Hearings of the
Committee on Rules
Subcommittee on Legislative & Budget Process
Tuesday, March 23, 2004
The subcommittee met, pursuant to call, at 11:03 a.m. in Room H-313, The Capitol, Hon. Deborah Pryce [chairwoman of the subcommittee] presiding.
Present: Representatives Pryce, Diaz-Balart, Dreier, and Slaughter.
Ms. Pryce. The subcommittee will come to order. And Mrs. Slaughter is on her way. I am sure she will be here by the time we finish our statements.
Good morning, everyone, and thank you for joining us as we focus on the effectiveness of our budget process, and what we might be able to do to improve upon it. We are here today to continue our discussion on how the budget process can be done more effectively to establish much-needed spending controls. While budget process reform may seem arcane, we know that these rules have a major impact on how Congress decides what and how to spend and its ability to achieve fiscal restraint.
At our first hearing on March 11, we heard from Members of Congress who have introduced proposals to revise the budget process and reinstate enforcement powers. We discussed a variety of enforcement proposals as well as proposals to establish a line-item veto that can pass constitutional muster, a joint budget resolution, collapsing the confusing categories of spending into a smaller manageable set and many, many others.
We were also joined by OMB director Josh Bolten, who testified on the administration's budget process reform proposals that include reinstatement of caps on discretionary spending, a pay-as-you-go requirement to limit new mandatory spending, but excluding tax legislation, and measuring the long-term unfunded obligations of major entitlement programs. We expect the administration's legislative package to be sent up to Congress in the near future.
Lawmakers share a tremendous interest in improving our budget process. There are numerous proposals that have been introduced or have been developed, and while we are not always in agreement on what changes should be made, we all share a common goal. That is to instill fiscal discipline and eliminate budget deficits.
It appears there is a growing consensus that we should, at a minimum, reinstate budget enforcement mechanisms that expired at the end of fiscal year 2002, specifically discretionary spending limits and pay-as-you-go rules, although there is disagreement on how tax cuts should be addressed. This reinforces the importance of discussing and understanding the very aspects of the current budget process and the implications of any changes that we make to it.
Today, we turn to the budget experts for their comments and critique about the current budget process. We will also ask them to remark on the various proposals to improve the budget process discussed at our earlier hearing. We are privileged to be joined by the Director of the Congressional Budget Office, Douglas Holtz-Eakin; and the Comptroller General of the General Accounting Office, David Walker. We will then hear from one final panel of budget experts for their comments a little later.
[The statement of Ms. Pryce follows:]
Ms. Pryce. All right. Thank you, Mr. Chairman, for your remarks.
Mr. Dreier. Well, thank you very much, Madam Chair. First I would ask you to grant me unanimous consent to include a written statement that I have in the record.
Ms. Pryce. So ordered, if no objection.
Mr. Dreier. And if I can just take a couple minutes to sort of go through some of the thoughts I have had. Thank you very much, Madam Chairman, to you for the work and your time and your effort that you have put into this. I was just talking to Mr. Pitts about this earlier, and we both were saying how great it is that you have really taken this on, because we know that this is obviously a very big and a very important issue. It is going to get a lot of attention this week as we get ready to move to the floor with consideration of our budget.
But it is important that we look at the fact that this here -- I said this when Josh Bolten was here at the other hearing that you had. This here does mark the 30th anniversary of the 1974 Budget Empowerment Act, and we are dealing with a completely different world than we did three decades ago. And we are regularly talking about the 21st century economy and the kinds of changes that have taken place, and we love going through talking about those changes, but they are amazing. And to believe that we are still living with this structure as it exists today leads me and a lot of other people to scratch their heads saying there has got to be a way in which we can try and improve this, because it has been a difficult process.
I am one who believes that we should do everything we possibly can to take a macroeconomic approach to this budget process. I think that looking at the big picture is a prerequisite for us. I also believe that we saw this 51-48 vote in the Senate the other day on the revenue side of PAYGO, and I will plead guilty to being a blind supply-sider. I am a blind free trader. But I am also -- well, maybe I won't use the term "blind." I will say I am a passionate supply-sider, because, you know, I came here nearly a quarter century ago in 1980 with Ronald Reagan.
Interestingly enough, one sideline on what we saw put into place four years after the Budget Empowerment Act was in place in 1978 was the Humphrey-Hawkins requirements, which frankly had a 5-year goal set of 4 percent unemployment and 3 percent inflation; and if you look at where we are today, we still have Humphrey-Hawkins reporting requirements in place, but 2 years after Humphrey-Hawkins was put in place, I came here -- that was 24 years ago -- with Ronald Reagan. And we during the 1980s saw, as was evidenced during the 1960s with John F. Kennedy and going, frankly, all the way back to -- and it is very rare that you get anybody to quote Warren G. Harding, but it was clear that reducing rates does, in fact, generate revenues to the Federal Treasury, and that is why I have this virulent, virulent opposition to this notion of claiming that reducing rates somehow jeopardizes the ability to enhance the flow of revenues in the Federal Treasury. We have seen it time and time again, and frankly, we have seen this economy grow because of what has been put into place with the tax policies that this President and that our majority have pursued.
So I think that it is really, really short-sighted, from my perspective, to try and claim that there is, in fact, a draining on the Federal Treasury if you do bring about rate reduction. Again, every shred of critical evidence that we have clearly demonstrates that.
As we look at the issue of reform, it is also important to note that we are half the equation here. We can't forget the fact that we have to deal with the Senate, and that is why I raise this 51-48 vote that we saw on PAYGO revenues from 2 weeks ago, but we are going to have to figure out a way in which we can come together on this with the Senate.
There are a number of provisions that I have championed for a long period of time, and I know some people here who are opponents to it. And I have said that we should try it, and one of the reasons I have said we should try it is the President of the United States feels very strongly about it and, believe it or not, the leadership in the Appropriations Committee, the chairman and the number one ranking Republican, and that is the issue of biennial budgeting.
And this realization that Speaker Hastert has pointed out repeatedly that our constitutional responsibility of oversight is often lacking and we could do better in that area. And I think that this notion of trying to move in the direction of a 2-year process would enhance oversight, I think, is something that we should do what we can to try to address.
And so, I mean, I think that there are a number of proposals out there right now that look at a wide range of reforms, and Doug, I hope you are going to comment on some of the proposals that we have seen. We had four proposals that came before this subcommittee in the testimony that we had last week from a number of members who have been working on that. I mentioned that the macroeconomic proposal that our Rules Committee colleague, Doc Hastings and our colleague from Delaware, Mr. Castle, have been working on, I think, is an important approach which will enhance this flexibility, which I think is an important thing for us to do.
And then let me just say on the issue of functional categories, which sort of relates to this flexibility issue, they really -- the functional categories have really become dysfunctional in many ways. Again, while we want to enhance the enforcement of the budget itself, this notion of providing flexibility when it comes to looking at the big picture is, I think, an important thing for us to do.
Another issue that we have to contend with of course is increasing the debt ceiling, debt limit increase. We dealt with the Gephardt rule on that in the past. There is so often politicization on the debt ceiling increasing, so that is something we are going to have to contend with.
So let me just, again, say thank you to all the witnesses who are going to be testifying today and again to you, Madam Chairman, for having this hearing. Once again, I am happy to see our colleague, Mrs. Slaughter, here, and the reason I kept talking was in large part due to the fact that you could be here to make your opening statement.
[The statement of Mr. Dreier follows:]
Ms. Slaughter. That is very gracious of you.
Mr. Dreier. So now that you are here, I will shut up. Thank you, Madam Chairman.
Ms. Pryce. Thank you, Mr. Chairman, and we are very pleased to be joined by the ranking member of this subcommittee, someone who has worked very hard on these issues. And we would be pleased if you would give us a statement, please.
Ms. Slaughter. Thank you, Madam Chairman. I am happy to be here for this second hearing on reforming the budget process, and I certainly want to thank you for coming, Mr. Holtz-Eakin, Mr. Walker, Mr. May, Dr. Berthoud, and a special thanks to my friend, Stanley Collender, who sort of came out of hearing retirement to be here today at my request, and I thank you for that. Thank you for your insights.
