be created by what you and the President are proposing?
Mr. Lew. Congressman, I thank you. I can't give you a
specific job forecast. I think we have all learned that there
is uncertainty in the projections when you get to a pinpoint
number. I think what we know is that when you build roads, when
you build ports, when you build the infrastructure we need to
be competitive in the future, it puts men and women to work on
those projects in real time. And in our Surface Transportation
Reauthorization Proposal, we do propose that $50 billion be
done at the beginning to get a head start and to get people to
work. I would be happy to get back to you with some notions of
what that means in terms of specific jobs, but it is clearly a
lot of jobs.
Ms. Bass. I would appreciate that, even if you could give
us a range. If you could get back to me, I would appreciate
that. Second question, with the cuts that are taken in the
defense part of the budget, I do believe that we can find
additional savings. I wanted to ask you, for example, as I
understand it, there is nearly 270 bases in Germany, 65 years
after World War II ended. And I wanted to know if the
administration has conducted a savings estimate on closing
these bases that probably no longer serve a strategic value,
and if some of them do, I would question whether over 200 do.
Mr. Lew. You know, I think that these are the kinds of
questions the Department of Defense needs to ask, not just
about Europe but about its operations everywhere. What do we
need for our current and future defense, what could we live
without? I don't want to prejudge the answers to any of those
questions, but I think that by putting in this budget the first
step to bringing the Department of Defense back into the normal
budget tradeoffs, where we are saying no real growth. That is a
cut, in terms of what you can buy; it means you have to start
doing less things. That is a step in the direction of asking a
lot of very hard questions.
Ms. Bass. Thank you, and then just finally I wanted to
thank you for your comments earlier, especially about the R&D
credit. Being in California and the Silicon Valley, we hear
that all the time from the tech community, the need for that to
be long-term so that they can do the planning. So thank you
very much for your time.
Mr. Lew. Thank you.
Chairman Ryan. Mr. Chaffetz.
Mr. Chaffetz. Thank you, Mr. Chairman. Director, thank you
for being here and your good work. I do appreciate it, the work
you have done in the past. But what I have a problem with is
this budget. It was suggested earlier that budgets reflect the
priorities and values of those that present them, and I think
in this case it is true. I think it is very true, that this is
a case that is being made by the administration. They want big
government, more government, the bottom line is this doubles
the debt in 10 years, and that it is fiscally irresponsible.
You know, the decisions we make in Congress are all about what
kind of money we are going to pull out of people's pockets and
give to somebody else. I find it reprehensible that we continue
to talk about investments and other things when we are pulling
money from people's pockets to try to give it to somebody else.
The most important thing we can do is allow money to stay in
their own pockets. It is the American people's money, it is not
Congress money, it is not the White House's money.
I want to get very specific at some of the things you said.
This budget is a down payment was one of the things I heard, a
quote from you, I believe, yesterday. This is a down payment on
mortgaging our future, and it exacerbates the problem. It
doesn't actually solve it.
I want to talk about part of your testimony on page six. It
says, quote, To stay on a path towards sustainable deficits.
Sustainable deficits seems like an oxymoron to me. We are on a
trajectory where we can't afford anything. We are paying $600
million a day just in interest. I would appreciate, at a future
date, to please try to define for us sustainable deficits,
because I think to the average American, to me, it does not
make sense. We have no sustainable deficits.
To further go on with that quote, you say, On the order of
three percent of GDP, we make tough choices across all areas of
the budget to identify more than $1 trillion in savings, two-
thirds from spending reductions. Where does that other third
come from? As I understand it, it is from tax increases, is it
not?
Mr. Lew. I am happy to answer all the questions you just
asked.
Mr. Chaffetz. Just this last one, please. I know our time
is short.
Mr. Lew. The net savings come from a number of provisions,
but a lot of it comes from the provision that would pay for the
alternative-minimum tax, which would reduce the value of tax
deductions for families with $250,000 and above.
Mr. Chaffetz. And a significant portion does come from tax
increases, correct?
Mr. Lew. Well, one-third.
Mr. Chaffetz. A third is coming from tax increases. You
have a statement in here about federal civilian employee pay
freeze. I find this to be terribly disingenuous. The reality
is, when Barack Obama took office to now, we have 145,000
additional federal workers. To suggest that pay is being frozen
is not an accurate statement. Through step increases, through
bonuses, through others, we have dramatically increased the
federal payroll. The budget that is being proposed, when you
say pay freeze, does that mean that expenditures on payroll
will go up or stay the same?
Mr. Lew. It means that people are not going to get a cost-
of-living adjustment, a raise from the pay that they get right
now.
Mr. Chaffetz. So the total, the line-item going forward,
will our total expenditure from the U.S. Government, will that
go up or will that be the same?
Mr. Lew. Well if we have more people, we will obviously
have to pay the people who we are hiring, but for an individual
federal worker they are going to see their pay frozen.
Mr. Chaffetz. I guess what I am worried about for the
American taxpayer is their expense for federal employees is
going to go up, correct?
Mr. Lew. Well I think if we want people to work at the
airports and check to see that bombs aren't getting on planes,
we have to pay them.
Mr. Chaffetz. We already have 65,000 TSA agents.
Mr. Lew. But we have new technology, and the new technology
requires people to use it.
Mr. Chaffetz. How many is enough? How many more TSA agents
do you need? You have 65,000 TSA agents.
Mr. Lew. Congressman, I am happy to go into detailed
answers.
Mr. Chaffetz. How many more TSA agents do you need?
Mr. Lew. I think as we put new technology at the airports,
we needed to hire people to work that equipment. I can get you
an exact number.
Mr. Chaffetz. We have 65,000. I need to know how many more
people is it going to take?
Mr. Lew. I know that it is not worth buying equipment that
we don't have people to operate.
Mr. Chaffetz. I appreciate it. Thanks, Mr. Chairman.
Mr. Lew. And I would like to answer your other questions if
I have time. I don't know if I have time.
Chairman Ryan. If you could get to the gentleman in
writing, only because we want to watch your time and the rest
of the members time.
Mr. Lew. Sure, okay.
Chairman Ryan. It has now my pleasure to yield time to Ms.
Moore.
Ms. Moore. Thank you so much, Mr. Chairman, and thank you
Mr. Lew for appearing. Now as you can tell, members on both
sides of the aisle are very frustrated, because this is a very
difficult budget. And coming from a cold place like Wisconsin,
it is just chilling to see things cut like the low-income
housing energy assistance program, for example. But I do
appreciate the fact that the administration has attempted to
have somewhat of a balance in terms of revenue and spending
cuts and defense cuts, and entitlement cuts. I just want to ask
you a very simple question: If we cut every dime of
discretionary non-defense spending, would that put us on a
course toward ending our deficits? Every single dime.
Mr. Lew. It has not a big enough part of the budget for us
to solve the problem.
Ms. Moore. Thank you. That is what I want to know, because
there is an attempt to really describe the solution as simply
just cutting everything, not just low-income heating assistance
but everything.
Entitlements, my questions are generated from just
listening here today. I get a little bit nervous when my
colleagues talk about the White House not having dealt with
entitlements. Did you say earlier in your testimony that you
had found, what was it, $65 billion.
Mr. Lew. $62 billion.
Ms. Moore. In savings from Medicare?
Mr. Lew. It is Medicare, Medicaid, federal employees health
benefit programs; it is dozens of different provisions.
Ms. Moore. So thank you. So you did, in fact, deal with
entitlements. The reason I get nervous is entitlements is a
really big category. The Medicare prescription drug program,
can you remind me of how much that cost and was not paid for?
Mr. Lew. Well I can tell you none of it was paid for. The
exact estimate at the time was on the order of $500 billion.
Ms. Moore. $500 billion?
Mr. Lew. I wasn't working on this at the time, I might have
the number wrong.
Ms. Moore. And I wasn't here, and Democrats weren't in
control of Congress. That is an entitlement that needs
reforming.
