TESTIMONY OF
JACOB J. LEW
DIRECTOR
OFFICE OF MANAGEMENT AND BUDGET
BEFORE THE
HOUSE COMMITTEE ON WAYS & MEANS
FEBRUARY 23, 1999
One year ago, President Clinton set the course of the Nation's
budget policy with his charge to
"Save Social Security First." The President recognized that we were
entering a new era as we left
behind the decades of large budget deficits. He was building the
foundation for budgeting in this
new era of surpluses.
Fiscal Progress Has Produced a Strong Economy
The year 1998 was one of the most extraordinary in modern U.S.
economic history. We enjoyed
the first budget surplus in 29 years -- the largest ever in dollar terms,
the largest as a percentage
of the economy in more than 40 years. And this budget surplus was not the
result of a temporary
wartime policy, as was the last surplus in 1969. We will have a budget
surplus again in the
ongoing fiscal year -- at an estimated $79 billion, larger than last year's
-- which will mark the
first back-to-back surpluses in more than 40 years. The President's budget
for fiscal year 2000
proposes a third consecutive surplus -- the first time that will have
happened in half a century.
And our 1998 budget surplus was the sixth consecutive year of improvement
in the U.S. fiscal
position -- the first time that has happened in American history.
The private sector is the key to economic progress, but we have
clearly seen in the decade
immediately past that the Federal Government can either hinder or promote
economic progress.
If the Federal budget deficit is high, so that the cost of capital is
driven up and the financial
future is uncertain, the private sector cannot yield the progress of which
it is otherwise capable.
But if, instead, the Federal Government declares its intentions of
responsible fiscal behavior, and
lives by those intentions -- and if the Federal Government supplies the
public investments that
America needs -- then the economy is free to prosper. This is the path
that this Administration
has taken.
In 1998 we reaped the fruits of five years of fiscal responsibility.
After the best sustained growth
of business investment since the 1960s, the U.S. economy fueled that
decades-absent budget
surplus. And the economy itself defied the pundits, staying on a pace of
solid, above-trend
expansion, in the face of an international financial disruption that broke
the stride of most other
economies around the world. Unemployment and inflation both hit
three-decade lows, with the
lowest unemployment rates for African Americans and Hispanics in the
history of those
statistics; real wages continued to grow after more than a decade of
stagnation, and a record
percentage of adult Americans worked in those higher-paying jobs; the
percentage of Americans
on welfare fell to a 30-year low; the 10-year Treasury bond rate reached
its lowest level in 30
years; and a higher percentage of Americans attained home ownership than at
any time in our
history.
The President deserves a great deal of credit for the virtuous
economic cycle that we now enjoy.
The announcement of a firm intention of fiscal responsibility in 1993 was
greeted by a continued
reduction of interest rates, which helped to trigger the investment boom
that has proved central to
sustained strong, non-inflationary economic growth. The two other pillars
of the President's
policy -- investing in our people and our technology, and opening foreign
markets to U.S.
exports -- complete this winning economic strategy.
The 2000 Budget Is a Defining Moment
This extraordinary budget-and-economic performance -- with the
budget setting historical
standards and the resilience of the economy setting global standards --
tells us something. It tells
us that we have developed a winning economic policy and that we must not
turn back. We must
not discard the economic philosophy that got us here, to this confluence of
economic indicators
that all sides now agree is the best in modern memory.
So in one sense, our budget policy now clearly should be built on
continuity. We have
achieved
a sustained fiscal improvement, and we should continue to sustain that
improvement. We have
an economy that achieved a record sustained peacetime expansion, and we
should continue to
sustain that expansion.
But in another sense, we have stepped into a new world. Where our
budget used to be
written in
red -- for so many years that people came to take it for granted -- now we
are in the black. And
this change has tempted some to throw away all of the policy principles
that got us here.
For two decades now, there has been much discussion about fiscal
discipline, restraint, and
deficit reduction. Since 1993, we have taken action; and far beyond the
expectations of even the
most optimistic, we now have budget surpluses as
far as the eye
can see. But now, as the first
surpluses appear, it is important that we not revert to the practice of
cutting taxes and raising
spending first, and thinking about the fiscal consequences later.
As the President suggested in his State of the Union address in
January, this is a moment that
will do much to determine the character of our country at the end of the
next century. We can
build and strengthen the fiscal foundation that first arose in these last
few years. Or we can
sweep it away, before it is firm and strong, and set our economy to
foundering again. The choice
is clear and the President is determined to pursue a balanced program of
fiscal discipline and
prudent investment for the future. This budget charts that course into an
era of surplus.