The first hearing held on March 11th was the beginning of a greater discussion on the budget. Many important questions still need to be answered, and we look to you for help in answering them. How did the Federal Government go from having historic surpluses to having historic deficits? Did the structure of the budget process lead to this dramatic shift, or is it the result of policy choices? How have the economic decline and current economic malaise affected the budget? What is the prognosis for the fiscal health of the Federal Government for fiscal year 2005 and in the next 20, 40 or 60 years?
Should the budget process and enforcement mechanisms be policy neutral, or should the process force or enable Congress to make policy decisions? Is the budget process broken, or is the process implementing the policy decisions that Congress has made? That is a very important issue I think. I imagine you would agree.
My hope for this hearing is that this well-credentialed group of witnesses will share their insights into the budget process at a micro level as well as at the macro level. We look to the panelists to assist us in the examination of the budget process, evaluate its condition, diagnose any ills and propose short-term and long-term treatments.
We know that entitlement spending is only going to increase. Over the next 25 years, the baby boomers will leave the workforce and retire. How can we adequately prepare for this? Is there a structural malady hindering the ability of Congress to deal with tough issues? Are we using the structure to obscure difficult policy issues?
History also has lessons for us to consider. Since the adoption of the Congressional Budget Act of 1974, many reform proposals have been proposed and tried. Biennial budgeting, a joint budget resolution, sequestration, caps on discretionary spending, caps on entitlement spending, PAYGO, constitutional amendments and other ideas were part of previous discussions and are part of the current budget reform debate.
However, when considering any proposed changes to the Federal budgeting, I am mindful of section 8 of Article 1 of our great Constitution that clearly and firmly places the responsibility of generating revenue and spending in the legislative branch. We must be careful not to cede this authority to the executive. This budget still remains and should remain in the bailiwick of Congress.
Again, I thank the witnesses, and I look forward to hearing from each of you.
[The statement of Ms. Slaughter follows:]
Ms. Pryce. Thank you very much, Mrs. Slaughter. And for the witnesses that are here, we will try to keep to the 5-minute rule. Your statements can be included in the record, and if you can summarize, that would be great, and then that will provide us much more time for questions. We will start first with Douglas Holtz-Eakin of the Congressional Budget Office. Thank you so much for joining us today. We are all very interested in what you have to say.
STATEMENT OF HON. DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL BUDGET OFFICE
Mr. Holtz-Eakin. Thank you, Chairman Pryce, Congressman Slaughter, Chairman Dreier, for the chance for CBO to be here today. I do have a detailed written statement, which I will submit for the record, and I will be brief in my opening remarks and touch on some of the high points.
The budget process contains many elements in the financial operation of the Federal Government. At some level, it has simple information such as that contained in the baseline. It serves roles in planning, in prioritizing, in establishing a budget plan and enforcing that plan, and in accounting for the outcomes of the plan.
For that reason, to talk about reform of the budget process is not a simple thing, and indeed it may be most useful to think about it in an incremental sense, where the emphasis is placed on one aspect or more in response to the needs of Congress.
And in doing so, I think the thing that I would like to emphasize at the outset is that it will most undoubtedly involve trade-offs, for one aspect of the budget process is emphasized perhaps to the diminution of some other.
For a moment, at least, the threshold question is what problem is most pressing for Congress and for policy right now? If there is a sufficient policy consensus, then the process can be a valuable tool in supporting that consensus, and indeed there is evidence of that in the past.
The current budget process contains a great many tools that can be useful, and the budget resolution contains enforcement activities that can be quite valuable in the presence of a policy consensus.
The one piece of evidence I would point to about the importance of consensus is figure 1 in the testimony that I submitted. That figure displays the close correlation between the discretionary caps that were in place under the BEA and the actual outlays that occurred up until 1997 -- and then with what looks, in retrospect, to have been an evaporation of the policy consensus to control discretionary spending, the large runup in outlays post 1997, despite the continued presence of these discretionary caps.
So the importance of consensus on the policy goals and using the budget process to support it, I think, is one lesson that comes from that.
Now, given the centrality of controlling spending going forward, there does appear to be consensus to reinstate some of the statutory mechanisms that expired in 2002, multiyear discretionary spending caps, as were in place in the 1990s, and PAYGO rules for mandatory programs. It may also be the case, given the importance of long-term budgetary pressures from mandatory spending, particularly in the area of the entitlements, to enhance the visibility of these programs in the budget process. In this area, I think it is important for Congress to avoid the law of unintended consequences and to go slowly in introducing longer-term considerations into the current budget process.
One example might be to simply introduce something familiar to this committee, such as a procedure like that under the Unfunded Mandates Reform Act, in which, simply, large increases in entitlement programs raised the potential of a point of order against the legislation containing those increases but did not, in fact, bring them dollar for dollar into the budget process at the outset.
My bottom line in these opening remarks -- and I am happy to answer your questions -- is to stress that it is important to think about the budget process as a multifaceted item, stress the facets which are most important to Congress right now, and to emphasize that this will involve trade-offs and that Congress can use the budget process to support its goals, but will probably not be able to use a budget process to replace those policy goals.
With that, I will close and be happy to take your questions.
[The information follows:]
Ms. Pryce. Well, thank you very much. Do you mind me asking how many times you have testified on this issue before this committee?
Mr. Holtz-Eakin. On this issue, this is the first. The CBO has testified numerous times. I counted five previous testimonies in my briefing book, and I hope there is not a test on the --
Ms. Pryce. No, there is not at all. I am just curious for my own information, because the budget reform debate goes on from year to year to year, and nothing much ever happens, and I think it really is incumbent upon us, and perhaps because of the fiscal state of the Nation, we must take a more serious look at it than ever before. But I wonder, in your opinion, what is keeping us from acting? Do you have any sense of what institutionally makes change so difficult?
Mr. Holtz-Eakin. I am never bold enough to speak for the entire Congress. I think that it is clear that, as I stressed, there are trade-offs involved, and so reform of the budget process is not a “do-it/don't-do-it” kind of decision. It is a question of which aspect of this is most important right now, and what will we emphasize at the expense of other things?
For example, if you were to move toward more kinds of measures that brought long-term obligations into the current budget -- whether that was full-blown accrual accounting or simply a point of order for some larger increase in the entitlement program - the change would probably bring into the process more information about the long term and helping with planning, but it would probably also involve less in the way of transparency. Cash budgeting is very transparent, very easy for people to understand, and so there are always going to be trade-offs about the information you bring in versus other objects, and perhaps that is what stands in the way of a clear path forward.
Ms. Pryce. Mrs. Slaughter.
Mrs. Slaughter. Let me follow through with some of the questions I asked in my opening statement. What is the prognosis for the fiscal health of the Federal budget for the next 20 to 40 years?
Mr. Holtz-Eakin. Well, we have put out our baseline budget outlook for the next 10 years. I am sure you are well aware of that and familiar with it. Over the longer term, a report that we put out in December, I think, spells out quite clearly that the large growth in the entitlement programs (Social Security, Medicare and Medicaid), the combination of rising health care costs with the aging population, will place a tremendous demand on budgetary resources. That, I think, is the paramount long-term issue.
Ms. Slaughter. Are we undergoing quite a revenue shortfall this year?
Mr. Holtz-Eakin. This year, the receipts are 15.8 percent of GDP in our baseline. That is a number that is relatively low in the postwar era, where we have averaged about 18.
Ms. Slaughter. What would be normal?
Mr. Holtz-Eakin. 18.4. Over the 10-year baseline, it goes from 15.8 to 20.1 percent. So your view of the outlook depends on the horizon that you choose.
Ms. Slaughter. I see. Well, do you think the budget process is broken?
