House Budget Committee - President's Budget for Fiscal Year 2005 - Part 2
REP. NUSSLE: Mr. Moran.
REP. JAMES MORAN (D-VA): Thank you, Mr. Chairman. Is this on?
In his State of the Union address, President Bush told us, and I quote, "In two weeks, I will send you a budget that funds the war, protects the homeland and meets important domestic needs by limiting the growth in discretionary spending to less than 4 percent. But yesterday, two weeks later, the president sent us a budget that does not fund the war on Iraq or the war on terrorist in Afghanistan or anywhere else.
The DOD press release-the Department of Defense press release on the budget states that with respect to incremental cost for operations in Iraq, Afghanistan, the global war on terrorism, we have yet to determine the scope of those operations. Well, you know, Chairman Nussle said very clearly to the witnesses for the Department of Defense that when you submit your budget for 2005, you've got to include the war in Iraq and estimates of any other military conflicts. Now, you know to stay in, quotes, "a budget that funds the war," that was clear. Could not have been clearer.
And yet the Department of Defense and the Office of Management and Budget, you, Mr. Bolten, have decided you're going to ignore the president's statement. Now, I think it's appropriate for you to explain why you chose to ignore the president's very clear statement. And, you know, I know your answer is going to be something about, we don't know when we're going to hand over power in Iraq. The fact is that you said yesterday that we are funding the war in Iraq and Afghanistan at a rate of $50 billion. Now, if you put $50 billion in there, would that not be more accurate than to put zero? Is there any chance that we will spend zero on the war in Iraq and Afghanistan in Fiscal Year 05? Mr. Bolten?
MR. BOLTEN: Mr. Moran, the budget document that you have in front of you expressly says that we will need supplemental funding in '05 for our ongoing operations in Iraq and Afghanistan. That's the actual incremental cost of keeping the troops on the ground. So we've been completely forthright in this document and --
REP. MORAN: Mr. Bolten, I'm sorry. I know what's in the budget but I'm not asking you what you have said in the budget, I'm asking for an explanation, because we have a budget here that you are telling us is not complete. You're telling us you're going to make offsets, for example. We need to have some idea where you're going to get those offsets when you decide to actually ask us for the cost of the war in Iraq. The president now says-we're told he's going to wait until after the election to hit us with that supplemental.
But that means that this whole budget resolution process is something of a sham. We know it's not accurate. We know we're going to have to take money from other programs. We know we have to fund the war in Iraq. We know when we got the budget resolution last year that there was no money for Iraq and yet there would have to be.
We've now spent $166 billion we've allocated for the war in Iraq, and those numbers are above our budget resolution. It caused havoc with the budget resolution and it's one of the reasons why when the president said he was going to hold it at 4 percent, it actually went-total spending went up to about 12.5 percent, about three times what the president said it was going to be. Discretionary spending about 8 percent.
You know, that takes credibility out of our budget resolution process. It makes us in the Congress look bad and yet there's nothing we can do about it if you're not going to be straightforward with us. So some of this is a lecture but it's a lecture, I'm sure, that the chairman would like to make if he wasn't in the position he's in. But I'd like to know-get some idea where you expect us to get the money to pay for the war in Iraq, which you know is going to necessarily have to be funded after the election.
MR. BOLTEN: I have had an opportunity to discuss this with the chairman. It was not quite in the same vein as the conversation that you and I are having right now, but what I did say yesterday and I repeat today is that the right way to do this kind of funding is through supplemental funding. We only really have two choices on our current system, and maybe we ought to talk about how else we might do it. But we can put it into the-we can put the additional funding for a war, for which we do not at this time know the cost, we can put that into the regular budget, run the risk that it becomes part of the baseline and increases Defense funding inappropriately out into the future, or when we know the numbers, when we have a better handle on them, we can handle that incremental funding-and that's all we ask for in the supplementals is incremental funding. We can ask for that through supplementals.
Now, given those two choices, the correct path is to do the latter. And we come forward with a budget that says we're going to need to do the latter. I also set some limits on what I think the actual request is going to be, because I identified for Mr. Spratt and I identified for the press yesterday, the amount that we believe we are spending now in Iraq and Afghanistan out over the course of the coming year, we expect that amount, the actual outlays, to be less than $50 billion. If you choose to believe that our commitment in Iraq and Afghanistan is going to need to remain as robust in '05 as it has been in '04, then that is the number that you should expect to add to the deficit.
My own hope is that it will be less and possibly substantially yes.
REP. MORAN: But you know, zero is not an accurate number?
Thank you, Mr. Chairman.
REP. NUSSLE: Well, let me, if I could, just on that-because I do share the gentleman's frustration. I think many of us do share-for the very reason of your last point or question, and that is that we know it is not going to be zero. The challenge that we have, of course, is that we hope it's not going to be 50 either. And trying to come up with a number in between is a challenge, particularly when we don't want to just feed it into the base of Defense spending that as a result grows and compounds every year thereafter.
And I would just ask, if I could, as a follow-up to the distinguished gentleman from Virginia, is there a way-or will you be willing to work with us to try and answer this question as we move the budget resolution forward, because we believe that honest budgeting-we know it's not zero, we hope it's not 50, but we're afraid to put in 30 if it's really 40. I mean, that's the challenge we've got. Or we're afraid to put in 10 if it's really 20. So coming up with a way to answer this question so it's clear within the budget and it's clear within the stated goal of reducing the deficit over time is something we need to work with you in order to accomplish.
MR. BOLTEN: It is a challenge, Mr. Chairman, and you've identified exactly the problem. If we put in too large a number and we end up having that money in the base, then we run the risk of the inflating the Defense budget entirely inappropriately and expanding our deficit in ways that I think all the members of this committee would be concerned about. Then we will be accused of trying to hide the true cost of the war and underfunding the actual needs of our troops. There's a real challenge to these emergency situations, and that's what this is. This is a war. There is a real challenge to budgeting for them. I'd be happy to work with the committee.