Fiscal Policy since 1993 Was Pivotal to Our Current Good
Fortune
To see why fiscal responsibility matters, consider where this
Administration started six years
ago. In 1992, the budget deficit was $290 billion, the largest in the
Nation's history. Between
1980 and 1992, the debt held by the public, the sum of all past unified
budget deficits,
quadrupled; it doubled as a share of our Nation's production, or GDP --
from about 25 percent to
about 50 percent.
These adverse trends showed every sign of accelerating. Both CBO
and OMB projected that,
without changes of budget policy, growing deficits would add to the
Nation's debt, and growing
debt service costs would add, in turn, to the Nation's deficits. OMB
forecast the 1998 deficit, in
the absence of policy change, at $390 billion, or 5.0 percent of GDP; by
2003, we expected the
deficit to be $639 billion, or 6.6 percent of GDP. And there was nothing
in the forecast to
indicate that this exponential trend would stop.
This threat was not turned back by accident. It required tough
policy choices, which the
Administration and the Congress took in 1993 and 1997. The President's
initial economic
program cut spending and increased revenues in equal amounts. Since that
time, deficit
reduction (and ultimately surplus increase) has more than doubled the
estimates for the
President's plan -- instead of the projected cumulative $505 billion,
deficits have fallen by $1.2
trillion. That is $1.2 trillion less in debt that the American taxpayer
must service -- forever.
And this deficit reduction has come as much from lower spending as
from higher revenues.
Spending has declined to its smallest share of the GDP in a quarter of a
century. And thanks to
the strong economy, receipts have grown beyond expectations, even though
the tax burden on
individual families is lower than it has been for
about a quarter
century:
- The typical family of four -- with the median family income of
$54,900 -- will pay a lower
share of its income in income and payroll taxes this year than at any time
in 23 years. Its
income tax payment considered alone will be the lowest share of income
since 1966.
- A family with an income at one-half of the median level, $27,450,
will pay the lowest share
of
its income in income and payroll taxes since 1965. Its income tax bill
will be negative; it will
receive money back because of the earned income tax credit. That was never
the case before
1998.
- Even a family at twice the median income level, $109,800, will pay
less in income tax as a
percentage of income than at any time since 1973.
Receipts have risen as a percentage of GDP not because of a heavier
tax burden on typical
individual families, but rather because of the extraordinary growth of
incomes of comparatively
affluent Americans (including capital gains and stock options that are not
included in measured
GDP); and because of the rapid growth of corporate profits.
The historic bipartisan balanced budget agreement of 1997 has
reinforced expectations of
Federal
fiscal responsibility. This has had a favorable effect on interest rates,
and the economy at large.
In the last six years, we have enjoyed an extraordinary economic
performance because our
fiscal
policy was responsible and sound. If we want to continue to enjoy such
strong economic
performance, we must continue our sound fiscal policy. As the experience
of the last 20 years
clearly shows, budget problems are very easy to begin, and very hard to
end.
Reducing debt burden is as important to the Nation as it would be to
a family. The Nation
must
service its debt. If we gratify ourselves today by collecting taxes
insufficient to cover our
spending, and accumulate debt, our children and our grandchildren will have
to service that debt.
If, instead, we reduce our debt, our children and our grandchildren will be
freed of the obligation
to tax themselves more heavily in the future just to pay the interest on
the debt they inherited
from us as our legacy.
The President's proposal will fully reverse the buildup of debt of
the 1980s -- and then go
further. By 2014, the end of the 15-year horizon of the President's
program, the combined
effects of the President's commitments to Social Security and Medicare will
reduce the Nation's
debt burden to an estimated seven percent of GDP. This will be the lowest
ratio of debt to
income that the Nation has enjoyed since before it entered World War I.
And as most experts
would tell us, this will be one of the greatest gifts that we could ever
give our children, as we
exercise our fiscal stewardship of these United States.
The President's policy would devote more than three-fourths of
future budget surpluses to
reducing the Nation's debt and accumulating assets through contributions to
Social Security and
Medicare; and would dedicate another 12 percent to household savings
through Universal
Savings Accounts. This is important to our economic performance for four
basic reasons: First,
it increases the Nation's savings rate, which is critical to productivity
gains and economic
growth. Second, it reduces the debt. Third, it improves the fiscal
position of the country, and
puts it on a stronger footing for whatever uncertainties might arise. And
finally, it improves the
retirement security of all Americans.