Mr. Holtz-Eakin. I think that there are indeed many tools in the current budget process that one could use, and I think that pronouncements of the budget process being broken are premature, and perhaps overstated -- that Congress has at its disposal a great many weapons to bring to bear in arraying policy choices for decisions, in guiding and coordinating the activities of the many committees involved, and then forcing the decisions that come out.
It may be that it is useful to supplement these with particular policy objectives. I think that is the lesson of the 1990s, where a relatively neutral budget resolution was shifted by the pay-as-you-go and discretionary caps provisions to place an emphasis on controlling the growth in spending and, as a result, reducing the deficit. So the budget process, per se, works, but it can be supplemented for particular policy objectives.
Ms. Slaughter. Do you recommend that again? Are you in favor of putting the PAYGO back up?
Mr. Holtz-Eakin. I think, as I said in my opening remarks, putting rules or process reforms in place in the absence of a policy consensus of some strength is unlikely to be successful. What really matters is supporting that consensus with rules that remind Members and reinforce the decisions that have been taken.
Ms. Slaughter. Do you think that you don't need a big stick to hit them with? Just reminding them of it would be sufficient?
Mr. Holtz-Eakin. I think, quite frankly, that this picture tells a very revealing story, which is that the same caps are in place throughout the period. Early in the picture, outlays adhere to the caps. Later in the picture, outlays are well above the caps. That suggests that caps, per se, are not the solution, that something larger has to be afoot.
Ms. Slaughter. Thank you very much.
Ms. Pryce. Mr. Chairman.
Mr. Dreier. Thank you very much, Madam Chairman. Thanks for your testimony. It is very helpful.
I would like to pursue a few of the areas that you have raised and then get your comment on some of the things I raised in my opening statement.
I talked a little bit about the dysfunctional category issue, and I wonder if you think that the structure that is in existence today for functional categories is useful. And the reason I raise it is I look at the example of this new cabinet-level agency that we have, this massive Department of Homeland Security, and the question is where exactly does that fit into the functional category question?
Mr. Holtz-Eakin. I usually have more than one answer, unfortunately. So I will give a few thoughts on that. The first is that we have, in fact, tried to, with help from the administration, track outlays and budget authority for homeland security, and it has clearly illustrated the difficulty of doing so in the current functional categorization.
The second is that cleaning up the functional categories is probably desirable, from an informational point of view, to match up with the objectives of Congress. The larger issue of whether, looking forward, the planning and budgeting should be done on a function-by-function basis is really one of the trade-offs between the information and the flexibility that Congress wishes to have in the budget process. For example, the tighter the caps for particular functions or activities (versus broader caps), the less flexibility Congress will have. So there is a trade-off between information on an ongoing basis, flexibility going forward in budgeting, and the coordination of many different groups.
Mr. Dreier. One of the things that we found -- obviously the 9/11 Commission is meeting today, and there has been so much attention with homeland security. We know that there was a real economic jolt to the United States. Obviously the tragic loss of life is foremost in our minds, but they tried to hit us right in the economic gut, and they didn't win, but they clearly did have an impact in mitigating the kind of economic growth that we wanted to see continue because of the terrorist attack. And one question that I would raise -- and Louise has correctly talked about the fact that we do have deficits today, we do have a debt we have to shoulder, and we saw surpluses growing in the latter part of the last decade and the end to the use of the 30-year Treasury bonds for debt management. Do you have any thoughts at all on the reintroduction of those as a way to manage debt?
Mr. Holtz-Eakin. Going forward, I think it will ultimately be the Treasury's call as to what is most efficient in the way of raising funds. From an economics perspective, the lengthening of maturities, by and large, doesn't gain substantial advantage in raising funds in a lower-cost fashion for the Federal Government. What it does do is allow financial indicators over a longer yield curve about the prospective outlook in financial markets, and treasuries are not the only possible place to go for that longer term outlook. One can look at the valuation of equities and a variety of other financial instruments.
So I don't think there is a clear and paramount case to make that it has a financial advantage for the U.S. Government, and the question is whether there is a perceived advantage for the Treasury and flexibility where it doesn't have to roll the funding over as much, and that is an operational decision.
Mr. Dreier. We are going to talk to some people on that.
Louise asked you the question is the budget process broken, and I think you appropriately say -- broken means, like, it is not working at all. When I talk about the 30th anniversary of the Budget Empowerment Act, I am just saying that we need to bring about some changes as we go into the 21st century, and there are a couple of provisions that I think in many ways create constraints. We regularly waive sections 309 and 310 which have to do with meeting the July 1st deadline on both appropriations and reconciliation. I wonder if you have any thoughts about those two provisions. I consider them to be pretty antiquated.
Mr. Holtz-Eakin. I certainly could say that I would think it would be desirable for Congress, if at all possible, to do its business within the timetables allotted, and certainly from a management perspective sitting at CBO knowing the resources that will be available for the next fiscal year and being able to do planning and the kinds of hiring and procurement that are necessary to run the Agency, all that is to an advantage.
The best way to get there, I think, is far from obvious. We have 30 years of experience. I don't know the exact track record on the number of times Congress has hit the statutory deadlines, but probably far from 100 percent. So how one can manage the process, whether it is moving the entire thing up or establishing different benchmarks, I am not sure.
Mr. Dreier. Would you care to comment on some of the things that I raised in my opening remarks, the PAYGO on revenues, the issue of biennial budgeting?
Mr. Holtz-Eakin. Let me do them in order -- first PAYGO on revenues. I think the centrality of spending in the long-range budgeting is clear. The threshold decision for the Federal Government is the decision to spend some money. Beyond that, it becomes a question of how it is financed, whether it is by contemporaneous taxes or by deficits, which are a decision to raise taxes in the future.
That in and of itself suggests that it may be appropriate to have an asymmetry between spending and receipts provisions in PAYGO rules. Mitigating in the other direction is the fact that there is not always a clear delineation between those. An obvious example is a refundable tax credit that has both an outlay portion and a tax portion. It is a mandatory program. How you handle that in a PAYGO situation becomes complicated. Both as a technical matter and from the point of view of policy, it is clear that one can target resources to private-sector entities through direct outlay provisions or through targeting tax provisions. An asymmetry in the PAYGO process may or may not be desirable from a policy point of view where one tries to control an outlay but can develop an equivalent procedure on the tax side.
And so those are considerations in thinking about exempting --
Mr. Dreier. Well, the refundable credit is one thing, but obviously as we look at this whole issue of -- you know, it has become a very, very political one, the drain on the Federal Treasury by reducing marginal rates, which has, in fact, generated an increasing number -- and I talked about my nearly quarter century here, and we dealt with revenues in the 1980s. Yes, we saw the deficit increase with the fight of the Cold War. We saw domestic spending increase during that period of time, but we did, in fact, double the revenues to the Treasury, and it was due, as most economists agree, to marginal rate reduction there. So, I mean, that is -- you know, the refundable credit is one thing, but I think that -- and obviously that is an issue that would have to be addressed, but I am talking about the growth-creating rate reduction.
Mr. Holtz-Eakin. Marginal taxes are one part of the policy coin in thinking about a PAYGO rule, but the point I am trying to make is that if you just stipulate the merits of the marginal rate reduction, the same rules would apply to exempting a tax of a particular part of the base for targeted policy purposes and tax credits, refundable or otherwise, which could be an outlay provision, but are, instead, delivered through the tax system. And the policy issue then is the degree to which a single set of rules can aptly capture those three different kinds of behaviors in a way that makes sure that you control what you think of as growth of the government's resources. That is the design issue.
On the biennial budgeting, the research from the States, whether there is some difference in it, has never delivered a clear distinction between the fiscal performance of States with the biennial budgets and other states. So one is left in the unhappy position, I guess, of trying to imagine alternative futures with and without biennial budgeting. And one could imagine a situation in which there was a clean separation of appropriations and then oversight review and a world in which there were relatively small innocuous shocks to the economic and policy side, which did not cause rethinking the basic stance over a 2-year period.