Social Security, I get very nervous. Can you just clarify
for me who pays for Social Security? It comes out of our
paychecks and employers paychecks, and you said earlier it was
not driving the deficit. Why do they keep lumping Social
Security into this deficit situation that we are in, and saying
that it needs to be dealt with?
Mr. Lew. Well, Social Security is financed by payroll tax,
half by the employer, half by the employee. And if you look at
the Social Security trust fund, it is projected to remain in a
position to pay benefits until 2037, so we don't have any
immediate crisis in Social Security funding. I think that it is
also the case that we are spending more year to year on Social
Security because people are retiring. If you turn 65, you get
benefits.
Ms. Moore. Okay, so thank you. I hate to cut you off but I
keep hearing an awful lot about how the White House is harming
small businesses, the business creators. I am just wondering,
what are they talking about? If I have a hedge fund operating
from my living room with a computer, I am a small business and
I make, you know, several million dollars, am I considered a
small business? A job creator? Like you said, law firms. Who
are these small businesses that we are harming with the tax?
Mr. Lew. I think if you look at the budget proposals we
have, we have targeted assistance for small businesses that
meet the kind of definition that I think most of us would, in a
common-sense way, think of a small business. A small factory, a
small shop, and it wouldn't apply to services like law and
finance. So we have incentives that we propose that would make
the tax code more attractive.
Ms. Moore. You have differentiated here so that we are just
not the mom-pop shop.
Mr. Lew. We don't need to have the overall tax rate on the
wealthiest Americans go back down to the [inaudible] level.
Ms. Moore. Okay, let me ask one final question in my last
five seconds, or just to make a statement maybe. The Bush era
tax cuts, which I think we ought to have gotten rid of, period;
those earning over $250,000 a year still benefit six times as
much as everybody else.
Chairman Ryan. Thank you, Ms. Moore. Ms. Black.
Mrs. Black. Thank you, and thank you Mr. Lew. I want to go
back and continue in the vein of the question related to a
sustainable deficit. You started out by saying that this budget
is just a starting point. I am a little disappointed in that
because my understanding is that as the role of the President,
he is to set forth a plan, not a skeleton. I am disappointed
that there wasn't more of a plan here along the areas of the
entitlement programs, but that is really not the direction I
want to go. The direction that I want to go in is talking about
sustainable deficits.
Now, as has already been said here, we admire the work that
you did during the Clinton administration, and particularly
having a budget surplus, and that it broke your heart that we
are not in that situation. However, it seems as I read your
testimony and what I hear today, that the goal here was to have
a sustainable deficit. And I think our goal should be to be out
of debt, and that we shouldn't have a sustainable deficit but
we should have a balanced budget. Do you agree that we should
be in a situation where our goal should not be a sustainable
deficit, but should be that we would have a surplus and not
spend more money than what we bring in?
Mr. Lew. The reason we call this a down payment is because
we do agree that we need to get beyond stopping the building up
of the debt, and we then need to work on surplus so that we can
pay it down. The problem is you don't get there quickly. You
have to stop putting more onto the bill before you can pay it
down. It is going to take hard work to do that. The three
percent of GDP gets us only to the point where we are paying
our current bills with revenue, and we still have the deficit,
the long-term debt, out there. And then we are going to need to
work together on dealing with that.
Mrs. Black. And I want to go to that too, because if our
goal over the next 10 years is to just have sustainable
deficit, we will never pay down the debt. And frankly, one of
the reasons why I ran is because I look at my six
grandchildren, and I am really sad to think that my goal over
the next 10 years, or my goal of serving for however long I
serve, is just to sustain the deficit and not go toward the
debt. And I think that it is short-sighted for us to think
along those lines. I want to see a plan that gets rid of the
deficit and begins to start to pay on the debt.
Mr. Lew. I think that having presented budgets that had
surpluses and now working on a budget that is a tough budget,
that stops building the debt, I agree that we need to look
beyond getting to the point where we are not adding to the
debt, and we need to look to the point where during good
economic times, we are paying down the debt. It is not a simple
process. We are not going to get there quickly. It took a long
time to dig this hole; it took a lot of decisions to get us
where we are. It is going to take a lot of hard work to get
out. And I think that the notion that this is a starting point,
I don't mean to say it is not a serious starting point. It is a
comprehensive, responsible budget. The President doesn't get
the final word; he gets the first word. He has put his plan
forward.
Mrs. Black. But I want to go back, again, to words that you
used on one of the other comments that you made, and you talked
about all of the things that got us to where we are. But you
said the number-one thing was, we suspended common-sense
spending where we are spending more than what we bring in. And
this budget that we have gotten does the same thing, and I
don't think it gets us to where our goal really should be, and
that is to stop deficit spending and start paying down our
debt.
Mr. Lew. Well this budget actually adheres to the principle
that we need to pay for what we do, and with all respect I
would note that changing the rules of the House so that tax
cuts don't require offsets is not something that is going to
help get to the goal that you are looking for. We need to have
a clearheaded understanding that whether it is a tax cut or
spending increase, if we don't pay for it, it increases the
deficit.
Mrs. Black. Well the more that we take from the people that
are out there creating the jobs, the less jobs we will have,
the less taxes we will collect. Thank you.
Chairman Ryan. Ms. Wasserman Schultz.
Ms. Wasserman Schultz. Thank you Mr. Chairman. Welcome, it
is good to see you.
Mr. Lew. It has good to be here.
Ms. Wasserman Schultz. I think it is interesting that the
gentle lady from Tennessee laments the lack of a plan. Here it
is. This looks like a plan to me.
Mr. Lew. Felt like a plan putting it together.
Ms. Wasserman Schultz. I bet it did. This from the party
that still after six weeks in the 112th Congress, still has no
jobs agenda, still has not put forward a plan to create jobs,
not a single piece of legislation, nothing that has as many
pages as this, 207 pages like this plan does. I think that when
casting aspersions about the lack of a plan, they should look
inward first. But your testimony referred to $62 billion in
savings from increasing efficiency and accountability of health
spending. Now we really focused on cracking down on waste,
fraud, and abuse, and that was a huge priority in the 111th
Congress for Democrats, particularly when we passed the
Affordable Care Act. What are some of the significant policies
in the budget that will contribute to that kind of savings?
Mr. Lew. Congresswoman, there is kind of three baskets of
savings. There is one set, which is about 16 provisions, which
we would call program integrity. It is to make sure that if a
provider has been paid erroneously, we recoup payment. If a
provider submits bills for things that shouldn't be paid or
duplicate bills, we have a process to make sure we pay once and
we pay properly. That saves a little over $30 billion.
We then have a number of provisions that would give
Medicare and Medicaid the ability to take advantage of generic
drugs, particularly generic biologics. That saves a little over
$10 billion. Then we have a couple of changes in the Medicaid
program, one of which would make sure that when we have
expanded coverage and less uncompensated care, we calibrate
correctly the disproportionate share payments that are supposed
to pay providers who are providing uncompensated care. And then
there is another that just lines up the state payment rates so
that there is accuracy in what they are being matched for.
Ms. Wasserman Schultz. The $62 billion in savings to which
I just referred: Is that separate and distinct from the $125
billion in savings included in the budget related to program
integrity?
Mr. Lew. It is only counted in the budget once, and it is
in the mandatory section, the $62 billion. We may have a
display that shows it somewhere else, but it is only in the
numbers once.
Ms. Wasserman Schultz. Thank you. I want to focus on the
cuts in Community Development Block Grants. In recent years,
Congress has typically provided more than the President
requests for Community Development Block Grants. And that is
obviously a program that helps local governments fund housing,
and sewers, and streets, and economic development, particularly
in low and moderate income neighborhoods. Let me just give you
a couple of examples of it for folks that really don't know
Congressional speak. You know, Community Development Block
Grants funds things like three grants in 2010 to the cities of
Janesville, Kenosha, and Racine, Wisconsin, totaling nearly $4
million, and $2.4 million in two grants to Lima and Mansfield,
Ohio. So my question is, the President's 2012 budget cuts
Community Development Block Grants by about $646 million, and
that is compared to the CR, where the Republican cuts it $3.1
billion, below, from the CR, $2.4 billion below the President.