The Current Challenge Is to Use the Surplus Prudently
In 1993, we faced the challenge of eliminating projected budget
deficits of $4.3 trillion over
ten years. Today we face the enormous opportunity of projected surpluses
of more than $4.8 trillion
over the next 15 years. The challenge is to use this surplus prudently --
to maintain our strong
economic and budgetary performance.
We must save Social Security first. A statement of good intentions
is not good enough for
the millions of Americans, retired and working today, who rely on Social
Security for their
retirement security -- and for protection for their families against
disability and premature death.
From the beginning, this Administration has kept its eyes on the future,
and taken policies that
would benefit the Nation for generations to come. It has paid off. Saving
Social Security first is
precisely such a future-oriented policy.
The President's FY 2000 budget -- symbolically, as well as
financially, "in the black" --
continues firmly on that successful path. The budget maps a course for the
Federal Government
after Social Security is reformed -- and makes its own policy
recommendations for the beginning
of the bipartisan Social Security reform process that the President
inaugurated last year. But the
budget also draws a line that this Administration will not pass without
Social Security reform.
Thus, the FY 2000 budget is fully paid for within the existing
budget law. Just as in every
previous year, the President has specified his own priority initiatives,
but has paid for all of
them -- line by line, dime by dime -- with savings from elsewhere in
the budget. The
budget
proposes a framework for allocating the surplus to meet national objectives
if Social Security is
reformed.
The President's policy calls for a bipartisan Social Security
reform, this year.
The President has
already committed 62 percent of our projected budget surpluses -- enough to
extend Social
Security's solvency almost an extra quarter century, to 2055. We hope that
this will launch a
bipartisan process to address long-term Social Security solvency. We are
gratified that several
leaders from the Congress have already accepted this principle and hope
that both parties, the
President and the Congress, can follow through on this commitment and
achieve sufficient
additional reforms to extend the solvency of the trust fund at least
through the traditional 75-year
actuarial horizon.
If we achieve that objective, the budget makes further commitments
of the surplus to priority
National objectives in the future. The President proposes to dedicate 15
percent of the surplus to
extending the solvency of the Medicare trust fund. This is a key element
of the President's
program, because the financial security of Medicare will be threatened even
sooner than that of
Social Security. In 1997, the President and the Congress, acting together,
made Medicare
financially sound through 2010. The President's 2000 budget would extend
that lifetime ten
years further, to 2020. We see the commitment of the surplus as a vital
step to facilitate an
environment in which a bipartisan effort -- including the current Medicare
Commission -- can go
even farther; with the time horizon so short, even after the contribution
of 15 percent of the
surplus, we cannot delay Medicare reform. As the President stated, he
wants to consider, as a
part of this reform process, expanding Medicare coverage to include
prescription drugs.
The President also proposes using 12 percent of the surplus to
finance his new Universal
Savings Accounts -- "USAs" -- a tax cut which would provide seed money plus
matching contributions
for individual accounts. The matching contributions will provide a
substantial inducement for
low- and moderate-wage workers. The goal is for all Americans to see the
rewards of saving
building up in these USAs -- and with this introduction to the power of
compound interest, to
begin to save further on their own. The President believes that this
program, with its
Government seed contribution, has the potential to reach even those who
have failed to respond
to the generous subsidies in the current-law Individual Retirement Accounts
(IRAs).
The President wants a fiscally responsible tax cut. He believes
that the USA is the right kind
of tax cut -- targeted toward the future, and helping the many American
families who have the most
difficulty saving for their retirement. It strengthens perhaps the most
neglected of the figurative
three legs of the retirement stool -- personal saving, to stand alongside
Social Security and
employer pension plans -- and for the many who have no employer plan, this
initiative may be
crucial. Most importantly, it is part of a plan that fixes Social Security
first.
Finally, the budget proposes that the remaining 11 percent of the
surplus be dedicated to
other important priorities -- including education, National security, and
health care.
The President's Framework Will Extend Trust Fund
Solvency
The President's contribution of the surplus to Social Security will
use many of the existing
financial management tools of the Federal Government. It will be in
addition to the
accumulation in the Social Security trust fund that would occur with no
change in the current
law.