But I could also imagine situations in which there were authorizations done in appropriations bills, appropriations done in authorizations bills, and unpleasant economic policy shocks that would cause the Congress to have to come back and revisit the appropriations that were supplemental or emergency in some way. That would raise a host of different issues in a biennial budget, and it is a situation where we simply don't have a clear line of evidence.
Mr. Dreier. Well, I think that again if you look at the States, one of the challenges that we have here, which is, in many ways, even greater just because of the size of the Federal Government, is this issue of adequate Congressional oversight, and that is one of the compelling arguments that we have had. And we want to vigorously pursue that. Thank you very much, Madam Chairman.
Ms. Pryce. Thank you very much, Mr. Chairman. And we are pleased to be welcomed by our colleague Mr. Diaz-Balart.
Mr. Diaz-Balart. I am glad to be here. Mr. Chairman, I have a statement for the record.
[The statement of Mr. Diaz-Balart follows:]
Ms. Pryce. All right. Would you like to --
Mr. Diaz-Balart. I have no questions at this time. I thank the Director. I will be interested to read his testimony.
Ms. Pryce. Thank you very much, Director. We appreciate the time you spent with us, and I look forward to working with you in the future. Thank you once again.
Our next panel, the Honorable David Walker, Comptroller General of the United States, General Accounting Office. Welcome. Thank you for being here. We are going to try to stick to the 5-minute rule, and your full statement will be received in the record without objection. You are free to summarize, and thank you very much for being with us this morning.
STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, GENERAL ACCOUNTING OFFICE
Mr. Walker. Thank you. Let me hit the highlights, if I can, Madam Chair. It is a pleasure to be here today to talk about the budget process and the need for reform.
I do believe that there is need for reform of the budget process. The GAO has for over 10 years prepared long-range simulations of our fiscal path. Naturally, depending upon what assumptions you use, you get somewhat different results. This is one of the potential paths based upon current tax revenue, as a percentage of GDP, based upon the most recent Social Security and Medicare trustees assumptions for growth in those programs, based upon the assumption that discretionary spending grows by the rate of the economy and based upon the assumption that all expiring tax provisions are extended. I am not saying this is good, bad or indifferent. I am saying it is a scenario.
There are other scenarios we could show you. The bottom line is this. Today at noon the Social Security/Medicare trustees are going to issue a new report. It will show, among other things, that we have created a new unfunded promise in the form of Medicare part D equal to about $8 trillion in current dollars. That is higher than the currently outstanding accumulated debt since the beginning of our republic. The report will also show a further deterioration of the Medicare trust fund solvency for part A that is a closer date when those trust funds are supposed to go insolvent -- and it will show a further compounding of our long-range fiscal challenges associated with growth in the entitlement programs.
The bottom line is that we are on an unsustainable path. The gap is too great to grow our way out of this problem. Clearly additional economic growth can and will help. Recent signs are encouraging in that regard, but as an illustration to close this gap, it would take double digit real GDP growth every year for decades. This has never happened in the history of our country, and it is not likely to happen.
So tough choices are going to have to be made. If I can, I will show the next chart which shows some of the fiscal exposures that we already have. If you look at the balance sheet of the U.S. Government -- I am the signing audit partner on the U.S. Government's financial statement audit -- the most recent financial statements were issued about 2 weeks ago. It shows that we had an accumulated debt of about $6.8 trillion at the end of fiscal year 2003. Now it is over $7 trillion, but what it doesn't show is that we have made a number of promises for which we have huge funding gaps, for example, the differences between Social Security and Medicare promised benefits and the current dedicated revenue streams.
In addition, if we look at all the other promises like veterans health benefits, which obviously we want to deliver on, Our current situation isn't a $7 trillion gap. It is more like $30 trillion, and that is before the Medicare Part D benefit.
Candidly, I believe that we are going to have to do several things. One, get better control of the budget in the near term to try to keep the situation from getting worse; in addition to that, we are going to have to look at considering the longer-term cost and implications of legislation, whether it be on the spending side, mandatory, entitlement, or discretionary, or on the tax side. We also need to consider the longer range costs and implications of current decisions.
And ultimately, what must be done - and we are happy to with the Congress, because the Congress, as it makes the tough choices - is 1) to engage in a fundamental review and reexamination of the entitlement programs to make them solvent, sustainable and secure for current and future generations of Americans, 2) to look at the base of discretionary and other spending, much of which was put in place decades ago based upon conditions that existed then but may or may not still exist. In addition, these programs may or may not be generating the expected results; they may or may not have the same priority. Thirdly, we are also going to have to look at tax programs and policies. A three-pronged approach ultimately.
Priorities and weighting might vary. Timing might vary. Candidly, ultimately, all three will be needed. I think that budget process reform is clearly a part of this, but it is not going to be the end in and of itself, because even with budget process reform, even if you restore the PAYGO and even if you end up having caps, those are likely for a period of time, 3 years, 5 years. It is going to take us many years to solve this problem. We are going to have to not only try to maintain discipline during whatever period of time the caps and PAYGO apply, but we are also going to have to think about how are we going to deal with the long-range implications of the retirement of the baby boom generation, escalating health care costs and other issues that threaten to swamp the boat if we don't start taking some action. So with that, I will be happy to answer any questions you might have.
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Ms. Pryce. Well, thank you very much. The picture looks challenging, to say the least, from your perspective.
Chairman Dreier has spent a lot of time already this morning talking about the budgeting and the chance it would give the Congress to exploit its oversight potential, and I think that what I heard from your testimony is that things need looked at very carefully with a very careful eye, and oversight would be the way we would do that, obviously.
I wonder, without stealing his line of questioning, if you want to comment on the biennial process, because I strongly favor it myself, but I got my propensity from my chairman.
So this really is his initiative, but I can't help but ask the question in terms of what you said about how we need to be looking at things.
Mr. Walker. With regard to biennial budgeting, clearly in theory, it could help to provide additional time for the Congress to be able to engage in a range of other activities, in particular, oversight and the fundamental review and reexamination along the lines of what I referred to in my opening statement.
The real question is how will Congress use that time. Will Congress use that time to be able to engage in the fundamental review and reexamination? Secondly, I think if we look at the experiences of biennial budgeting, we find one large State has biennial budgeting and an annual Legislature; that is Ohio, I believe. There are members from Ohio and there is a former governor of Ohio in the other body, Senator Voinovich. I would think that it would be instructive to get a sense as to how that is working and the related pros and cons.
In recent years, we haven't hit the milestones for the budget or appropriations process, for a number of reasons, some beyond the Congress' control. There have also been supplementals every year. So it is not as if there hasn't been an annual effort by the Congress to take a look at events that have occurred that were unexpected. So I think a biennial budgeting deserves serious consideration.
At the same point in time, I don't think it is a panacea, because the real question is what assurances do you have that Congress will actually spend the time engaging in the other activities which are so sorely needed. I think, frankly, Congress is going to need some help from CBO, from GAO, from CRS and others to try to provide options for it to consider to try to address these large and growing challenges as well.
Ms. Pryce. This is, like, Ground Hog Day up here. We think about it and we never do it. Do you have any insight for us as to the institutional reasons that this is so hard to accomplish?
Mr. Walker. I think part of the problem is the way we measure and keep score. The way we keep score provides a false sense of security. If you look, for example, on how we report from an accounting and reporting standpoint, we are not showing as a liability, for example, the bonds that are in the Social Security and Medicare trust funds. They are not shown as a liability of the U.S. Government because the assumption is the left hand owes the right hand; but in reality, we took the people's money, we spent the people's money, we put back an IOU that is backed by the full faith and credit of the United States Government, but it has no economic substance. It has political substance, legal substance, moral substance, but no economic substance.
If you look at Social Security, Medicare, veterans benefits, those are very serious commitments, and current and future generations are expecting that the Congress will deliver on those commitments; but, yet, we don't show the funding gap in those programs as an obligation.
Secondly, if you look at the budget process, when Congress debates, it looks at 10 year numbers. 10 years is better than 1 or 3, and surely the longer you go out, the more difficult it gets to estimate; but when you are looking at known demographic trends where we are going from 16 people paying into Social Security for every one person getting benefits in 1950 to 3.3 today, ultimately 2 to 1, we need to look longer range.