Can you classify the distinction between the President's
approach to Community Development Block Grants cuts and the
cuts in the CR, from the Republicans?
Mr. Lew. The President's budget is a comprehensive budget
where we have made tough tradeoffs. Reducing community-
development block grants by 7.5 percent is a tough decision. We
have got a lot of cities and towns that do good work with this
money. But we didn't think it was necessary to make a deeper
cut than that to hit the target of the $400 billion savings.
Chairman Ryan. Thank you, Mr. Chairman.
Ms. Wasserman Schultz. Thank you.
Chairman Ryan. The gentleman from Appleton, Wisconsin, Mr.
Ribble.
Mr. Ribble. Thank you, Mr. Chairman. Thank you, Director
Lew, for being here today. Just reading out of your testimony
on page five, you say, Now that the country is back from the
brink of potential economic collapse,--I would dare say that
there is about 10 million Americans who wouldn't agree with
that because they don't have a job today--Our goal is to win
the future. But we cannot do so if we are saddled with
increasingly growing deficits. Do you believe that statement,
or was it just put in there as hyperbole?
Mr. Lew. No, I believe it. I think that we were in a state
of free-fall in the economy. We are not content with
unemployment where it is now, or growth where it is now, but we
have gone from negative growth and losing jobs to positive
growth and creating jobs. And I believe that if we don't deal
with the deficit, it is going to become a real threat to our
economy.
Mr. Ribble. So we cannot win the future if we are saddled
with increasingly growing deficits. That is a statement that
you agree?
Mr. Lew. Yeah, no, I definitely agree with that. I wrote
it, and I agree with it. That's a good thing.
Mr. Ribble. Why would the President project a budget that,
for the last five years, whose deficits are $890 billion, $891
billion, $960 billion, $1.05 trillion, and $1.16 trillion? All
growing deficits.
Mr. Lew. I think if you look at these last few years, there
have been extraordinary things going on because of the
recession. We have had a collapse in terms of revenues because
of lower economic activity, we have had increased expenditures,
some of them automatic stabilizers, some of them actions
Congress and we took together to get the economy moving again.
We have said that we are now at a pivot point. We cannot accept
that as business as usual. It was necessary during the
recession. We had to get out of this recession; if we were
seeing negative growth right now and rising unemployment, that
would be a terrible thing. So we are very proud of the work we
did. We inherited an economy that was not in good shape, and we
have gotten it on the path towards being in much better shape.
The job is not done. And we are now looking to the future, and
that is why we are putting together a budget that we think
invests in the future.
Mr. Ribble. Yeah, but the first five years, you project
decreasing deficits and the last five years, you project
increasing deficits, which will prevent us from winning the
future.
Mr. Lew. I think the deficit, as a percentage of the
economy, stays in that 3 percent range in the entire period of
this budget, and that is what we need to do to be able to pay
our bills and not to put our current expenses on the credit
card. We are going to have to do a lot more to pay down the
debt. We are, and we are not pretending that we can do that all
at once. We need to do that together, but we have got to get
started.
Mr. Ribble. On page seven, you use, It would be
shortsighted to cut spending across the board and short-change
critical areas for growth and competitiveness, such as
education, innovation, and infrastructure, or carelessly slash
programs that protect the most vulnerable. It is a little
incendiary to think that those are the only two choices, but
maybe it wasn't written with that intent. I will tell you what
I believe is careless; when all the adults in this room leave,
cameras are gone and the television announcers go home, I
believe there is going to be a five-year-old sitting here with
the bill. I think that is careless. Thank you sir.
Chairman Ryan. Thank you. Mr. Ryan.
Mr. Ryan of Ohio. Thank you, Chairman Ryan, thank you, Mr.
Lew. I think this is the best budget you could put together
given the circumstances, and I think it is important for us to
remember that it was the President and this administration that
said we need to have a Debt Commission, that made that happen
while a lot of Republicans on the other side were doing the
Potomac two-step, backpedalling away from it. And I think we
need to go back and read those press clippings. You were here
in 1993. Would you say that 1993 budget, when we had great
economic growth during the 90s, 20 plus million new jobs being
created, was it the 93 budget that really got the economy back
on track?
Mr. Lew. Congressman, I would say that what really made a
difference was that from 1990, under President Bush, to 1993
under President Clinton, to 1997, when there was a bipartisan
budget agreement, we showed continued emphasis on reducing the
deficit, and paying for what we were doing, and getting our
economic house in order. 1990 and 1997 were bipartisan; 1993
was not. I hope that we are now going back into a period where
we can work together, because I actually believe that people
draw a false distinction between, Is the economy causing us to
get out of the deficit or is it our policies? They are
connected. When we pursue policies that promote confidence in
the future, it is good for the economy. When the economy grows,
it is good for the deficit; a virtuous cycle.
Mr. Ryan of Ohio. I think it is important that we realize
that mature decisions were made in 1990; mature decisions were
made in 1993. In 1993, there wasn't one Republican that voted
for that budget. Vice President Gore had to break the tie in
1993, and then when we got into the 90s, we had some money to
invest in children's healthcare and R&D, and set the stage for
T-Com revolution and the Internet revolution and everything
else.
Two quick questions. One is, is a concern of yours, we have
got $100 billion in cuts that our friends in the House want to
make immediately in the next few months. We have got about $140
to $150 billion in cuts being made by states across the
country, $2 billion is going to be pulled out from the federal
employees. Are you concerned that in the short-term, that we
are pulling too much money out of the economy and it is going
to hurt the growth that we have had and the success that you
have had over the last year or two?
Mr. Lew. We have put together a budget that tries to step
on the brakes at the right time, and to not jump too fast into
fiscal consolidation. I think we are going to have to look and
see how the debate develops here in Congress. I think there is
a concern in the states, as they are facing their fiscal
challenges. We were careful in this budget that overall, the
impact on the states, we don't think will create more of a
problem there, though there are some things we reduce, there
are other things we increase.
Mr. Ryan of Ohio. I am concerned. You guys have the veto
pen, and I just want to encourage you to not be afraid to take
a stand, because we have come a long way in the last two years
and we need the President to continue to lead us out of this.
We are doing the right things now, I disagree with what my
friends on the other side are saying. That leads me to my next
and final question, and you have got 35 seconds to try to sum
it up. How do these investments that you are making, R&D,
education, high-speed rail, infrastructure, how do these
investments compare as a percent of the GDP to what China is
doing, what Germany is doing, what some of these other
countries are pumping money into; how do our investments
compare to these other countries, as we try to be competitive
and compete?
Mr. Lew. Well overall, the United States as a private-
public combined, spends more money on research and development
than the next four largest countries put together, so we are
the leaders in R&D. I think in these areas, we frankly have not
kept up with some of our competitors. The infrastructure
investment needs to keep up in order to be able to ship goods
and buy and sell goods.
Chairman Ryan. Thank you. Mr. Flores.
Mr. Flores. Thank you Mr. Chairman, and thank you Director
Lew for joining us today. I want to continue the conversation
that Mr. Price started about amnesia regarding the past. Do you
recall what the unemployment rate was in December, 2006? It was
about 4.4 percent. The unemployment rate in December, 2010 was
in the mid-nines. I would submit that what you claim that you
inherited was due to a legislative process that occurred during
that four-year period, and that wasn't controlled on this side
of the aisle.
I am new to this job, I have been in it about six weeks.
Before I did this, I was a CPA and a CFO and a CEO for a number
of successful companies, and so I know what it is like to sign
the front side out of a paycheck, to make the decision to
commit to hire an employer, to make an investment. This so-
called plan doesn't put me in a position, if I were in that
chair today, to do that.