After the trust fund is credited for all of its own receipts,
exactly as in current law, the
Treasury will be left with the unified budget surplus. Each dollar of that
unified surplus can be used only
once -- for cutting taxes, increasing spending, or buying down the debt.
The President has
brought the debate right to the point: What should we do with that surplus?
Or to put it another
way: If we were to look back fifteen years from now, or at the end of the
next century -- what would we want to be able to
say that we had accomplished with
this opportunity? The President wants to leave a legacy of building for
the future: saving Social
Security and Medicare; encouraging Americans to save for their own futures,
build wealth, and prepare for
retirement; investing in education; ensuring our National security; and
making other key investments.
So the President started by committing 62 percent of the surplus to
save Social Security first.
Most of the share committed by the President to Social Security will be
used to buy down the
publicly held Federal debt through the periodic debt refundings of the
Treasury Department, in
exactly the same way as debt was retired last year. That same amount will
be credited to the
Social Security Trust Fund, in the form of Treasury securities. This same
procedure will be
followed for the President's contribution to the Medicare trust fund.
This commitment will significantly extend Social Security solvency.
At the end of 1999, the
currently estimated combined balances of the OASDI trust funds is about
$850 billion. Through
2014, we estimate that additional contributions to the trust funds under
the current law, including
interest, will total about $2.7 trillion, leaving a total balance of about
$3.5 trillion. The
President's program would contribute an additional $2.8 trillion to the
trust funds over the next
15 years. Taking into account additional interest earnings, that would
leave a balance in the trust
funds of more than $7 trillion -- instead of the approximately $3.5
trillion under the current law.
The President's program will more than double the balances in the trust
funds over the next 15
years. (This does not account for the anticipated higher earnings on the
portion of the surplus
invested in corporate equities.)
Because the President's plan will reduce the public debt, the total
obligations of the Federal
Government will not increase. We are already committed to paying benefits
beyond 2032, when
the trust fund is now expected to be exhausted. The President's proposal
would reduce the debt
borrowed from the public, and deposit assets of an equal amount in the
Social Security trust
fund. Interest payments will go to the trust fund, to cover future Social
Security benefits, rather
than to banks, individuals and other investors in Government bonds.
A small portion of the President's commitment to Social Security (21
percent of the
commitment) will take the form of holdings of corporate stock. Because the
Federal
Government will need that amount of the cash surplus to purchase the
shares, this contribution
will not reduce the public debt. However, it will improve the Federal
Government's implicit
balance sheet -- to the same degree, but in a different way. While the
reduction of debt will
reduce the Federal Government's liabilities, the corporate shares
will increase the
Federal Government's assets. The salutary effect on the
Government's balance sheet
will be the same, but it will appear on the other side of the balance
sheet. Furthermore, this
amount will add to national savings, just as it would if it were used to
buy down debt.
Thus, the President's policy in no way increases the total
obligations of the
Federal Government. In fact, by retiring part of the public debt, it
strengthens our economy
in exactly the same way that reducing the budget deficit, and
avoiding the accumulation
of debt, has helped the economy over the last six years. The President's
program does shift
the Federal Government's commitments to Social Security, however,
and in that way improves Social
Security's solvency for the next century. This will give Social Security a
first call on the economic benefits
associated with long-term reductions in publicly held debt. In a recent
report, Merrill Lynch
noted:
Allocating a portion of budget surpluses to debt
reduction, as the President proposes, is a
conservative strategy that makes sense. Reduced debt will result in
increased national savings,
lower interest rates, and stronger long-term economic growth than would
otherwise be the case.
(Merrill Lynch, Assessing the Investment Climate: Focus on
Washington, 10
February 1999.)
The President believes that budgeting in an era of surpluses
requires a focus firmly on the future.
We must put money aside against our current obligations before we incur any
new obligations.
The President's program does that, by retiring debt and accumulating assets
against the Social
Security commitments that we already have.
Accounting for Sound Policy
There are some further, highly technical questions that one might
ask about the effect of the
President's framework on budget accounting, and on the presentation in the
budget documents in
the coming years. These questions are issues of detail, and have no
bearing on the substance of
the President's proposals, and on their effect on the economy and the
nation broadly. The
President's proposals are new policies that are designed to address new
circumstances and new
public needs, but sound accounting principles can explain these policies.
The unified budget surplus provides the best and most meaningful
standard for assessing the
fiscal impact of general fund transfers to Social Security. The unified
budget is a comprehensive
measure of the fiscal activities of the Federal Government, and the surplus
or deficit in the
unified budget is the best indication of the Government's demands in the
private credit market.