Right now, our only available option that makes any sense is to notify the committee, as we have done very forthrightly in this budget, that we intend to come forward with a supplemental when the numbers are clear and at a time when the Defense Department actually needs the money.
REP. NUSSLE: I thank the gentleman.
Mr. Thornberry.
REP. MAC THORNBERRY (R-TX): Thank you, Mr. Chairman.
Mr. Mankiw, I want to get back to this point Mr. Gutknecht asked about and that you referred to at the end of your statement, because I do think it is a very fundamental issue when you look at budgets as to the economic effect of taxes or borrowing. I have saved an article from last fall written by Robert Samuelson, this copy happened to be in the washingtonpost.com, and it's titled "The Deficit Chicken Hawks." And he argues-he points out at the beginning a variety of Republicans and Democrats are talking about deficits and the problems that they create. And then he goes on to say that almost everything you think you know about budget deficits is wrong or misleading, and talks about their effect on the economy and their effect on tax rates.
But the key is this paragraph, which I want to read, and I want to see whether you agree with Samuelson's opinion. He says, and I quote, "But the biggest misconception about deficits is that by themselves they threaten the economy's long-term vitality. Not true. The real threat is rising government spending. The reason is simple. Government spending must be paid for by either taxes or borrowing. If spending rises too high, economic growth may suffer from either steeper taxes or heftier deficits. Spending is the real culprit." End quote. Now, is that your view and the administration's view as to the dangers that either taxes or spending create?
MR. MANKIW: Yes, I do agree with that. And one of the things that no economist that I know of agrees with is the idea that the government faces a budget constraint. That means that every time you increase spending, you are increasing taxes. If not immediately, then sometime down the road. And that's the sense in which, as I said earlier, that a policy of cutting taxes and spending sort of go hand in hand. Permanent tax cuts is only feasible if it's with spending restraint, and that's precisely why the president has put forward his spending restrained budget in front of you.
REP. THORNBERRY: Well, it seems to me that perhaps we ought to keep our eye on the ball, at least in the opinion of this economist, that the real threat is spending levels rather than deficits.
Mr. Bolten, I want to ask you specifically on the subject of taxes, my understanding is that some of the reductions in taxes which we have passed in previous years are set to expire at the end of this calendar year. I would like to know what those tax cuts are that are set to expire, how many people are affected, if you have those numbers, and how they would be affected if they expire in taxes and those areas are allowed to go back up.
MR. BOLTEN: Mr. Thornberry, there are three specific provisions that expire at the end of this year. They are the child credit-these are tax cuts-the child credit, which expands the credit to $1,000 per child. They are marriage penalty relief, and they are the expansion of the 10 percent bracket. And those provisions, I don't have the exact numbers for you, would be glad to provide them for the record. Maybe one of my colleagues can help me out here with something, but those provisions apply to nearly every taxpayer. Certainly your average family in America, these are the tax cuts that are important to them. They make a huge difference in the tax bill that the average American family faces because a child credit, the marriage penalty and the expansion of the 10 percent bracket hits right at the heart of where the Tax Code hits average American families.
REP. THORNBERRY: I would appreciate, if not now, to know how many taxpayers or what percentage of the taxpayers are affected by each one and how much their tax bill will go up if these tax cuts were allowed to expire.
MR. BOLTEN: We could break that down for you, Mr. Thornberry. But what I would say is that almost every taxpayer in America is affected by at least one of these provisions.
REP. THORNBERRY: Great. Thank you.
Thank you, Mr. Chairman.
REP. NUSSLE: Thank you.
Ms. Baldwin.
REP. TAMMY BALDWIN (D-WI): Thank you, Mr. Chairman, Ranking Member Spratt. One of the best ways to appraise this budget is whether it conveys to the American people that this president understands the problems they are facing and attempts to confront those problems head on.
Mr. Bolten, today I would like to take a little opportunity to look at how this budget will affect my constituents and it seems to me that the president's priorities are more tax cuts and that those tax cuts continue to benefit the most affluent Americans over lower and middle income Americans and over immediate issues of jobs, healthcare and education and, parenthetically, these are the chief three issues that my constituents raise to me when we get a chance to meet and share. This budget makes most of the provisions of Bush's 2001 and 2002 and 2003 tax cuts permanent and at a projected cost of $1.31 -- sorry, $131.6 billion over five years but at a cost of $936.3 billion over 10 years or at $2.2 trillion when one includes interest on the debt.
The budget also proposes a series of new tax favored savings accounts, the Lifetime Savings Account and a new tax favored Retirement Savings Account. And in both of these cases, programs appear affordable in the short term five-year picture but when fully mature, these are projected to cost up to $50 billion per year. These tax initiatives, all of them combined, will certainly drive us deeper and deeper into debt and disproportionately, as I mentioned earlier, enrich the very most affluent in our country.
In so doing, this will also squeeze out immediate hope of doing some meaningful things to address our constituents' top challenges: jobs and healthcare and education, as I mentioned before.
The effect of extending tax cuts that have previously been passed and are due to expire remains similar to the original packages before us, the top 1 percent of households will receive on average a $58,000 tax break yet the average middle income family will receive a tax break of just around $635. So of this commitment of just under $1 trillion over 10 years, over 47 percent, or $440 billion, will go to the top 5 percent of households and that's a larger share than the entire share the bottom 90 percent get when combined.
I think the new savings plan would similarly benefit the very wealthy. The Lifetime Savings Account, when fully up and running, according to some estimates, will provide the top 5 percent of the population with 50 percent of the tax benefit. The to 10 percent would secure two-thirds of the tax benefits and, believe or not, the Retirement Savings Account is supposed to be even more skewed in terms of who receives the tax benefits.