The other thing is that I know a little bit about
businesses and budgeting, and I have learned some new
terminology. Sustainable deficits is a new term, and then
primary balance, that is another interesting term. When
Chairman Bernanke was here last week, he said that the federal
deficit over the long term should not exceed the interest cost
that we pay on our debt. We have come up with this definition
of primary balance, that it is okay to run a deficit of 3
percent of GDP. How many businesses and families do you know of
that can operate in primary balance and for how long?
Mr. Lew. We haven't set the goal of stopping at primary
balance. We have said you have to get to primary balance in
order to get beyond that, and I think it is an important
difference.
Mr. Flores. This doesn't get better than primary balance.
Mr. Lew. You are not going to get to balance if you don't
pass through primary balance.
Mr. Flores. Let me submit to you that most families and
most businesses that I know of cannot operate in primary
balance. I commend you for having balanced budgets during the
Clinton administration. That is what I call primary balance, is
where you have zero deficit or a surplus.
Mr. Lew. If I could just respond on the first point. You
know, I think most families have had some experience with
building up balances on their credit card that they really were
facing really hard decisions.
Mr. Flores. They don't do it over 10 years. They don't do
it over 40.
Mr. Lew. They start by cutting up the card, not putting
more on it, and that is what primary balance is.
Mr. Flores. And they start by cutting their net deficit to
zero, and this plan doesn't do that. My questions are this, you
have got average spending during, what was it? Let me rephrase
that.
Mr. Lew. I am going to have to bring historical statistics
with me the next time I testify.
Mr. Flores. I can answer it for you, but do you recall what
spending was as a percent of GDP during the Clinton
administration?
Mr. Lew. It was around 20 percent.
Mr. Flores. Correct. And what is the average spending as a
percent of GDP under this plan?
Mr. Lew. I think that when you look at spending as a
percentage of GDP over time, it does grow as the population
grows, because people become eligible for Social Security and
Medicare. So when one talks about those numbers, you have to
look at what is behind them.
Mr. Flores. It is almost 23 percent, and if we really
wanted to develop a plan to have sustainable deficits of zero
or a primary balance of zero, we should have spending down
around the same level as taxes and that is around 18.3 percent
of GDP over the long-term.
Mr. Lew. You don't get the balance if your revenue and your
spending don't cross. The question is, at what level they cross
providing what we need for the country.
Mr. Flores. I understand. I yield back.
Chairman Ryan. Ms. Kaptur.
Ms. Kaptur. Thank you, Mr. Chairman. Welcome, Mr. Lew. Each
member of Congress arrives here from different life
experiences, and one truth in our family is going back nearly a
century, that when Republicans occupied the White House in
Congress, members of our family were thrown out of work. And
when Democrats regained those offices, our family members
started going back to work. It is one of the reasons I am a
Democrat. I know until all Americans who want to work are able
to become productive again, we won't be able to balance our
budget nor reduce the deficit. No American I know wants to
borrow more money from China or any other foreign country to
keep this economy afloat. The administration budget, in my
opinion, makes a responsible start and takes the deficit
seriously, and so do I. In fact, I have served in this Congress
long enough to have been a part of the solution during the
1990s that some of my Republican colleagues have referenced, to
balance the budget and grow jobs in this economy. Mr. Lew, you
were a part of that, I think the President has the right man in
your position.
Also this man, Mr. Panetta, who now has the CIA. We sat in
this room, I was a member of the Budget Committee back then. I
know what we did for America, and when we did it, Alan
Greenspan said he didn't think it was a good idea to balance
the budget. That is the most unbelievable statement I ever
heard in my life. Congress did it by making tough choices, by
cutting waste and also curbing special interests. I support the
administration's proposals to get rid of those oil subsidies.
Let them compete in the global economy. In the tough times we
are facing today due to the Wall Street abuses that caused the
recession we are in, the problem with the Republican budget is,
it hurts job creation and it goes after the people who can
least afford to hold their lives together in this economy.
In fact, their budget cuts off almost four million student
loans, it takes away five million meals to the homebound
elderly, it lays off meat and poultry inspectors, and it cuts
40,000 jobs in preschools and Head Start. I don't think that is
a very good set of proposals, so my questions, really Mr. Lew,
to you deal with jobs, which is where we should be focused in
two areas; one transportation, and the other one energy. For
where I come from, which is not a government platform like
capital cities like the one we are sitting in right now, and it
is not a trading virtual platform like New York or Chicago or
San Francisco, these places that deal in virtual stuff, we are
the real economy in northern Ohio, and for us transportation
and energy are destiny.
So let me ask you, the administration has put some focus in
its budget, despite tough times, on investing in
infrastructure, and also in new forms of energy. That is music
to our ears in our part of the country. We have to compete in
an unsubsidized, free-enterprise economy in northern Ohio.
Could you please tell us a little bit about the investments
that the administration is going to be making in transportation
and in renewable energy, and how this will contribute to job
creation, which we all desperately want?
Mr. Lew. Thank you, Ms. Kaptur. I am going to try in 50
seconds to do justice to our program, but we have an approach
that is designed to make sure that we build the infrastructure
so that we can have goods come and go between American markets
and shipped internationally from our seaports and our airports.
We have taken a broad view of surface transportation, because
it also means having the kind of modern communications
technology so that northern Ohio becomes part of the virtual
economy because there is no part of the country that is left
behind. That is what it is going to take to win the future. In
R&D, in energy, you know we look at the new technologies in
renewable energy and where other countries are frankly putting
their money down, saying That is the future. If we don't do the
same, we are going to find ourselves left behind. America has
never been left behind before, and we shouldn't start now.
Ms. Kaptur. I wish you could say more. Thank you very much,
Mr. Chairman. Thank you, Mr. Lew.
Mr. Lew. Thank you.
Chairman Ryan. Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman. Mr. Lew, I am also
one of the folks who is new around here, but I am familiar with
budgets, I have written them, I have read them, and I can
assure you, sir, that if you let me play around with the
assumptions, I can make you a budget that looks as good or as
bad as I want it to. I am looking at your assumptions regarding
the revenues in the future, and you have assumed, essentially,
that revenues have become about 19 percent of GDP in the next
couple of years and then steadily increase over the course of
your budget, peaking out above 20 percent. These are the
historical numbers going back to the 1960s, and I suggest to
you sir, or I would ask you, are you making an assumption that
we have only seen once or twice in the last 40 years?
Mr. Lew. You know, the revenue projections are based on a
combination of current law and specific proposals, and it is
driven by what is happening in the economy overall.
Mr. Mulvaney. But the truth of the matter is that you are
assuming numbers that, you are assuming the numbers will be
average. Nineteen percent, 19 percent, 20 percent, and we have
only seen that sporadically once, maybe twice, in the last 40
years. You take a look at the GDP, another one of your
assumptions, Mr. Ryan mentioned it earlier, the Washington Post
beat you up on it today; you are assuming rates of growth in
the economy that dramatically exceed even what the
Congressional Budget Office is assuming. Against that backdrop,
you are also assuming interest rates dramatically lower than
the Congressional Budget Office. I would suggest to you, sir,
that to assume growth rates that are higher but interest rates
that are lower is internally inconsistent, and I draw your
attention to the fact that you have assumed an interest rate on
the 10-year Treasury note of this year of 3 percent. Do you
know what the 10-year traded at last week?
Mr. Lew. I did not check the [inaudible] rates last week.
Mr. Mulvaney. Three point six five. And your assumption is
that it will be 3 percent this year. The Congressional Budget
Office, by the way, says it will be 3.4; they are already too
low. The Congressional Budget Office also testified that for
every percentage point that they assume the interest rate is
too low, it is $1.3 trillion of additional debt over the course
of the 10 years. You have assumed revenues that are way higher
than average, GDP that is higher than anybody else thinks, and
interest rates that are dramatically lower than anybody else
thinks. And I put it to you, sir, that that is the reason that
this is not a credible document.