And take the Medicare Part D debate. There has been a big debate about the 10-year estimate, is it $395 billion? Is it $535 billion? There isn't enough debate about the $7 to $8 trillion in discounted present value dollar terms. That is the real cost potentially of the program, not $395 billion or $535 billion. It is $7 to $8 trillion in current dollar terms. I think we have to look at how we keep score, and I think we need to figure out how we can increase the transparency and the public discussion and debate, not only within this great building but also in the public about some of these longer range challenges that are going to need to be addressed.
Ms. Pryce. Well, in terms of how we keep score, what about how we actually score? I mean, I don't know that the $7 or $8 trillion would take into account the savings from the prevention part of the Medicare bill. The fact that drugs will keep people out of hospitals, decrease costly surgeries, and that we are not allowed to consider potential savings because we don't have any dynamic nature to our scoring capabilities. It would seem to me that that -- nobody can believe any numbers, because we don't have a model that seems to be available that would work. Do you mind commenting on that?
Mr. Walker. Well, the trustees are allowed to consider dynamic scoring approaches when they come up with the estimated cost of these programs, and in fact, one of the things that the actuaries do when they consider the Part D benefit is not just the cost of the Part D benefit, but whether and to what extent the changes that were made in the past year will end up having a positive or negative effect on the spending of the Part A program.
My understanding is, is that because these are assumptions and we won't know until the events actually occur, is that they are going to show that the financial condition of Part A has actually deteriorated, and that is what is going to be announced today, most of which is for reasons apart from the drug bill.
Clearly one of the major challenges that we have other than the budget process, quite frankly, in our fiscal situation is our health care system, which is a major problem for competitiveness. I think it is a major problem for revenues. More and more wages are now being paid in the form of tax-free fringe benefits such as health insurance. It is having a real adverse effect on competitiveness. I think it is having an impact of job creation. There are some issues that I think that Congress is going to have to come to grips with.
Ms. Pryce. But even though the trustees are perhaps able to use dynamic scoring, Congress is not.
Ms. Slaughter. I will be happy to hear, in any case, from the trustee.
Ms. Pryce. So what is your opinion as to whether or not that should be appropriately used here?
Mr. Walker. Normally when dynamic scoring is talked about, it is talked about on the revenue side and as an impact on the broader economy. My comment would be that as a supplement to what Congress gets, I think it can provide some useful information, but I think that you would have to end up disclosing the assumptions that go behind it. I think they are very, very important and can change the results.
I do think it is important to understand that while many tax cuts are stimulative, not all tax cuts are stimulative.
Ms. Pryce. I am just talking about on the spending side. The examples that I gave, the very common-sense things that people are wondering why isn't this program going to bring us huge savings instead of costing so much.
Mr. Walker. Well, there is absolutely no question that Congress should seek that type of information, and I would imagine you probably did. For example, there is a great debate about whether and to what extent prescription drugs will end up saving money on more invasive procedures, and there is a lot of research that has been done about that. The research that I have seen to date shows that while there are some savings that result from that, that there is a significant net additional cost. Because, you know, there are many prescription drugs that are frankly not only --
Ms. Pryce. My question isn't about that example. It is just about whether you think that we should be looking toward models that would help us in budgeting that are more dynamic.
Mr. Walker. Yes. As a supplement to, not a substitute for the current approach.
Ms. Pryce. Thank you. Mr. Diaz-Balart.
Mr. Diaz-Balart. Thank you, Madam Chair. I had read a study that your office put out recently which was very worrisome as well as interesting, and of course your testimony and your information, the information you brought forth today is as well.
I agree that these kinds of debates that you point to have to go on not only here -- obviously here where the law will be changed -- but it can't be changed here in a vacuum without the debate being engaged in by the society at large. So I am glad that you are focused on these issues, and you are helping us. And I am convinced that when the debate does take place in a thorough fashion in and with the society at large, that steps are going to be taken here to address these problems and, you know, never in a perfect manner because perfection is never cheap, but in an important matter that matters.
And so I will read this anew, what you brought forth today, with interest, and thank you for your testimony.
Mr. Walker. Thank you.
Ms. Pryce. Mrs. Slaughter.
Ms. Slaughter. Thank you very much. That was very enlightening, and I didn't -- I am happy to hear from you.
One of the things that I noticed in your first chart is that the revenues stay pretty static all the way through that time period. Did you --
Mr. Diaz-Balart. That is as a percentage of GDP.
Mr. Walker. Yes. And it is intentionally that way. Revenues will go up because the economy is going to grow. That's correct. What we tried to do is we tried to show -- since we can take inflation out of it and we want to put things on a relative basis, based upon that scenario, it would show that if revenues as a percentage of GDP stay the same and if the Social Security and Medicare trustees are right with regard to what they expect for spending in those programs to be -- by the way, that is before today's announcement, so it is going to get worse after today's announcement -- and if discretionary spending grows by the rate of the economy, that is the future that you get.
And basically what you can see is it is spiraling deficits and debt, because the most rapidly growing piece on the chart is the blue portion, which is interest on the Federal debt. This reinforces the need not only for budget process controls but also to reexamine the base of government, to look at entitlement programs, to look at discretionary spending, to look at tax policies in a conservative fashion to be able to close that gap. I agree with you, Congress will eventually act and the public will eventually come to understand, but I think we need to figure out how we can end up encouraging that to happen sooner rather than later, because the miracle of compounding is working against us right now.
Ms. Pryce. Ms. Slaughter, may I just ask him for a clarification? Because I don't understand a term he is using.
When you say, reexamine the base of the government, would you tell me what you mean?
Mr. Walker. Sure. I will give you an example. If you look at most Federal programs, policies, and spending, they were put into place decades ago based upon conditions that existed in the United States and in the world decades ago. And let me give you a couple of examples to bring light to it.
If you look at the infrastructure that the Federal Government has -- not just the Defense Department but the Postal Service, the VA, and most agencies -- we have huge excess infrastructure. And part of that was because a lot of the infrastructure -- and I am talking about buildings and things of that nature -- was put in place before we had the telecommunications revolution and before we had great air transportation systems, etc.. and when the model of management in the world was the hierarchical model in the 1950s. So you had all these regions and then you had districts and so on. We have never fundamentally reviewed and examined that.
Another example is disability programs. The definition of disability is based upon the 1950s. It is based upon the industrial age. It is based upon brawn, not brain. It is based upon the average life expectancies in the 1950s. It is based upon medical technologies in the 1950s. In another example, look at the Triad, the Nuclear Triad. Yes, we need a deterrent. Do we need all three in today's world? Do we need it in the relative numbers that we have right now?
You can do the same thing on tax incentives.
So there is a whole range of things that I think that -- you know, I have run two Executive Branch agencies. Now, I am running this Legislative Branch agency, and over the years, I have seen that the assumption is that “the base” is okay. The big debate is how much do you plus or minus the base. But the base is not okay, and the base is unsustainable.
Ms. Pryce. That gets obvious, but I just really wanted to understand.
Mr. Walker. Thank you for your question.
Ms. Pryce. And thank you so much.
Ms. Slaughter. Of course.
I just want to make a statement, that the Joint Committee on Taxation is allowed to use dynamic scoring.
I gather, from what you are saying to me, that maybe we should stop spending our time fiddling around trying to find the perfect budget process and get busy on things you are talking about.
What do you see for the country in 20 years if we continue?
Mr. Walker. We are on an unsustainable path.
Ms. Slaughter. We can't make it that long.
Mr. Walker. We can't wait until the Social Security and Medicare trust funds go insolvent. That is the historical measure -- you know, as long as the trust funds are okay. But the trust funds are an accounting device; they have no real substance.
I do believe that you need to look at some budget process reforms, but that is no panacea. Because what that will probably do is help get better control in the short term.