And I don't have time right now to go into some of the reasons for why these appear so skewed in the out years. If you look at even current law, the Treasury Department says that only 4 percent of those currently eligible to contribute to IRAs are able to actually max out and 5 percent of those participating in 401(k)s are able to actually contribute to the minimum. These are the people who are going to receive the real benefit of these new proposals.
But bringing it back home, the average family of four in my district will not get a lot of these benefits from these trillion dollar commitments that we're making over the next 10 years, aside from additional interest payments on rapidly expanding debt. And yet, families in my district are still struggling with recent job losses and significant increase in health insurance costs. And it appears from this budget, reacting to these is simply not a priority.
Well, do you dispute the out year, the 10-year estimate from 2009 to 2014 on the tax cuts expansion that I just mentioned and also the fully implemented savings programs?
MR. BOLTEN: Ms. Baldwin, I don't actually have the numbers at hand on the LSAs and the RSAs. I'm going to ask Mr. Mankiw to say something about that in a second. With respect to the extension of the tax programs, I think your numbers sound about in the range that we have estimated. I think those were roughly the numbers that we were carrying in the budget tables at the back of our proposal.
Mr. Chairman, if I may go over Ms. Baldwin's time for a couple of minutes because she raised several very important issues. Can I ask for one chart to be put up on the screen about the tax cuts because you expressed some concern about the tax cuts being skewed to the rich. One of the things that happen with our Tax Code and has happened increasingly over time is that wealthy people have paid a larger and larger percentage of the total income tax. So therefore if you cut taxes, wealthy people tend to get more of the tax cuts but the net effect of the tax cuts that this Congress passed and the previous tax cuts that the previous Congress passed in '01, '02 and '03 has been to make the Tax Code more progressive. And that is demonstrated on this chart.
Let me take one example, which is the top 5 percent. Those are the top 5 percent of income earners in this country. Those are people making more $135,000 a year and I think most of us would accept that that's somebody in a pretty high income range. In that group, the top 5 percent, before the tax cuts, if you took out all of the tax cuts, the income tax cuts that you all adopted, those people were paying 50 percent of the total tax revenue in this country. The top 5 percent would have been paying 50 percent of the total tax revenue.
After the tax cuts, that same group is paying 53 percent of the total tax revenue in this country. The result of the tax cuts that you all enacted has been to make the Tax Code more progressive rather than less. And I think that's the kind of relief that the tax cuts have made. More importantly than arguing sort in the rearview mirror about whose benefiting more than who, because there's a lot of benefit to go around in these tax cuts, the important part about the tax cuts is that they benefit the economy.
Jobs is number one, I imagine, in your district. People care most about jobs. And where the jobs are coming from is especially in the small businesses of America. Those small businesses, typically through the sub-chapter S corporations pay the top income tax rate. They flow through their income. They pay the top income tax rate. So when you talk about the tax cut benefiting the rich, a lot of the people getting that tax cut are the businesses. They're getting it through their business to create jobs which the small businesses in districts all over America that are really creating jobs. When they get that tax money, they are able to plan. They are able to invest and they are able to use that money to create jobs.
Now if you care about jobs going forward, the worst things we can do for those folks is threaten them with a tax increase. That will choke off the economic recovery that we are now seeing and all those people to draw in on their investment and fail to create the jobs that I think are the most important things on your mind and on the president's mind as well.
Let me ask Dr. Mankiw to say a word about the LSAs and RSAs.
MR. MANKIW: Let me say a word about the broader economic impact of tax provisions aimed at increasing private savings. Private saving is now low by historical standards and that is the concern of many economists and it's a concern both at the micro level that people may not be saving enough for their own needs but it's also a concern at the macro level because one of the things we learn in basic macroeconomics courses is that savings provide the funds available for an investment in the economy: new factories, new equipment, new housing. Investment in turn leads to capital accumulation. Capital accumulation in turn leads to productivity growth, and it is growth in productivity that allows rising incomes, rising real wages and rising living standards for American families.
So in thinking about the LSA/RSA proposal, it's important to think about this not only in terms of its immediate effect but the fact that this is going to provide incentives to save, which in turn is going to provide the foundation for longer term economic growth.
REP. NUSSLE: Mr. Toomey.
REP. PATRICK J. TOOMEY (R-PA): Thank you, Mr. Chairman.
The first thing I wanted to just touch on for Dr. Mankiw, just follow up a little bit on the discussion we had earlier about-you described two different aspects or two different ways in which the tax cuts affect the economy for the better. One was the demand side, the sort of immediate impact of people having more cash and they spend that, and the other is the supply side effect of creating greater incentives to work and save and invest.
It strikes me, and I really would like your opinion on this, that over time the bigger impact of the two is the supply side effect; the fact that as long as we keep lower marginal tax rates, as long as we maintain a lower capital gains rate, as long as we keep the pro-growth tax policy in effect, we get year after year after year ongoing permanent increased incentives and therefore greater economic output. So as you weigh the two, the greater economic value comes from maintaining the lower tax rates regime versus the short-term demand side impact. Do you agree with that, or would you characterize it differently?
MR. MANKIW: I think I agree with 90 percent of what you said. I think most economists would say that the demand side effect would predominate in the short run, over the period of six months or a year when you have unused capacity and the idea is to increase demand so people put that capacity back to use. But over time, as the economy goes back toward full employment, supply side effects will predominate and the supply side effects of lower marginal tax rates mean an increased incentive to work. It also means increased incentives for capital accumulation and saving-and saving capital accumulation, as I said a moment ago, which leads to productivity, growth in the long run.
REP. TOOMEY: Right. I wanted to also follow up briefly on the comments from my colleague from Texas, which I think were exactly to the point about the real measure of the burden that government imposes on the economy. I have long believed that it's best measured by the total level of spending and the way in which we finance that spending is of secondary importance to the total amount, for a variety of reasons. And I'm very glad that we've established that once again here today. I think we need to emphasize and keep our eye on the ball. The problem is spending. That's what generates the big deficit, that's what represents the misallocation of capital.