And I go back and I look at the past couple of budgets that
the President has offered. Two years ago, he told us the
deficit this year would be $900 billion in his budget. Last
year, he told us the deficit this year would be $1.3 trillion.
Yesterday, he told us it was $1.6. Two years ago, he projected
that the budget deficit next year would be $557. Last year, he
told us that number was going to be $829. Now he is telling us
the number is going to be $1.1. I can't believe the numbers. I
can't do it. And until we can get numbers that we can agree on
are at least in the middle of the assumptions, it is going to
be very difficult for us to focus on policy.
Is it a question? No, sir, it is not. Am I beating up on
you? Perhaps unfairly so. But the point is this; we should be
here talking about policy. We should be here talking about what
the President wants to do to fix the country, and what we want
to do to fix the country. I happen to be one of those
Republicans who does not believe the President doesn't want the
country to succeed. I believe that he does, but we have to have
a discussion about policy, and when you give us numbers that
are simply not credible, it really prevents us from doing that.
I expect better.
Mr. Lew. Can I respond at least quickly?
Mr. Mulvaney. Very briefly. I expect better out of you, and
I have already spoken to the Chairman, I expect better from us.
When you see our budget, you are not going to see unreasonable
assumptions. But yes, sir, you may.
Mr. Lew. The economic assumptions in this budget reflect
what is the middle in terms of where the Federal Reserve Board
looks at what the likely patterns of recovery are. So, there
are mainstream assumptions.
Mr. Mulvaney. Well then you need to walk to the
Congressional Budget Office and tell them that their numbers
are whacked out.
Mr. Lew. And there is a conceptual difference between the
Congressional Budget Office numbers, where they believe the
economy never gets back to the level of strength that it had
before the recession. That hasn't been the experience of past
recessions, even financially-led recessions. It is taken
longer, but we have gotten back. So there may be year-to-year
disagreements, but we think we have very credible economic
assumptions, and I am happy when we have more time, to go
through them in some detail. Thank you.
Mr. Mulvaney. Thank you.
Chairman Ryan. Thank you Mr. Huelskamp. Mr. Huelskamp, will
you just yield for 10 seconds?
Mr. Huelskamp. Yes, sir.
Chairman Ryan. Here is what we think is wrong. You are
assuming 3.9 percent growth in the first five years, 3.2
percent over 10 years. That is above trend, and only with those
rosy assumptions can you ever get close to the primary balance
you are claiming. That is why when we see blue chip
Congressional Budget Office far below where you are, it sort of
strains the credibility of these claims. That is the point we
are trying to make.
Mr. Lew. Mr. Chairman, I would just say that in the short
term, we actually are slightly less optimistic. In the long
term, we are slightly more optimistic, because of the
difference in approach I just described.
Chairman Ryan. And medium-term, where you hit your
objectives more often.
Mr. Lew. The idea behind the economic projections is, will
we or won't we track the recovery patterns from past
financially-led recessions? We believe we will. That is what
the projection is. So it is to that trend.
Chairman Ryan. Mr. Huelskamp.
Mr. Huelskamp. Thank you Mr. Chairman. Mr. Director, I
appreciate you being here, and back in February 23, 2009, the
Congressional Budget Office at that time outlines a $1.186
trillion deficit. The very next day, the President made his
promise to pledge to cut the deficit in half by the end of my
first term in office. In your comments, and the President's
yesterday, he made a claim that he was going to meet that
pledge, at least projected. But the numbers show one-half of
the Congressional Budget Office figures are a $593 billion
deficit. What do you predict?
Mr. Lew. If you look at it as a percentage of GDP, we cut
it in half by the end of the first term.
Mr. Huelskamp. That was not the statement of the President.
That is what bothers me, how the President can stand up, and
you can stand here in this document, and claim that you are
cutting the deficit in half, when you did not.
Mr. Lew. We are cutting it in half as a percentage of GDP.
Mr. Huelskamp. That was not the claim the President made.
Would you agree with me?
Mr. Lew. I know what we have done in this budget. I know
what we have said in this budget. We have cut the deficit in
half as a percentage of GDP.
Mr. Huelskamp. I appreciate that. Again, I will just note,
that is not what the President said, and that is not accurate
of what is in your budget, and that is some of my difficulty.
Where I come from, if you are wrong, you are wrong, but to
stand up and again make that claim, I was very disappointed in
that particular claim. But I am also particularly disappointed,
Mr. Director, in another statement in your document where you
state, quote, We are going to stay on a path towards
sustainable deficits. How long are deficits sustainable?
Mr. Lew. We need to get to the place where we stop adding
to the national debt. This is a down payment. We need to work
together to go farther than that. But you have got to walk
before you run. You have got to get rid of the deficit before
you cut the debt.
Mr. Huelskamp. I understand, but this budget never does
that, does it?
Mr. Lew. It gets us on a path where we will able to do it,
yes.
Mr. Huelskamp. The path is unsustainable. Your path in this
budget is unsustainable. The deficit is not sustainable.
Mr. Lew. I look forward to seeing the plan.
Mr. Huelskamp. We are not talking about a proposed plan,
Mr. Lew. That is why I am dissatisfied. The language that is
coming out of this administration is telling the American
people that we can borrow for 10 years or longer, and are going
to call it sustainable. We are going to say 3 percent borrowing
is sustainable. It is not sustainable. There is no way we can
sustain the track that is being presented here, and that is
disappointing, because I know the American people. I know
people that work every day and try to balance their budgets and
they understand that sometimes you go under water awhile. But
to sit here today, and have the President claim, somehow, it
will be all okay, even if we are going to have a $768 billion
deficit in two years and we are going to sustain that forever,
and that is why I am very disappointed that the President
didn't stand. I am very disappointed in that. That is what I
wanted to convey. Because the President has the opportunity to
stand up and provide proposals to save and strengthen Medicare.
And you have said here that those are not contained in here.
But I just want to note, to the American people, the folks
that are listening here, and in the media, this is not
sustainable. You can call it whatever you want. Sustainable
deficits do not work. Primary balance is a figment of our
imagination. Only in Washington could you run a deficit and
claim it is balance, and somehow use the word balance. Mr. Lew,
you couldn't do that anywhere else. They would laugh you out of
the room. And I come at the state level. I served in the state
legislature. We had a requirement; balance. It wasn't a primary
balance. We couldn't run a deficit. This country is on a course
for un-sustainability and I would expect the President to stand
forward and say I am not going to keep my word, but to stand up
and tell the American people, I kept my pledge. He did not.
Mr. Lew. I disagree with you Congressman.
Mr. Huelskamp. He is $193 billion off of his promise. That
is a false claim and I am very disappointed in that. I yield
back the balance of my time, Mr. Chairman.
Chairman Ryan. Do you want to take a second?
Mr. Lew. No, I would be delighted to, Mr. Chairman.
Chairman Ryan. You know it is coming out of your time.
Mr. Lew. I understand. I have missed lunch a lot of days. I
think that if we want to use the kinds of common-sense language
that people understand, we should just do that. We should say,
Can you bring down the debt before you eliminate the deficit?
No. You can't start paying down the debt until you stop adding
to it. That is all we mean by primary balance. We are not
talking about it being okay. We are just saying that you can't
honestly tell people that we can pay down the debt, while you
are still adding to it.
Chairman Ryan. Mr. Young.
Mr. Young. Mr. Director thanks so much for being here
today. I know it has been a long morning and early afternoon
for you. My focus here in Congress is on sustainability, but it
is on sustainable job creation. And in the testimony we
received from Bernanke the other day, he indicated that the one
thing that really is missing from our policymakers in
Washington, the Executive Branch and Congress alike, is that
coherent plan, as he phrased it, and as Moody's recently
phrased it when they downgraded Japan's debt. A coherent plan
to deal with our entitlement programs. That is pointedly absent
from this budget, this roadmap, if you will. I think that is a
dereliction of duty on the part of the President.