As OMB, CBO, and others have long noted, the unified budget is a
comprehensive measure of
the fiscal activities of the Federal Government, and the surplus or deficit
in the unified budget is
the best indication of the Government's demands in the private credit
market.
...most economists, policymakers, and participants in credit
markets look at the total budget
figures, including Social Security, when they seek to gauge the
government's role in the
economy and its drain on credit resources. (CBO, The Economic and
Budget Outlook:
Fiscal Years 2000-2009, January 1999, p. 34.)
The shortcomings of focusing on the on-budget results can be
illustrated by contrasting the
Administration's proposed transfers to Social Security with alternative
proposals for tax cuts that
would reduce receipts by the amount of the on-budget surplus. While a
dollar of tax cuts and a
dollar transferred to Social Security would seem numerically equivalent and
equally fiscally
responsible, the dollar of tax cuts would increase publicly held debt and
reduce national saving,
thereby hindering the nation's ability to meet the future fiscal challenges
of Social Security and
Medicare. In contrast, the dollar of transfers would allow the debt
reduction to take place.
There is a similar, and analogous, comparison between discussions of
the debt held by the
public, on the one hand, and the nation's gross debt (or the closely
related debt subject to limit), on the
other. Gross debt, in the broadest terms, includes debt held by the public
plus debt owned by
Government agencies (such as the Treasury securities held by the Social
Security trust fund).
Such debt is owed by one part of the Government to another. It does not
therefore in any way
reduce the Federal Government's ability to meet its obligations to actors
in the economy at large.
Financial market analysts have long believed that the economy is not
affected by the amounts of
agency-held debt; such debt does not influence interest rates, and thus
does not influence the cost
of capital to American businesses. Therefore, future business investment,
and hence future rates
of economic growth, will be driven by changes in debt held by the public,
rather than in gross
debt. Policies that reduce debt held by the public are thus far more
important than changes in
gross debt.
Of course, a policy that increases debt held by the public will
also, all else equal, increase
gross debt dollar for dollar. Accordingly, changes in gross debt are not
irrelevant, but it is essential to
consider why gross debt changes. If gross debt increases because of
policies that increase the
nation's budget deficit and publicly held debt, then that change does
signal an adverse impact on
the economy. However, if, as under the President's Social Security
framework, gross debt
increases while debt held by the public declines, the effect on the economy
will be favorable, not
adverse. It may be worth noting that the President's framework, in buying
down the publicly
held debt and increasing the assets in the Social Security trust fund,
would have exactly the same
qualitative economic effects as the bipartisan and now universally hailed
Social Security Act
Amendments of 1983.
We have an historic opportunity for long-term prosperity if we
rise to the
moment
There is much to be proud of in America today. By balancing the
budget, we have not just
put our fiscal house in order; we have left behind an era in which the
budget deficit, as the President
said recently, "came to symbolize what was amiss with the way we were
dealing with changes in
the world." Today we have risen to the challenge of change -- by preparing
our people through
education and training to compete in the global economy, by funding the
research that will lead
to the technological tools of the next generation, by helping working
parents balance the twin
demands of work and family, and by providing investment to our distressed
communities to
bridge the opportunity gap.
If the deficit once loomed over us as a symbol of what was wrong,
our balanced budget is
proof that we can set things right. Not only do we have well-deserved
confidence, we have
hard-earned resources with which to enter the next century.
As the President said, what we do now -- after having balanced the
budget -- will shape the
character of the next century. We can build upon our newfound firm
economic foundation; or we
can squander it.
The President has brought the debate right to the point: What should
we do with the surplus?
Or to put it another way: If we were to look back fifteen years from now,
or at the end of the
next century -- what would we want to be able to
say that we had accomplished with this opportunity?
The President wants to leave a legacy of building for the future:
saving Social Security and
Medicare; encouraging Americans to save for their own futures, build
wealth, and prepare for
retirement; investing in education; ensuring our National security; and
making other key
investments.
There is no more pressing issue facing us as a nation than the need
to guarantee that Social
Security will be there for generations to come. And there is no better
time to act than now while
the system is still strong. This is truly an exceptional moment in America
-- the economy is
prosperous, the budget is in balance, and the President's commitment to
national dialogue has
created conditions for constructive action. We must seize this moment.