In terms of getting that under control, there are several things that we've attempted. In the past we've had a practice, perhaps not always observed but at least occasionally observed, when there was a supplemental appropriation bill introduced, at least the non-defense parts would often be offset, or at least there would be an attempt to offset it. I myself have authored amendments in recent years to try to offset the non-defense portion of supplemental appropriation bills, and yet we've not been able to do that and, if my recollection is correct, the administration has not requested offsets. Is that the policy of the administration now or in the future? If we do have additional supplemental requests outside of the defense arena, will you seek offsets to those new spending measures that would go above and beyond this budget?
MR. BOLTEN: Mr. Toomey, we don't have a policy on when we will and will not seek offsets. With something as large as a war supplemental, there really isn't a reasonable prospect of doing that. Where we see the prospect and we see the prospect of actual enactment, yeah, we'd like to work with you and try to see to it that any additional supplemental spending for whatever the supplemental may be, that we can-whether we can offset it because we're concerned about the same things you are, which is that those supplemental expenditures do tend to undermine the integrity of the whole budget process.
REP. TOOMEY: Good. I mean, I agree when you have a war it's just not feasible and, you know, I've never advocated that we attempt to offset that kind of magnitude. But, as you recall, we did have more modest sized and non-war related supplementals, including about $1 billion for FEMA recently, where I think we could have offset that. And if we get that sort of situation where it is manageable, I hope you'll be able to work with us and hope we'll try and establish that discipline of finding those offsets.
The second thing I wanted to observe: I'm glad to see that the president is proposing a very, very modest-certainly by recent historical standards, a very modest increase in non-defense/non- homeland security discretionary spending. I personally hope we can hold it even to less than that, but that certainly that's movement in the right direction. My concern is that that only amounts to about one-sixth of the total budget here, and two-thirds of the total budget is mandatory spending. We've recently in recent years increased that dramatically, a pharm bill-this new prescription drug bill, which of course is an enormous increase. Isn't there more we could be doing now on the mandatory side to try to get this under control, especially since mandatory spending has been growing at a more rapid rate in recent years and it already represents two-thirds of the budget?
MR. BOLTEN: There is a great deal with can do, Mr. Toomey, on the mandatory side. The chairman and you have both long been advocates of trying to control that portion of the spending, which is much more difficult to control. We have proposals in our budget to reduce some mandatory spending. I alluded to one in my exchange just now with Mr. Spratt on Medicaid, but there are a lot of other areas where I think we can work on holding those expenditures down. And institutionally I think a very important move we can make is to adopt kind of budget enforcement legislation that the administration is intending to put forward that would set limits on mandatory spending. If you want to propose to increase mandatory spending under this proposal, you'd have to propose at the same time to cut mandatory spending.
REP. NUSSLE: Mr. Moore.
REP. DENNIS MOORE (D-KS): Thank you, Mr. Chairman. We have a $7.1 trillion debt, national debt, in our country right now. We have a $561 billion deficit projected for this year. We're spending almost a billion dollars a day on what I call the debt tax, the interest on the national debt, and that's the only tax that can never be repealed. And we're here talking today about what we're going to do this year and how we're going to try to cut that in half over the next five years, and I'm very, very concerned for the future of our country.
I spoke to a high school class two weeks ago, went through this little rant with them, and I said to the senior class-government class, why should you be concerned about the national debt? One girl raised her hand and said, because we're going to have to pay it off. Well, good luck to them and good luck to our grandkids because we're going to saddle them with a debt that I don't think they can ever pay off, especially when it comes to the baby boomers starting to retire and that kicks in as well.
So we've got some major problems here and I think this budget submission does not deal with reality of the situation we're facing right now. And I want to be as respectful as I can here, but I'm very, very concerned about this and I think we, as Republicans and Democrats, need to come together and put aside partisan politics and say, we've got a problem in this nation and we need to do something for the future of our kids and grandkids and our country to make sure that we solve this problem. You know, Mr. Chairman, talks about we want to stay strong and free and I want that and I think most people on both sides of the aisle want that for our country.
But a country can't be strong and free and broke, and that's where we're headed right now if we don't turn things around. When it comes to supporting our national defense, when it comes to supporting our homeland security, I think you're going to have 95 percent of the people in this Congress agreeing with that and we will support our troops. I voted for the use of force resolution, I voted for the $87 billion supplemental and I will support our troops. But I don't like it when-and with all due respect, when people come in here and say, well, we're not going to tell you how much it's going to cost because we don't know.
Even businesses make advised or informed judgments and projections and estimates and you could give us a projection or an estimate about a supplemental. If it's wrong it's wrong, but it's better than a zero estimate and that's what we're getting right now, and that's what we had last year when I asked these same kind of questions. I'm very concerned about what we're doing. Again, I think we need to work together and put aside partisan politics and do what's right for our country.
You talk about the worst thing we could do right now to small business-and I want to protect small business and I don't want any tax increases. I voted for the president's tax cut two years ago-two-and-a-half years ago when we were in surplus mode. I voted against it last year when we were in deficit mode and instead supported a smaller tax cut that was paid for, because I thought it was the fiscally responsible thing to do. What we need to do now-and you talk about the worst thing that can happen is the tax increase for businesses.
I think maybe worse than that would be what Alan Greenspan I expect to talk about in the next 30 to 45 to 60 days, and that is the danger of interest rates going up when this economy does start chugging again. And you remember the late '70s. We had interest rates of 14, 16, 17 percent and that would be absolutely devastating for business, for real estate, for consumer borrowing, for everybody in this country as far as I'm concerned except for people who want to get a large income-large return on their investment.
We cannot afford, as a nation, to go down there and people are not seeing that right now because I think we have the lowest interest rates in this country we've had in 40 years. But if we don't get a handle on this I fear that we could be in for some rough sledding ahead, and we owe it to our country to do better than that. The thing that just, I guess, gets me the most of this job is the ungodly partisanship up here. I'm not being partisan when I say that because both sides do it, but we need to stop that and we need to start working together for our country.