Now you have indicated in today's Wall Street Journal, if
they quoted you correctly, that such proposals to deal with
these matters are better left in closed-door settings. Fair
enough. Perhaps that is the political judgment you make. I
actually think we owe it to the American people to own up to
them and to treat them like adults. That is what I intend to
do. What is our pathway into this meeting? How are we going to
begin this conversation? Will a letter be forthcoming? What
will the date of that meeting be? Please enlighten us.
Mr. Lew. Congressman, I don't believe that is exactly what
I said, but what I do believe and what I have said is, we have
put down a plan, which is the President's plan for how we are
going to get to the point where we stop adding to the debt. We
have also said that we need to have an environment where we can
work together on these long-term issues and have conversations
about things that it is frankly hard to have conversations
about. History shows that it is much harder to create an
environment where we can have trust and conversations to work
on a bipartisan basis, than just to take polarizing positions.
We have tried to strike a balance, putting a responsible plan
out there and creating an environment for that conversation. We
just took the first step yesterday. Congress is going to come
forward. You will write your budget and we will engage. It is a
long process. This is the first step.
Mr. Young. What is the next step?
Mr. Lew. Congress will write a budget. We look forward to
seeing what you do and your budget, and how you reach primary
surplus, how you reach deficit reduction, if you bring down the
debt. We really do think that you will have ideas that we want
to take advantage of and we look forward to working together.
Mr. Young. In this remaining minute and a half, let us
narrow down exactly what concerns the President has. People on
this panel here, at least on this side of the aisle, invite and
encourage the dialogue with the White House on this. Is it
people in his own party that are a barrier, and what might I do
as a freshman member of Congress to create the political space
where the President can step up and take a leadership role in
these matters?
Mr. Lew. I have worked on bipartisan negotiations from both
sides of the street, I was in the Speaker's office when the,
with a Democratic speaker when there was a Republican
President, and with a Democratic President and Republican
speaker. I can tell you the hardest part of the process is
developing the trust, where you can talk about the things that
you have to do. I think the attempts to characterize this
budget in the way that we have done it today are things that I
hope people take another look at, because this is a serious
proposal. I know you don't agree with it. I know there are
things that will be in your budget that we don't agree with. We
have to come from those positions, to find the middle where we
can agree. That is how you reach bipartisan agreement.
Mr. Young. Well I would encourage the President, I know he
is watching C-SPAN today, to move forward aggressively on this
matter. We are running out of time. We don't know what the
optimal debt to GDP ratio is, as Bernanke and others have
testified, and I think we need to very quickly embrace this
issue and solve it, as opposed to dancing around it and doing
the Potomac two-step.
Mr. Lew. We look forward to working together. We share the
same long-term goal. We may have different ideas about how to
get there and that is what we need to work through together.
Chairman Ryan. Mr. Rokita.
Mr. Rokita. Thank you, Mr. Chairman. Thank you, Mr. Lew.
Representative Young, Representative Stutzman, and I come from
a state that has a balanced budget. In fact we have a triple-A
bond rating, haven't raised taxes, and our secretary of state
for the last eight years has been running the office on a 1987
budget, unadjusted for inflation, and by and large, no one
seems to have missed a beat, no one is complaining about lack
of services or anything else. Can you imagine if we could have
Washington work on 1987 dollars? Hold on, don't answer that.
Mr. Lew. I think there would be a lot of people who asked
where their Social Security check was.
Mr. Rokita. No, I don't think so. I don't think so. But we
have to get to that, because you are right. You have
acknowledged here a couple times that we have this pig in the
python, the baby boomers you described, getting older and need
their check, and that is, I think, the frustration here, is
yeah, we all see that. But where is the leadership? You
mentioned a few times that you are a lawyer, I am one too, I
feel your pain.
Mr. Lew. I haven't practiced in a long time.
Mr. Rokita. But, classic basic skills of negotiation
dictate that, when you are kicking off a process, which you
just did yesterday, leadership dictates even, that you kicked
off up here. And it seems that you are right here, and saying,
Okay, you guys fill in the blanks.
Mr. Lew. No, I don't agree with that. I think we kicked off
the process with a comprehensive plan that put an awful lot on
the table, that is, we think, the best way to deal with the
immediate challenges in front of us. And if that is not
something that you agree with, we look forward to seeing your
plan, and then we will work together to find where we can
resolve it. So I don't agree with the characterization. I do
agree that, as the President said, when he said this is a down-
payment, there will be issues that we have to deal with beyond
this, and those are totally consistent.
Mr. Rokita. Okay, so in that regard, let me ask you some
specific things. There has been a bipartisan agreement. Steny
Hoyer, if I am quoting him correctly, said, Democrats agree
that spending cuts are necessary to tackle our deep budget
deficit. So we have got bipartisan agreement that we have got
to start cutting spending. Given the reality that spending cuts
are coming, has Office of Management and Budget approved any
agency's spending in excess of fiscal year 2010 levels?
Mr. Lew. We are currently operating under a Continuing
Resolution. Under the Continuing Resolution, we neither can
begin or terminate activities. So we have been operating under
the terms of something that provides for funding, in most
cases, at fiscal year 2010 levels. It is an imperfect way to
run the government, we should have full-year spending bills,
and there undoubtedly will be complications as we move through
the year, adjusting these numbers as we go along.
Mr. Rokita. Have you advised agencies to prepare to start
lowering their budgets?
Mr. Lew. Well, we advised agencies that they should follow
the law. The law is that under continuing resolution, you do
not initiate or terminate programs.
Mr. Rokita. Well, for the future, are you starting to get
these agencies acclimated to a culture of spending cuts?
Mr. Lew. I think the budget exercise we went through to
produce this budget was a transition for many agencies, where
things that were sacred cows that only grew, were frozen or
reduced. There are tough decisions in this budget, really tough
decisions, and I think there isn't an agency of government that
hasn't made those trade-offs.
Mr. Rokita. You acknowledged that there is a net excess of
22,000 federal employees under your plan.
Mr. Lew. I am acknowledging that there is an increase,
which is a very small percentage of the federal workforce, to
address new activities in this period.
Mr. Rokita. In Indiana, 22,000 is a lot of people.
Mr. Lew. It is a lot of people, but it is a big country,
too, so when you put a few people at airports all over the
country, it starts to add up.
Mr. Rokita. Oh, don't start the airport business.
Mr. Lew. I could give other examples if I had more time.
Mr. Rokita. One more thing on Social Security. You
mentioned that Social Security wasn't much of an issue, I am
paraphrasing, obviously, but I want you to tell me whether or
not the trust fund has any money in it or not.
Mr. Lew. Trust fund has been running a surplus since 1983.
Mr. Rokita. That is been taken.
Mr. Lew. And it has bonds in it.
Mr. Rokita. Thank you.
Chairman Ryan. Mr. Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman. Thank you, Mr. Lew,
for your time today. Does the administration have any concern
about the national debt?
Mr. Lew. Yes.
Mr. Stutzman. I mean, am I right in reading that, on page
202, that our debt is going to go from $13.5 trillion to $26.3
trillion over the next 10 years?
Mr. Lew. Yeah, I think that we are very concerned about
controlling the deficit so we stop building the national debt.
We then have to start bringing down the debt so that the
interest payments can also be reduced.
Mr. Stutzman. There is no plan, or no idea, in here, that
even starts the curve back to some sort of solvency with
national debt. I mean, to me, as we waited for the President's
budget, I really felt that, you know, the President was going
to come back and he was going to, in this town as a freshman, I
am finding it is very political, I see great divides between
the party, and I thought maybe the President's going to try and
one-up the Republican party, and do something that, you know,
maybe we are going to try to jump out in front and do.
And it totally surprised me to see this type of a budget.
As a small business owner back in Indiana, to project deficit
spending, project doubling the debt; when are we going to start
to see some sort of action to show otherwise?