But I think, in addition to that, to think about what are the long-term costs of current legislative proposals beyond whatever window you have for PAYGO and caps and also, what kind of metrics and mechanisms can be put in place to engage in this fundamental reexamination, which is going to have to happen.
So I think we need to look at all of those elements, and all of those are going to be necessary.
Ms. Slaughter. How did we go from the largest surplus in the history to this gigantic deficit?
Mr. Walker. A combination of factors.
Number one, we ended up first going into recession and then having slower economic growth for a variety of different reasons.
Secondly, we have been spending at a much more rapid pace than historically has been the case.
And, thirdly, we had tax cuts.
So it is a combination of all of those things that led us to where we are. The past has happened, the real question is, where do we go from here.
Ms. Slaughter. Well, given the fact that, although the economy is presumably getting better, you couldn't prove it in my district. We have 4,500 more people to be laid off with Eastman Kodak this month, and the revenues are falling.
I think the previous witness said that they were down about 3 percent already this year.
What do you foresee for next year?
Mr. Walker. Well, I have not projected the revenues. We are not in the business of doing that.
I will tell you that, I think, one of the underlying key factors both on the revenue side as well on the job side as it relates to competitiveness and off-shoring is health care. I think that health care is one of the key factors that is driving a lot of this.
Take for example the tax preferences accorded to health care. If you look at the tax preferences for the fact that individuals do not ever pay income tax on the value of their health insurance provided by their employers. They also don't pay payroll taxes, like Social Security and Medicare taxes on that, that is about $125 billion a year.
Employers are ending up paying more and more each year for health care, which they feel means they can pay less and less for wage increases and other increases. They are trying to compete on a global basis, and we are not going to win based on wages.
Ms. Slaughter. We can see the difference between that in the United States and Canada in respect to health care.
One thing that is becoming more and more apparent to me is that people who are laid off, downsized, outsourced, whatever the term may be, search, sometimes in vain, for another job. But invariably, when they find one, it is at a lower-wage scale. I don't know of any other interpretation for that, other than the standard of living in the United States is dropping.
Mr. Walker. Well, not across the board, it is not dropping.
Ms. Slaughter. No. I know there are people with very high incomes.
Mr. Walker. I think one of the things that we have to recognize is that one of the most valuable assets that we have is our people. And from a practical standpoint, in a knowledge-based economy -- and that is what we are in -- we have to do everything that we can through the education system, through training and assistance to maximize the skills and knowledge and the productivity of our people. Because that is the only way that we are going to win. And there are some real challenges in all of those dimensions right now that we need to deal with.
Ms. Slaughter. I wish we were. Thank you very much.
Ms. Pryce. Mr. Chairman?
Mr. Dreier. Thank you very much, Madam Chairwoman.
General, thank you very much for your very thoughtful testimony and with respect to your fine and very important work.
I appreciated your comments on this 1950's challenge -- looking at the regional structure, I mean, the Triad and disability models that existed back then. And that is one of the reasons that I have said, as we mark the 30th anniversary of the 1974 Budget Impoundment Act that was light years ahead of where we were in the 1920s, clearly things have changed. I don't think any of us who are advocating the issue of budget crisis reform believe it is going to be a panacea.
I came here with the goal of trying to reduce the size and scope and reach of the Federal Government, and so many things that we deal with can in fact be handled at the local level. And that is one of the reasons that I felt strongly about this issue of biennial budgeting and the oversight aspect of it. And the Speaker Hastert joins me in that.
And Chairman Pryce talked about the fact that I may have played in inspiring her, but it really is her state, and it is our colleague, Ralph Regula, who continued to provide me with argument after argument. I mean, here is a guy who is an appropriator. He and Bill Young both were the great champions. And I sat down -- the three of us sat down and began talking about this. And Ralph Regula has testified about the examples that you used in the State of Ohio's success before this subcommittee when we went through the issue of reform in the past. And I think that is very important.
You correctly talk about the fact that we can't sustain this kind of action on the part of the Congress into the future. We need to look at these big numbers. It is one of the reasons that I have been advocating a modest economic approach, but cost containment is something that is very important.
And when we were putting the Medicare package together, one of the things that we included was a rather modest cost-containment provision. We wanted to go to reconciliation, but the Senate, unfortunately, would not let us go down that road. So we included in this a provision that says that, if the percent of the funding exceeds general revenues, then we will in fact have what I call a trigger in several steps where -- where that came from in the work of this committee trying to design it. These are the kinds of mechanisms that I think can help us.
I mean, again, you are right, there is no panacea. But help us do what I believe is the platform on which I first ran for Congress and continue to, because I look not only at the cost factor as a general outlook, I look at the impact on lives as we looked at the issue of welfare reform. Yes, there was a reference of cost to the perpetuation on generations of the cycle of welfare. But if you also look at what it does to people's lives, the cycle of dependence, it doesn't do anything to encourage individual initiatives and responsibility for one's actions.
And that is why I just wanted to touch on that issue and see if you have any thoughts on that.
Something that, really, we have not seen before in this country is the level of productivity we have today. If you go back two decades, one of the things that was talked about as a lot of the concerns that are being raised in this presidential campaign were voiced by Walter Mondale two decades ago, a series of speeches on the fact that we are hearing the exact same arguments: The worst trade year in our nation's history was in 1984; we were going to lose 3 million jobs because of the problems that existed then. And we created 40 million in the ensuing 20 years.
One of the -- the number one problem they talked about then was low productivity. And what is it that everyone says today? They are now arguing that, because of productivity, we are not creating jobs. And we have seen this unprecedented level of productivity in virtually every single area you just alluded to by talking about efficiency, whether it is in health care or other areas.
And so I know I have thrown a number of things out here. I wonder if you have any thoughts about some of the mechanisms that we have looked at here to try and address the shared goal that we have dealing with this big picture issue.
Mr. Walker. I think restoring PAYGO, looking at caps that are realistic, over an appropriate period of time, and relooking at what those caps are every 2 to 3 years to make sure that they are realistic. Because if they are not realistic, chances are you are not going to be bound by them.
Looking at triggers. I think you are exactly right, Mr. Chairman, that when you are looking at mandatory spending programs or entitlement programs, looking at a trigger approach so that when they get to be a certain size of the budget or a certain size of the economy, Congress needs to go back and review and reexamine the programs.
But I would also respectfully suggest, Mr. Chairman, that we are on a path that, in some cases, we can't wait for those triggers to kick in, because by the time those triggers are hit, our degree of difficulty in being able to make the reforms that are going to be necessary is going to be that much greater.
Mr. Dreier. Well, then I would argue, this is the best we could get.
Mr. Walker. I understand. And that was a plus.
Mr. Dreier. And we don't want to point the finger from here to the other body, but I think we could have got a better process and could have worked something out.
Mr. Walker. Productivity is at very high levels. There is no question about it. The question is, is it going to be sustained? And we don't know. And is it a paradigm shift? And how long will it be maintained?
But I do think -- I come back to the fact that you are looking at budget process reform. How do we consider the longer-term applications of current policy choices, and how can we reexamine the base? I think we have got to do all three of those in order, ultimately, to deal with the challenge.
Mr. Dreier. Thanks.
Thank you, Madam Chairwoman.
Ms. Pryce. Well, thank you very, very much, sir. We appreciate your time today and your insight, and we look to working with you in the future. You may leave these for the record or take them with you.
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Mr. Walker. Thank you. And I should have acknowledged for the record your home state, because it is of strategic importance given the topic we have today.
Ms. Pryce. It certainly is. And the Chairman speaks correctly.
Mr. Walker. Thank you.
Ms. Pryce. Thank you very much.
All right. If the committee is ready to proceed with the next panel, we may do that. We are staying right on schedule here.
Ms. Pryce. We have John Berthoud, President of the National Taxpayers Union; Stanley E. Collender, General Manager, Financial Dynamics Business Communications, welcome; and Richard E. May, Legislative Consultant, Brownstein, Hyatt & Farber.