And I guess I would ask you again, I suppose you can't do it today but please come back to us as soon as possible with some estimate as to what this continuing conflict in Iraq's going to cost, just an estimate so we can plan. I don't expect it to be built into the base, and I understand the reasons for that but you could at least give us an estimate, somewhere between zero and $50 billion about what it's going to cost. And I would ask you please to do that and submit that back in writing as soon as possible. Thank you.
REP. NUSSLE: Mr. Hastings?
REP. DOC HASTINGS (R-WA): Thank you, Mr. Chairman.
And thank the two of you for coming and testifying today. I have to remark on my friend from Kansas, and I know-I understand the passion that he's speaking with in trying to get this resolved.
And I've been on this Budget Committee-this is my fourth year now, and I remember 9/11 also when we were supposed to meet here and talk about getting into the Social Security Trust Fund and how difficult-but what Mr. Gutknecht didn't say when he referred to that is that times have changed. 9/11 changed the whole lot.
And that's represented in the needs for this country, it's represented in this budget with the increase in homeland security spending of 10 percent and defense 7 percent and trying to keep a cap on other spending because the economy hasn't grown, we've all acknowledged that. But the reason I mentioned my friend from Kansas' remarks in this is that we have a responsibility in this committee to build a budget.
I would hope we, the majority party, will have a budget. I would hope that we'll have an alternative so that we can debate the alternative. We didn't have that last time. And with an alternative, this becomes a whole lot of political gamesmanship and so I'm with my friend from Kansas, I hope we don't do that. It seems to me we ought to at least acknowledge that there hasn't been a budget that we could debate between the two of us.
I'm going to talk about a couple of issues in my district that hasn't been touched about, but I want to give kudos to OMB, particularly in regard to the commitment that your predecessor made at OMB and you have made at OMB, regarding the cleanup of the most environmentally contaminated sites in this country, and that's the nuclear sites at Hanford and Savannah River and other places in the country. The administration made a commitment last year to accelerate that clean up which will save billions of dollars in the out years. I want to congratulate you for keeping that commitment.
I just wanted to say you have a kind of proviso in there that there has to be some discussion on the reclassification issue. I just want to let you know that this member is talking to both the department and my state to see that gets done as quickly as possible, and if you want to comment on that, that would be fine. I have another question to follow up, if you want to comment that would be fine.
MR. BOLTEN: No, just thank you for your comment, and I also wanted to thank Mr. Moore for the tenor of his remarks.
REP. BAIRD: Would my colleague from Washington yield for just one moment?
REP. HASTINGS: No, I don't-I have a short period of time here and I just want to get my questions to --
REP. BAIRD: Just for the sake of accuracy, we did have a budget last year, an alternative.
REP. HASTINGS: I want to-again, dealing with the Northwest and you had some language and some issues there with the power authorities and specifically with BPA. And specifically on page 26 you said that the administration might consider proposing legislation regarding Bonneville Power and I understand that this is something that the administration is considering. Now, is it true that you are considering this? Is that an accurate statement?
MR. BOLTEN: That's correct, Mr. Hastings, and we'd be very open to working with you on whatever plans we have.
REP. HASTINGS: Good, and I just wanted to say because that's something that we worked with on a bipartisan basis in the Northwest and we look forward to working with you as that consideration comes forward.
MR. BOLTEN: And, Mr. Hastings, we're aware of your interest and know what a strong advocate you've been for Bonneville and for all of the folks in that region and we will certainly be consulting with you closely before we come out with any proposal.
REP. HASTINGS: That's good. I appreciate that because BPA has tried some innovative things and that was a direction, as a matter of fact, that this committee and OMB had given them in the past. One last question here in my last minute. To get on the larger scale again, you-Mr. Toomey talked about the mandatory spending. I'm glad that you're going after the mandatory spending because that is two thirds of the budget. Would you care to comment on the 65 programs that you're seeking to eliminate and just briefly-I want to save a minute here because my colleague doesn't want to-he wants some time, if I don't have that time, that's his problem. Go ahead.
MR. BOLTEN: Just briefly, Mr. Hastings, we do have a number of program terminations proposed in this budget. There are 65 of them. They total $4.9 billion savings over the '04 enacted levels. In addition to that we have 63 major programs with major reductions in them. The total savings in that is about $12.-let me see, about $8.0 billion savings over the '04 level.
So there is quite a bit in this budget-quite a bit of belt tightening. This will not be good news all around, there will be plenty of complaints I think from probably almost every member concerned about something that we are proposing to terminate or ratchet down. We'll be ready to work with each of the members as we go through the process going forward. But something we do recognize is that when we have these demands of defense and homeland security we do need to tighten the belt elsewhere. We think we're doing it in a responsible way, making sure that the real priorities of this country continue to be met.
REP. HASTINGS: It's just a matter of prioritizing.
Real quickly, Mr. Chairman, if I may. My remarks regarding the budget was a budget proposal, an alternative, submitted in this committee. That has not happened in four years in this committee, that's all I was saying. Thank you, Mr. Chairman.
REP. NUSSLE: Ms. Capps.
REP. LOIS CAPPS (D-CA): Thank you, Mr. Chairman and Ranking Member Spratt.
If I could turn our attention-Mr. Bolten, welcome and Mr. Mankiw as well-to Medicare as a part of our budget. It has been widely reported in the press, and it was revealed in the president's budget, that the administration has a much higher cost estimate for the recently passed Medicare legislation, rejecting a 10-year cost of $534 billion, a $139 billion increase over CBO's estimate. Now in a letter from CBO to Chairman Nussle dated yesterday, CBO explained the differences including a $46 billion higher payment for private plans. Can you confirm that the administration estimates that private plans will receive increases of $46 billion under Medicare legislation?