Mr. Lew. First, I mean, you are looking at, there are
different measures of the debt. The debt held by the public is
the part of the debt that has the impact on credit markets. And
I would just note there are different ways of looking at it, it
gets to a much lower number in 2021.
Mr. Stutzman. Where does it start to do, to go back down?
Am I looking at the wrong line?
Mr. Lew. No, I mean, until we start paying down the debt,
the interest payments on the debt will still be increasing that
number. I don't disagree that we need to ultimately turn the
corner and start paying down the debt. I just am arguing, and I
think it is common sense, that until we stop adding to the debt
through our spending policies, to pay down the old debt is
impossible. So we have got to do this in two steps. This down
payment has that first step, which is the critical and
necessary first step.
Mr. Stutzman. As I am going back through, there are a
couple of departments that get minimal increases. But it
appears the largest increase is to the Department of the
Treasury, specifically the IRS. Can you comment why?
Mr. Lew. Well, there are several reasons. First of all, we
are implementing financial regulatory reform, which is an
important area. We certainly don't want to be exposed to the
future risks of bail-out that we have seen in recent years.
Secondly, we have enforcement initiatives where, I think we
all agree, that if two people live next door and they are in
the same income tax status, they have the same income, they
should pay the same taxes. It shouldn't be that if you cheat
you pay a lower tax rate. And there are enforcement efforts in
there.
Mr. Stutzman. So how many of the 22,000 new federal
employees are anticipated to be hired by the IRS?
Mr. Lew. I would have to go back and check the specific
numbers.
Mr. Stutzman. I have got a couple of miscellaneous
questions. How many federal employees do we currently have?
Mr. Lew. I could give you an exact number, I am happy to
get back to you.
Mr. Stutzman. Okay, and then real quick, I think I heard
you say earlier, that employers' number one concern is that
they need an educated workforce, is that right?
Mr. Lew. I said, when I meet with CEOs, one of the big
concerns that I hear them express is that they are having
trouble hiring people with the skills they need in science,
engineering, and math.
Mr. Stutzman. Okay, all right. Thank you, Mr. Chairman, I
will yield back.
Chairman Ryan. Okay. Mr. Lankford.
Mr. Lankford. Thank you. You got to do this whole exercise
last year, and go through all the dance and all the hearings
and everything else, and then the budget was actually not
passed.
Mr. Lew. I have only been here eight weeks on the job.
Mr. Lankford. Congress just passed on it, and so getting a
chance to do this again, and that we can hopefully get a chance
to pick up and pass a budget this time, and get us through all
that. I am hearing a perpetual sense that the certain
apocalypse is coming if Republicans actually try to balance the
budget and move us from, out of just deficit spending, to
actually cutting down the debt. But I can tell you, I see the
other side of this, to say $26 trillion is a more frightening
thing to me that balancing the budget is a frightening thing to
me on that.
Let me just set a quick stage for you, just the emotions of
that, because you are walking to this, early on at this point,
returning back, as I am walking into it. Here is the sense that
I walk into it with. When I came on January 5, this year's
budget deficit was projected to be $1.4 trillion. By the State
of the Union, it was $1.5 trillion. As of yesterday, it is
$1.65 trillion. Now, what I am hearing is this sense of
consternation that we are talking about cutting $100 billion
out of this year's budget when actually our deficit has
increased $250 billion, just in the six weeks that we have been
in this session, at this point.
So there is a real sense among a lot of people that I have
talked with, to say we cannot just slow down the amount of debt
that we are adding each year. We have actually got to get back
to balance. And I know you are walking a fine line, and I know
you are fulfilling the President's mandate to say let us slow
down the curve somewhat on it. But you go out 10 years, and
there is no debt reduction. I know you said a bunch of times,
we have got to get back to this primary balance. But it seems
as if the next President and the next Congress is left with the
hard decisions, and this is just some simple decisions that get
into it.
Mr. Lew. In fairness, President Obama took office and
inherited a situation that was out of control, and we are
getting it under control and we are doing it as we emerge from
the recession.
Mr. Lankford. What I am hearing are terms like sustainable
deficits, that doesn't seem to be working towards getting it
under control. That seems to be working towards getting it to
some manageable balance that we only add a trillion or so a
year to our debt, and we are not really getting out of this.
The other side that really concerns me is this whole sense
of trying to split up the way that we are handling energy, that
there is a preferred energy and there is a non-preferred
energy. And we are going to try to sink a lot of money into
R&D, into new technologies and energy, while punishing people
that are in traditional. There has been a lot of conversation
about jobs and about small businesses. And my question, in
multi-fold in this; my concerns on it, number one is, is an
independent producer of traditional energy sources who has
three to five employees a small business?
Mr. Lew. If that was the entirety of the business, I
believe it would be a small business.
Mr. Lankford. For a lot of independent producers around the
country, they have three to five employees. And there is this
sense of, we are going to go hammer on the big oil companies,
when the majority of our energy companies aren't the big giant
companies. They are small independent producers that are
scattered all over the country. There are hundreds and
thousands of them, scattered all over, that are about to get
hammered, that are living in fear that the administration is
going to come hammer them to come do another type of energy,
very similar to what President Carter did when he said we are
going to have 20 percent of our electricity produced by solar
power by the year 2000. Yet here we are, in 2011, it is not
even one percent.
Mr. Lew. We are seeing that other countries are investing
in the technology now, and the technology has advanced, and we
are entering a different period of time.
Let me just respond to one point that you made.
Mr. Lankford. Let me just finish, I have no issue with all
forms of energy. I have an issue with going and punishing one
group that is actually fueling our vehicles and powering our
cars and getting our homes ready, so we can go try to do
something else that may work ten years from now. It feels like
the sustainable debt, you are saying, We will try to manage
this and hopefully that will work out at some point. That is
what I feel like we are doing to energy by trying to punish the
energy companies.
Mr. Lew. I know we are almost out of time, but I just want
to go back to one point you were making earlier, when you
described the increase in the projected deficits. I just want
to point out that in December, I know you weren't here in
December. In December, my first couple of weeks in this new
position, we had an important bipartisan agreement to do
something that I think most of us agree on, which is taxes
shouldn't have gone up January 1 of this year. We needed to
have economic activity, it was the wrong time to let a tax
increase take place. We also needed to do some things because
we were still in a recession. That is driving up the numbers,
but we knew when we passed it at the time, that it would have
that short-term impact.
Chairman Ryan. Thank you. Mr. Guinta.
Mr. Guinta. Thank you, Mr. Chairman. Thank you, Mr. Lew,
for being here. I have a couple of quick questions, and I will
try to not take up the full four minutes. First of all, I
understand earlier this morning we agreed on the $1.6 trillion
deficit number for fiscal year 2012, as proposed. Correct?
Mr. Lew. I am not sure I understand what you are referring
to.
Mr. Guinta. Did you agree that this budget proposal has a
$1.6 trillion deficit?
Mr. Lew. Our budget states in its four corners, what the
deficit is each year.
Mr. Guinta. 2012, it is $1.6 trillion, correct?
Mr. Lew. In 2012, it is 1.1.
Mr. Guinta. One point one trillion, okay. You had said that
we want to cut the deficit in half, as it relates to GDP. You
had also made statements about the deficit as a percentage of
GDP. You also said that we need to be talking more clearly to
the country about the challenges we have. I don't disagree with
that. My point would be, I don't think the country appreciates
the verbiage that we use. Municipalities, states, and homes do
not budget the way the federal government budgets. I agree with
you, and I think most people here agree, that we do have to
reform and reduce spending. We do have to get on a path to have
a greater fiscal soundness moving forward.
I don't see that path in this budget. You have conveyed
that this is a first step. You have also made the statement
that we need to put the, step on the brakes at the right time.
I believe that the country believes that this is the right
time. Our time is now, in order to change course, change
direction. And I am certainly willing to work with you, and
anybody, who recognizes that point. I don't see it in the
budget, and maybe I am missing it, but I will continue to look
through.