STATEMENTS OF JOHN BERTHOUD, PH.D., PRESIDENT, NATIONAL TAXPAYERS UNION; STANLEY E. COLLENDER, GENERAL MANAGER, FINANCIAL DYNAMICS BUSINESS AND COMMUNICATIONS; AND RICHARD E. MAY, LEGISLATIVE CONSULTANT, BROWNSTEIN, HYATT AND FARBER
Ms. Pryce. Gentlemen, thank you very, very much for your participation today. We had hoped that Representative Moran would be here to introduce you, but he is still in Virginia. So if you don't mind, we will proceed. But we are very certain that he would have done a fine job.
We are going to try to stay to the 5-minute rule. You may summarize, and your full statements will be available in the record, if there is no objection. And, thank you. And you have a preset order?
Mr. May. Who do you want to go first? We don't care.
Ms. Pryce. All right. Well, let us put my list -- Mr. Berthoud, Mr. Collender, and Mr. May. That is how it is listed.
STATEMENT OF JOHN BERTHOUD, PH.D.
Mr. Berthoud. Thank you, Madam Chairwoman, and Ranking Member Slaughter. I appreciate your invitation to appear. I am in very distinguished company today. And thank you.
My name is John Berthoud. I am the President of the National Taxpayers Union. We are a nationwide organization with 350,000 members. You can read more about our work on our website at ntu.org.
I come before you today to offer testimony regarding budget process reform. No one can doubt that, to answer your question, Congresswoman Slaughter, that Congress's budget process is facing a crisis.
Ms. Pryce. We can't hear you.
Mr. Berthoud. I'm sorry. I apologize.
That the budget process is in crisis. And the introduction to my testimony has some numbers in recent history to back up that point.
In my 5 minutes of remarks, I would like to talk about some of the highlights and some of the more contentious issues, what we believe at NTU budget process reform should contain.
First, I think it is very important, and I know in your hearing on the 11th you heard testimony to this, that any reforms that Congress enacts must have real enforcement mechanisms. Over the past 30 years, Congress has enacted many worthwhile rules to restrain budgetary excesses. That is the good news. The bad news is that, unfortunately, these measures have often been ignored or overridden.
In his testimony before this subcommittee, Representative Hensarling observed: I recently asked the Budget Committee staff how many times the House has waived points of order in the 108th Congress, and I was told that it occurred too often to keep track.
If Congress intends to enact meaningful budget process reforms, they must have real and powerful enforcement mechanisms.
One idea would be to require a supermajority vote to waive the rules. We believe that this majority requirement should be applied both to the Senate and the House. And the House should not allow a rule requiring only a majority vote to override the requirement for a supermajority vote.
H.R. 3800, the Family Budget Protection Act, which NTU has endorsed, removes the Rules Committee's jurisdiction to waive permanent supermajority points of order.
I recognize that there will be a natural resistance by the Rules Committee, and I probably have lost any chance of ever testifying here again by saying this today, but let me offer these thoughts.
Before dismissing this idea as a nonstarter, you may want to consider the magnitude of the problems that Congress faces and the Nation faces, and I would go back to Comptroller General's first chart as powerful evidence of this in terms of the long-term liabilities, deficit spending and a broken process.
In that context, this committee -- the subcommittee and this committee -- may come to realize that strong, coherent budget rules will help the House leadership to turn the tide in the budget war. Absent that, we believe expenditures will remain out of control, and deficits will continue to rise and, in turn, spending profligacy will imperil the recently enacted tax cuts, lead to possible adverse results for the economy and, finally, also probably bring about severe electoral repercussions.
Congressman Baron Hill was absolutely correct when he remarked to this subcommittee that it is going to be a painful process to get back on the right track, and we are not going to be able to do it without a set of rules that hold our feet to the fire while getting us there. I have a couple of other ideas in my testimony as well.
I also would like to comment on the issue of whether PAYGO -- of new PAYGO rules. We are strong supporters of bringing back the PAYGO rules to mandatory spending as the President has proposed, but we do not believe that PAYGO rules should be applied to revenues.
It makes sense, as OMB Director Josh Bolton, testified to this committee two weeks ago, during the Kennedy Administration, mandatory spending represented about a third of the Federal budget. Today, that figure has ballooned to 30 percent.
Clearly, we must do all that we can -- Congress must do all that it can to stop the accelerated growth and uncontrollable spending. So we applaud, as I said, the President's proposal that any net increase in mandatory spending require OMB to enact across-the-board reductions in non-exempt mandatory programs.
Regarding PAYGO and taxes. If deficits were occurring in the United States because Americans weren't paying enough in taxes, then it might make sense to have a rule making it harder to cut taxes. That, clearly, in our judgment is not the case.
Contrary to the hyperbole of tax-increase advocates, by historical standards, there is a tremendous amount of revenue in the Federal coffers. Just in the past 10 years, we have seen real growth in revenues, despite all that you have seen and heard by tax-increase advocates, of 18 percent in real terms.
In other words, for every $1 that the Federal Government got in revenues in 1994, today we have $1.18, and that adjusts for inflation. If Washington had merely held annual spending growth to 3.75 percent over the past 2 decades, our rate, which, by the way, exceeds the rate of inflation in all but one of those years, the Federal Government would today be in a surplus.
And of course, more fundamentally, every dollar that Washington spends is not its own money; it is money earned by the people. While Federal discretionary and mandatory spending may have spun out of control and thereby necessitated rules to restrain future actions, restraining the ability of the Federal Government to return some tax dollars to the rightful owners is unfair to America's families who are not the culprits behind Washington's fiscal mess.
Particularly in the current context, with numerous tax relief provisions expiring, the adoption of PAYGO rules for taxes would mean that those who seek to raise taxes on the American public would require less than a majority to do so. I believe that few Americans would approve of making it that easy for Congress to raise their taxes.
Finally, and I say this -- I have a longer, lengthy testimony -- we believe and recent history shows, that it has been far easier to raise taxes than it is to cut universal entitlements. And therefore, it doesn't seem to make sense to us or it justifies having rules to restrain growth in universal entitlements. Congress has, at times, raised taxes. It has not, for the most part, taken any action to restrain growth in universal entitlements.
A couple of the other ideas that we talked about in our testimony: Congress should enact caps for mandatory spending as well. We believe strongly that the best budget reform is to be constitutional. We would like to add incentives to meet deadlines. Obviously, the Congress has not been able to do a terrific job on meeting deadlines in 30 years of the budget process since 1974.
We would like to see a limit on Federal spending as a share of GDP. Senator Gregg is working on that over across the way.
And we would like to also and have testified in support of the process to eliminate obsolete programs.
In conclusion, the facts I have stated in my introduction or have written in my introduction make clear that it is long past time for Congress to act. There is a critical need to enact budget process reform as soon as possible, but let me caution the subcommittee that we believe it is essential that the reforms Congress enact be meaningful. Weak reforms, we would argue, are worse than no reforms at all.
I thank you very much, Chairwoman Pryce. And we look forward to working with you and members of the committee as you move forward on this important process.
[The statement of Mr. Berthoud follows:]
Ms. Pryce. Thank you very, very much, John. Thank you, too, for your testimony.
And now we turn to Stanley Collender.
STATEMENT OF STANLEY COLLENDER
Mr. Collender. Thank you. I appreciate the opportunity to be here today.
I would, at the risk of saying something I probably shouldn't, I would like your permission to submit my testimony for the record and paraphrase what I was planning on saying.
Ms. Pryce. Certainly. Absolutely.
Mr. Collender. Let me state this as directly as possible. The basis of my testimony today is: Don't do it. Don't enact any budget reforms this year.
I want you to understand how difficult it is for me to say that. First of all, I am an unabashed process supporter. I want it to work. And, it is not working. It has gone through being a reason for pride among those of us who either followed or were involved in the budget process to a source of late night jokes for comedians. That is, personally, very difficult to take.
It is also painful for me to ask you not to make any changes in the budget process because my career is based on explaining what you do. Much of what I have done professionally is to analyze, explain, consult on -- not lobby -- the budget process. If you were to change it, there would be a spike in demand for my services, and it would be, personally, very beneficial.