MR. BOLTEN: No, I can't, Mr. Capps. The actuaries have a large number of differences. I don't have any reason to disbelieve the number, but it's a very complicated area --
REP. CAPPS: Well, can I follow along because yesterday HHS officials briefed staff stating that the administration's estimate for payments to private plans is $46 billion. And in a letter to Chairman Nussle dated yesterday as well, CBO stated, and I quote, "Full estimates assumed that many of the participants in Medicare Advantage"-which are the private plans as they are called now-"are in areas where the payments to MA plans and beneficiaries through premium rebates would exceed what it would cost if those beneficiaries were in the fee for service sector."
And I continue: "Most of the additional participants in the administration's estimate are in relatively low-cost, low-density areas where the payments to MA plans would be substantially higher than the cost of those beneficiaries in the fee for service sector." In other words, it would cost more to make these payments to private plans than it would to keep seniors in traditional Medicare. And my question is why should we pay private plans with taxpayer money, so much money to provide services that would be cheaper in traditional fee for service plans versus in our traditional Medicare fee for service?
MR. BOLTEN: Ms. Capps, I have to leave it to the actuaries who have done the briefing to provide you with the actual numbers. But stepping back to the principle involved, which I think is what you are asking about on the Medicare, is that the Medicare bill that you all enacted last year adopts the very sound principle that that system overall will be better off if there is competition and choice in the system.
So that seniors who want to, only those seniors who want to, can move into a-over into a private plan that has a history, in the history of our economy anyway, and has a very strong history of providing both superior service, of providing more innovative service and ultimately doing at lower cost. Within the budget window that the actuaries are talking about there is an anticipation of the cost --
REP. CAPPS: I don't mean to interrupt you, but I would like to state for the record, according to Medicare Payment Advisory Commission, MEDPAC, Medicare already pays private plans 19 percent more than what it would cost to serve those same seniors in the Medicare fee for service plan. And based on data from HHS's own actuaries, the average annual growth in Medicare spending from 1999 to 2002 was 6.4 percent as compared to 10 percent for private health insurance. This is the evidence that we have.
And even when you scrub the numbers to make sure that they only compare benefits covered by both Medicare and private plans, Medicare growth was still lower at 6.2 percent, compared to 8.7 percent for private plans. And you may say that private-and this has been the argument, that private health plans are better at controlling costs, but all the concrete evidence is against you. MEDPAC, which is the foremost resource on Medicare financing, clearly says that private plans cost taxpayers more than traditional Medicare. And even the data from your HHS supports this conclusion.
On top of that the fact is that they cost the taxpayer more and private plans are also less reliable than traditional Medicare. Across the country, even when they get increased payments, the private plans keep cutting benefits, raising cost sharing and getting up and leaving our beloved ones in the lurch. So I strongly urge that the administration rethink this policy as our seniors are as they're receiving this bill and the language that it's been couched in and I think we should go back and do away with this failed privatization experiment. We've left you a few seconds to comment on these feelings, these strongly held convictions and the data behind them that I bring from my constituents in my district.
MR. BOLTEN: I understand the convictions. There's a philosophical divide here that was-that I think was resolved in the Medicare bill that you all adopted, and that is, do you trust the government to be dictating what seniors Medicare plans --
REP. CAPPS: How do you respond to these statistics, though, that I've given you from MEDPAC?
MR. BOLTEN: I don't have any basis to dispute the statistics of what's happening now in the short run. In the long run, I have every confidence that the private sector is going to be able to provide more innovation --
REP. CAPPS: Based on what?
MR. BOLTEN: -- more choice --
REP. CAPPS: Based on what? I'm sorry.
MR. BOLTEN: Based on two hundred and some years of history in this country with a system in which the most innovation comes not from the government, the most efficiency comes not from the government, the most quality of care comes not from the government, but from innovation in the private sector. I think that was effectively litigated and resolved in the bill that you all adopted.
REP. CAPPS: I yield back.
REP. NUSSLE: The gentlelady's time has expired. Just because you referred to it, I think it's my duty, since the letter was to me, to ask that it be made part of the record. I apologize for not doing that sooner, I'd ask unanimous consent that the letter from CBO be made part of the record. And I believe-I hope it's been distributed. It sounds like it has.
REP. CAPPS: Yes it has, and thank you very much.
REP. NUSSLE: Yes, thank you.
Mr. Schrock?
REP. SCHROCK: Thank you, Mr. Chairman.
Dr. Bolten, Mr. Mankiw, thank you for enduring this again. I might ask you a question on a figure. According to your testimony the current deficit is 4.5 percent of the GDP. What is the highest percentage of GDP that the deficit has ever increased? I think for relation purposes, it would be good to know that.
MR. BOLTEN: In modern times, in the last 25 years, the highest has been 6 percent during the Reagan administration, I think it was 1983, the highest percent of GDP-of deficit as a percent of GDP. In World War II it probably spiked above 30 percent. So in all out war time it got much higher, but in modern times the highest was 1983 at 6 percent of GDP.
REP. SCHROCK: Six percent, thank you. One of the president's goals is to, you know, cut the deficit within the next five years, and I certainly approve of that. I wish we could do it quicker. And do you think it's doable? Do you think we can do it quicker, and if so, how do we-what's the path we take to get us there?
MR. BOLTEN: The chart that I had up on the screen showed that we do get more quickly than five years of cutting the deficit in half as a percent of GDP. It looks like on the numbers that we have, let me take the-what, the green bars, yeah, this one, you'll see that on the current numbers it looks like just barely make it in 2006. The members have been correct in pointing out that especially in '05 and maybe even in '06 we will need to add in money for war in Iraq and Afghanistan. So that may be an unrealistic expectation to say that we will make it by '06, but by '07, '08 and '09 I think we are comfortably in that range if we adopt the president's policies.