A couple of things that I would consider. First of all, I
would like to know, how many programs for this budget did the
administration audit?
Mr. Lew. How many did we audit, we reviewed every program
in the Federal Government. We have terminations, reductions,
and savings in over 200.
Mr. Guinta. In this budget proposal? Okay, do you know how
much money that saves?
Mr. Lew. $33 billion, those 200 plus terminations,
reductions, and savings, save over $33 billion in 2012.
Mr. Guinta. And where did you end up spending that savings
in this proposal?
Mr. Lew. We are living within the freeze. We are paying for
the extension of the Medicare Doc Fix, we are doing, there is a
whole host of things. In just a few seconds, it would be hard
to give you the complete, comprehensive answer.
Mr. Guinta. Is there a proposal for a reduction in force of
federal employees?
Mr. Lew. There is not a general policy. I believe there are
some agencies that may well have some reductions enforced. It
is not that it was a government-wide policy.
Mr. Guinta. But you could instruct the departments to
reduce their size and scope?
Mr. Lew. Right, we have a pay-freeze, which is a reduction
in compensation for federal workers. And we have budgets that
are very constrained, which mean that they are going to take on
new missions without new people. And I think these are very
tight budgets for federal agencies.
Mr. Guinta. Okay. And the final point I would like to make
is, in New Hampshire, my home state, 94 percent of our
employers are small business owners. I note on the Office of
Management and Budget Website that you project over 10 years,
500,000 new jobs will be created in New Hampshire. Our total
population is about 1.3 million. I fail to see how we are going
to create 500,000 new jobs in my state, particularly when we
have got the marginal rate lapsing at 45 percent with the
number of small business owners we have.
Mr. Lew. I am not familiar with the specific projection you
are referring to. I am happy to take a look at it and get back
to you.
Mr. Guinta. Okay. Thank you very much.
Chairman Ryan. That is it?
Mr. Lew. Thank you very much.
Chairman Ryan. I hope you get some time to eat lunch before
your next hearing. Thank you for coming by. We obviously have a
chasm that separates our opinions on these issues. I look
forward to further meetings with you in the future, this
hearing is adjourned.
Mr. Lew. Thank you, Mr. Chairman.
[Questions submitted for the record and their responses
follow:]
Questions Submitted for the Record and Their Responses
Chairman Ryan:
Director Lew, in Table S-7, there is an adjustment to the BEA
baseline of $118 billion over ten years ($12 billion per year) to
``reflect the incremental cost of funding the existing Pell maximum
grant award.''
Could you provide a more detailed justification for this adjustment
and tell us if it is mandatory or discretionary funding?
A: The adjustment to the BEA baseline reflects the special
scorekeeping rule for Pell Grants that CBO, OMB, and the Congressional
budget committees have used since 2006. The scoring rule charges the
appropriations committees for the full cost of funding the Pell maximum
award for all eligible students, regardless of the amount of budget
authority specified in the appropriations bill. The proposed outyear
adjustment to the BEA baseline reflects the full cost of funding the
current discretionary maximum award level--$4,860--for the projected
number of students who would qualify in each fiscal year of the ten-
year budget window. Finally, the adjustment is discretionary and does
not suggest mandatory funding for the entire Pell Grant program.
Chairman Ryan:
Your predecessor's June 8, 2010 budget preparation guidance to
agencies ``requested that each non-security agency submit a budget
request five percent below the discretionary total provided for that
agency for FY 2012 in the FY 2011 Budget.'' Despite this guidance, many
agencies including Commerce, Education, Energy, HUD, Interior,
Treasury, EPA, GSA, NASA, NSF, SBA, and SSA saw increases over the
projected 2012 level or decreases smaller than 5%.
Why did the administration not reduce spending that the agencies
themselves decided were low priority?
Please provide for the record a list of the programs identified by
the agencies pursuant to this guidance.
A: The agency submissions to OMB are part of the deliberative
process which informed the development of the 2012 Budget. Like in past
years, OMB provided guidance to agencies on their 2012 Budget request,
including the top-line funding level for each agency. This past year,
we also asked agencies to identify lower priority programs that are
less critical in advancing their missions.
The materials agencies submitted were critical to developing our FY
2012 Budget request, and directly informed decisions to terminate or
reduce funding for many low priority programs. Overall, the budget
proposed 200 terminations and reductions that save $30 billion in 2012.
In other cases, the Budget proposes to consolidate funding for low
priority programs and use the funding more effectively, or reform
programs so they can better accomplish their mission.
All of this contributed to the President's proposal to freeze non-
security discretionary spending for five years.
Chairman Ryan:
Please provide the Committee with a list of proposed terminations
and major reductions in the President's budget for FY 2002-FY 2010 and
the ultimate funding level provided by Congress for these programs.
A: Attached is the list of discretionary programs that were
proposed in the President's Budget for termination or reduction from
2006 to 2010, compared with the funding levels enacted by the Congress.
The 2006 Budget was the first year that the President's Budget included
a supporting document detailing proposed terminations and reductions.
From 2006 to 2009, the supporting document was titled ``Major Savings
and Reforms.'' Since 2010, the supporting document was titled
``Terminations, Reductions, and Savings.''
Congressman Yarmuth:
Director Lew, for the past two years I have opposed the
Administration's proposal to repeal the Last In, First Out (LIFO)
accounting method for tax purposes. American companies have been
operating under the assumption that LIFO is a perfectly sound
accounting method since 1939, when Congress enacted tax code section
472, which expressly makes LIFO an acceptable method of tax accounting.
Repealing LIFO would have a devastating impact on a number of companies
in my district, particularly Brown-Forman, a wine and spirits company
that is one of the largest producers of Kentucky bourbon. Brown-Forman,
which employs about 1,300 people in Louisville, estimates repealing
LIFO would raise its taxes by hundreds of millions of dollars. The
company, and the spirits industry at-large, has long used LIFO as its
standard accounting method, which is, in part, attributable to the fact
that it produces whiskey, a product which necessitates aging over long
periods and which federal law specifically requires to be aged.
There is one aspect of the President's proposal that has me
particularly concerned for American companies, and that is the fact
that the proposal would not only repeal the LIFO method going forward;
it would also ``recapture the LIFO reserve'' of every LIFO taxpayer.
This proposal would retroactively repeal deductions that were clearly
authorized by the U.S. tax code and that in many cases were taken by
the taxpayer as far back as several decades ago. This would be the
equivalent of repealing the mortgage interest deduction and forcing
homeowners to repay all of the deductions they took. This, like the
current LIFO proposal, would be exceedingly unfair, as are most
retroactive tax changes. I, therefore, urge you to reconsider your
proposal--and respond to these concerns.
A: The repeal of the LIFO (last in, first out) method of accounting
will eliminate a tax deferral opportunity available to taxpayers that
hold inventories, the cost of which increase over time. This tax
benefit does not accrue to taxpayers who use the FIFO (first in, first
out) method of accounting. In addition, LIFO repeal would simplify the
tax code by removing a complex and burdensome accounting method that
has been the source of controversy between taxpayers and the Internal
Revenue Service. International Financial Reporting Standards do not
permit the use of the LIFO method, and repealing LIFO would remove this
possible impediment to the implementation of these standards in the
United States.
Taxpayers that currently use the LIFO method would be required to
write up their beginning LIFO inventory to its FIFO value starting in
2013. Allowing LIFO taxpayers to exclude the amount of the inventory
write up from gross income would represent a substantial windfall for
those taxpayers relative to others who have been using FIFO for years
and potentially paying more tax as a result. Furthermore, the
Administration's proposal mitigates the burden of the retroactive
effect by allowing the one-time increase in gross income to be taxed
over 10 years, rather than all at once; in short, the Administration's
proposal provides appropriate transition relief.
[Whereupon, at 12:55 p.m., the committee adjourned subject
to the call of the Chair]