One important caveat on that that Dr. Mankiw may want to comment on is that we are making conservative economic growth assumptions. We are on the low side of CBO and the blue chip economic forecasters. The biggest factor in bringing these deficits down more rapidly is strong economic growth and that is why we are so convinced that the right thing to do is not impose a tax increase on this economy right now, it's to keep the tax cuts going because if we can get better economic growth out of this economy we will get that deficit down much more rapidly.
MR. MANKIW: This is a brief comment. As Josh mentioned, we do make conservative economic assumptions. We try to very much track the private sector but our budget forecast was locked almost two months ago and there has been by and large good news on the economy over those two months. So I think right now the forecast implicit in this budget is on the conservative side of the private sector forecasters. For example, in 2004 we-year over year we have a 4.4 percent growth rate. The blue chip consensus of private sector forecasters is 4.6 and CBO was 4.8. The same thing is true of 2005. We're a little conservative compared to the blue chip and CBO. So if CBO turns out to be right on economic growth, that will be good news as far as the deficit is concerned, it will bring in more revenues.
REP. SCHROCK: So do I hear you saying you think it is possible to grow our way out of this deficit?
MR. MANKIW: I don't think by itself. I think it's going to require spending restraint, but I think the way we're going to get ourselves out of this deficit is the combination of robust economic growth, which we're forecasting and CBO's forecasting even more over the next two years, together with that spending restraint.
REP. SCHROCK: Mr. Bolten, the president's budget also proposes two spending controls, two significant controls. Caps on discretionary spending, of course a pay as you go mechanism for entitlement programs.
How serious do you think the president is this year in enacting these budget controls and would you recommend that the president consider insisting on them as a price for signing the appropriations bills?
MR. BOLTEN: The president is serious about them. I've discussed them with him directly and I have shared with the president the keen interest of many members on this committee and elsewhere in the Congress in re-instituting those kind of controls, so he's quite serious about it. It's probably not up to me from this witness chair to say what the president is likely to insist on or not, but I do know that he attaches a priority to it. We at OMB and CEA-I think I speak for Dr. Mankiw as well-attach a very high priority to it and we're anxious to work with you on it.
REP. SCHROCK: He's threatened to veto. Never has, never not signed a bill. Do you think he would not sign an appropriations bill? Is he that serious?
MR. BOLTEN: I think the president would certainly not sign an appropriations bill that went outside the limits that he was proposing to keep us to, and I repeat that I think that the leadership, your chairman, the rest of the leadership in the Congress, was very effective this past year in making sure that the appropriations did not exceed the limits that were agreed to by the president.
REP. SCHROCK: I hope so. Thank you very much.
MR. BOLTEN: Thank you, sir.
REP. NUSSLE: Mr. Thompson?
REP. MIKE THOMPSON (D-CA): Thank you, Mr. Chairman.
Thank you, Mr. Bolten. You know, I would agree that September 11th and the downturn in the economy created a bunch of challenges that we had to deal with, unexpected challenges. But I really don't think that they explain what I see is a real credibility gap in a document that we're looking at today. There's just-there's omissions, there's out year costs are ignored. If you look at just the tax cut provisions, the big cost doesn't come until after 2009 and that's at the same time we have a huge spike in the baby boomers that are going to be dependent upon different services and I really think that has to be explained to have any credibility.
The others are pay go provision in this document, but it only applies to one side. It doesn't take into effect the revenues, and I don't know how you can spend-do tax expenditures without calculating where those costs are going to come from because, like everything else we've discussed here today, that money comes from some place and as it is right now, it's merely tacked on this incredibly large and ever growing national debt. There's discrepancies between the two entities that calculate the cost of these programs, most notably is the prescription drug bill, it's a $135 billion different cost from one entity vis-vis the other. I hate to beat a dead horse, but the whole war funding issue, it's just not here. We have a budget document that does not have one penny regarding funding for Iraq, and that's just not-you couldn't take that out to any one of our districts and get one person, one constituent that any one of us represents, to see where that's justified. It would be probably laughed at.
And there are also cost shifts in this document. Some on this committee are fond of talking about what constitutes a tax cut. Well, if you're going to charge veterans who leave the military with an understanding that they get healthcare, a $250 charge-and these aren't rich guys. This is $30,000-something a year salary with five dependants. That's a cost shift that these people are having to bear and then the idea of cutting local law enforcement by the number in your document and then put a slide up that suggests we're increasing funds for homeland security.
These are the first responders, the fire and the police guys and if you take it with one hand and then give it back with another, the local guys who are going to have to respond if there's a problem are going to have trouble doing that. And I think that these issues need to be addressed and I would like to hear on PAYGO, how you can possibly expect us to support a half a PAYGO program. It seems to me we should look at both the expenditures and the tax expenditures as well.
MR. BOLTEN: Mr. Thompson, I'm going to ask Dr. Mankiw to talk in more detail about the distinction between a mandatory spending increase and a tax increase or a tax cut, but the short version here on that specific question is, as Dr. Mankiw and others have described earlier, it's spending that's the problem, it is overspending in the economy that damages the economy and it's not under taxing that damages the economy. Let me ask Dr. Mankiw here --
REP. THOMPSON: But it's a loss of dollars and that are available. That would be like saying that I want to retire, work part time, make $30,000 a year and put an addition on my house. And my banker's going to say, well where are you-how are you going to pay for it? That doesn't wash. You've got to be able to assess where they money's going and where the money's coming from.
MR. BOLTEN: I'm going to ask Dr. Mankiw to take that up in just a second, but I want to take up one of the other things that you mentioned, because several of the things you've mentioned I think we've had a chance to have an exchange on. But one of the things that you mentioned last we have not, which is on the first responders. And I want to come to it because I think it's a very good example of where we in the administration and this Congress need to make some tough choices about priorities. The president is proposing to increase homeland security spending overall by 10 percent. Those are large increases in bio-surveillance, there are large increases in counter- terrorism efforts and so on.
I apologize, Mr. Chairman. If I can go over just a minute here the-but we can't spend on everything and one of the areas where we have been spending in homeland robustly is in getting money out to first responders. And we have been-we have put that money out since September 11 as a capacity building undertaking, to try to bring some of the first responders all over America more up to the risks that we face today.
REP. THOMPSON: That may be. But the point I'm making: you give it up on one program then you take it away from local law enforcement/firefighters on the other, and it all comes out of the same pocket of the local law enforcement, the local firefighters, the first responders.
MR. BOLTEN: And the point I want to get to, Mr. Thompson, is that this is part of the very difficult exercise that we need to engage in jointly, which is making some choices. In our budget we have made the choice that the more of that first responder money-there's still a good chunk of first responder money in here, but a lot more of that first responder money needs to go to the high threat areas, to the urban areas, to the critical infrastructure and so on and get moved away from your average city and town that probably is not realistically under as much threat.
Now, this will be unfortunate news to some-a lot of police chiefs and fire chiefs in all of your districts, but it's the right way to set our priorities if we're going to protect the homeland. Those are the kind of choices that are made in the budget, there's a lot of money in this budget going into first responders, but we're going to focus it on the high threat areas and unfortunately disappoint some people who are not in the high threat areas. Let me ask Dr. Mankiw to respond on the other.
MR. MANKIW: When thinking about fiscal policy, there's more to think about than just the budget deficit. The budget deficit is obviously an important measure of what fiscal policy is doing, but what it doesn't look-capture is how fiscal policy is affecting the incentives that the tax code is giving to people to work and save, how the tax bill is affecting the cost of capital, how it's affecting the incentives for people to start businesses and hire workers.
That's a sense in which one can't think of tax increases and spending cuts as equivalent ways of reducing the budget deficit. Taxes have important effects on incentives and typically adverse, and as a result tend to impede economic growth and that's a central issue. Looking just at the budget deficit a summary measure, an incomplete picture of what fiscal policy is doing to the economy.
REP. NUSSLE: Mr. Putnam?
REP. ADAM H. PUTNAM (R-FL): Thank you, Mr. Chairman. I didn't mean for you skip over Mr. Crenshaw, but I'll be happy to move ahead.
The agencies that are facing cuts, Agriculture, HHS, Transportation, there's a common thread there that I observed and I wanted to know if it's just a coincidence or if it's material. They lost significant portions of their apparatus to Homeland Security, which has gotten huge increases each of the last couple of years. So are we in a sense realizing savings from some of these agencies-and I grant if it's a transfer to Homeland Security it's not necessarily a real savings. But are we seeing a net reduction in the size of these departments as a result of shifts of agencies and personnel to Homeland Security? And if so, what kind of a number are we talking about?
MR. BOLTEN: We undoubtedly are seeing that, but we have tried to adjust for it in the budget. We may have missed some things, but by and large as we presented the numbers to you we have tried to adjust for the transfers that have taken place so that the budget is still making a-if you looked at last year's budget or the year-more importantly, the year before, you would still be looking apples to apples and not looking at a highly distorted situation because the Treasury Department lost the Customs Service over to the Department of Homeland Security.
REP. PUTNAM: So the reduction is a net real reduction in spending then?
MR. BOLTEN: In most cases, yes.
REP. PUTNAM: Okay. One of the things that I have observed in my very short period of time here, as it relates to defense in particular, is how outstanding our men and women in uniform are at doing exactly what they do best, and how poor a job in many cases the underpinning logistics, personnel, procurement, human resources, database, IT, all of the components of the bureaucracy are. And while it's important that we hold homeland security and defense somewhat harmless, I'm curious if there is an effort to address some of the cost saving recommendations that have been made by GAO and other congressional oversights in those agencies? I mean, consistent double digit increases while clearly very important in wartime, they also create instances of waste, and I wanted to make sure we're not holding them harmless from oversight as well.
MR. BOLTEN: We are not, Mr. Putnam, and we appreciate the interest that you have, I know the chairman has, a lot of other members have in holding government's feet to the fire on this very issue because we've seen over the last decade or so enormous increases in productivity and efficiency in the private sector and it's hard to see that in government. And we're doing the best we can to try to squeeze the same kind of things out of government that have happened in the private sector.
One of the mechanisms that we use to do that in this administration, as through the president's management agenda, we keep a score card and you can find it in the budget here. Look for the little red, yellow and green lights that appear next to agencies and to programs. And we now are going around assessing all of the programs in government and saying is it delivering value for money for the taxpayers' dollar? And as we have gone about making our budget decisions for this '05 budget, in the past and increasingly in the future we're going to be basing those budget decisions on which programs are delivering real value for the taxpayers' dollar. And if they're not, we either need to fix it or take the money away from that program.
REP. PUTNAM: Well, we appreciate that. You and your predecessor have put management back into the Office of Management and Budget, and that's important. I hope you stay on it.
MR. BOLTEN: I give Mitch Daniels a lot of credit for that. I think he's really set us on a good path. And we have a terrific deputy director at OMB, who's not here with me today, Clay Johnson, who is really driving that agenda very effectively. We're very grateful for that.
REP. PUTNAM: Dr. Mankiw, following up on some of the discussion on economic growth and the need to grow our way out in addition to spending restraint, your estimates are fairly conservative in terms of GDP growth. What would each additional point in GDP growth translate into in terms of revenues to the government and its impact on the deficit? Is there a way to calculate that?
MR. MANKIW: Yes, there are sensitivity assumptions in the budget that will tell you precisely how GDP growth translates into that. I don't have those numbers in front of me, although (it's easy enough ?) to find them. So there's no question that higher GDP growth translates into higher revenues, I might even have that right here. Okay, we'll get that number to you. It's in the budget somewhere.
REP. PUTNAM: Thank you very much.