Unfortunately, I don't think it would be similarly beneficial for the country. And that is because -- and this will get directly to, I think, the point you made several times this morning. Why do we keep talking about it but not doing it? The question, if answered -- my question back to you is, what do you mean by it?
The budget process is not the problem. Let me paraphrase former CBO Director Rudy Penner: The budget process is not the problem; the problem is the problem. And there is no consensus here on what that problem is.
Mr. Chairman, I have heard you say several times that you think -- and you have come to limit spending, to limit the size of government. Let me suggest that if that was universally accepted or even generally accepted by your colleagues, putting together a new budget process or revising the one we have to accomplish that would not be a problem. It would have been done years ago. The specifics of all the little mechanical things that we have talked about this morning would fall into place relatively easily.
The problem, though, is that there is no consensus on what needs to be done.
Let me just, at the risk of -- this is just a little bit of some of the things that have been talked about this year: Is the purpose of the budget process, as you all are thinking of it, any of the following? Is it deficit reduction? Spending limits? Tax reduction? Entitlement limits? Discretionary spending reductions? Managing the national debt? Pay-as-you-go restrictions for new mandatory spending and revenues? PAYGO just for revenues? Enacting all bills by the start of the fiscal year? Limits on new tax cuts but not old ones? Limits for all spending except military and homeland security? Protecting Social Security, protecting Medicare, protecting Social Security and Medicare, or any one of about 20 others that we could come up with?
These are not things that I have made up; these are all things that people have talked about for the past year, have talked about passionately over the past year. And many of the -- much of the legislation that you are considering embodies one or more of these but not all of them.
If there was a general consensus on any one of these things, putting the budget process together would be simple. There isn't. And that is the basic bottom line here.
As soon as you develop that consensus, the new budget process will come together quickly and easily and with great fanfare. But starting with a process that tries to impose a consensus, as I think, unfortunately, a lot of people are talking about, should be seen and exposed for what it truly is, the political equivalent of trying to put a square peg in a round hole.
Here is the real bottom line. You could accomplish everything that you are talking about right now -- spending limits, deficit reductions, any other changes you talked about -- without doing any procedural changes. All you need is a consensus and a majority to make it happen. It doesn't exist right now.
Under those circumstances, trying to embody that in a process dooms that process to failure. That will just destroy the credibility of the process going forward, which will be critical as the Comptroller General Walker talked about, becomes more difficult. Wall Street, the average voter, needs to have faith that Washington can make happen what it needs to do. And by putting together a process that people don't believe in, that is waived or ignored routinely, then, for many of the reasons you were talking about, will just destroy that credibility even further.
So, the bottom line: Unless you are going to tell me that you are going to impose or include mandatory civil or criminal penalties for Members of Congress and congressional committees for not complying with rules -- good idea. Is that what you said? Unless you somehow make it impossible to finesse the numbers -- and I have been working on this for 25 years, and that is not doable.
And unless you can guarantee that definitions of things like emergencies and other budget concepts can't be changed when some majority has the votes to do so, the fact that you put together a new budget process and that it is a law won't make much of a difference. It will be routinely ignored, waived or just passed. In fact, history is littered with budget process changes that have been ignored.
Most people don't remember -- I think it was 1949 or 1950 -- there was a Joint Committee on the Budget that was created that basically went out of existence a year later when few people wanted to serve on it, and no one wanted to do much about it.
Here is the one thing I can recommend, rather than being totally negative this morning. If you are truly interested in budget process reform, I would like to urge you to do what your colleagues did back in the 1970s when they created the Congressional Budget Impoundment Control Act.
Rather than come up with a single concept, try to get it on the floor and pass it and then hope that it would be implemented, Congress created an ad hoc group of members that went off, went away and reviewed the way Congress budgets.
Two years later, after countless meetings, legislative drafts, extensive formal debates on the floors of the House and Senate and rewriting on the floor of the House and Senate, the result was the Congressional Budget Act.
Yes, those changes are 30 years old. Yes, they need to be reviewed. But when you think about it, the Budget Committees continue to exist. The Congressional Budget Office is as strong today as it has ever been. Budget resolutions are something that we fight about and are the basis for much of what we do.
In other words, while that act was policy-neutral, it has continued to create a platform for much of the rest of what we do. The reason that happens is that that act represented a broad consensus of how things should be done. That consensus included representatives and senators, Democrats and Republicans, liberals and conservatives, and, probably what most of us would be consider most amazing, it also included a consensus among appropriators, authorizers and tax writers.
If you are going to do anything at all this year, create another type of ad hoc committee. Let them go off for a year or two, take it out of the realm of current politics, come back with a process that is reviewed during the regular congressional legislative process.
Other than that, please reject everything that is being proposed right now, and let us move on so we can just get the appropriations done by the start of the fiscal year.
Thank you.
[The statement of Mr. Collender follows:]
Ms. Pryce. Thank you. All right.
Mr. May, we appreciate you being here. And unless your testimony is going to be exactly the same, you may proceed.
STATEMENT OF RICHARD E. MAY
Mr. May. Madam Chairwoman, Ranking Member Slaughter, Mr. Diaz-Balart, and Mr. Chairman as well, it is a pleasure to be here. In fact, it is an honor to be here.
The last time I think I set foot in this room in an official capacity, I sat in that chair over there, and Mr. Kasick was the chairman of the Budget Committee, and we just passed the rule to bring the Balanced Budget Act of 1997 to the floor for conference report enacting. So it is always a great time to be here.
And I know if Mr. Solomon was alive, I know he would be very interested in this subject. He was always interested in budget process reform, and of course, we miss him as well.
First of all, it is always great to go after Stan, because I know Stan. Stan is a good friend of mine.
Ms. Pryce. I apologize for the order.
Mr. May. And typically he is wrong, as he usually is.
This is a perfect time to do budget process reform. It is a great time, because we have a situation where Members of Congress are struggling with fiscal issues.
Probably, the answers are yet a couple years away of sort of the near term, but budget process reform does give Members at least an opportunity to start the process. And I believe budget process reform is that.
Plus, we need to change the system -- not overhaul it, not blow it up. It doesn't need to be completely revamped. It just needs to be modified or modernized, I think, as the Chairman would say, because there is a built-in bias, I would argue, within the system of more and more spending.
And you are right.
Stan is right in one sense, that budget process reform doesn't create the decisions that Members need to consider, need to enact.
But budget process reform does give them the enhanced ability to say the hardest word in politics, and that is, no. And if they can improve the chances of them saying no instead of saying yes, I think budget process is a very important step.
And I think we are here today -- where we need more steps to say no, help members say no, and I think it is where budget process reform needs to be focused, in how to help members say no.
PAYGO is the -- I would like to respond, if I could, just to a couple points. There is a lot of consensus I think within the various proposals of the subcommittees I have been looking at. Granted, are they the perfect solutions? No. Are there some disagreements in some of this consensus, like, for instance, on PAYGO?
But there is a great deal of consensus relating to joint budget resolutions, discretionary caps or some controls on discretionary spending as well as on entitlement spending, some looking-forward provisions regarding the long-term budget problems facing the budget. All those things are good.
If we can enact those today, great. Of course, I would encourage the committee to do more, but at least there is, I believe, a beginning of the forming of a consensus to do something this year.
But if I could respond to a couple of the comments by the Chairman on PAYGO. PAYGO was originally created, of course, back in 1990, during the worst phase of all, budget summits. And no budgeteer likes to go to budget summits. I remind the committee that PAYGO was designed not to inhibit the status quo; it was designed to stop new ideas.
And I also remind the committee that the current tax cuts that are the controversial ones were sunset primarily because of artificial budget constraints passed in the Senate.
So I would argue, there is a rationale for why at least the two most recent tax cuts should not be subject to PAYGO. Maybe there is an issue of, maybe, other tax cuts in the future may need to be subject to PAYGO, but at least the ones that are currently on the agenda of Congress, I think, there is a rationale why they should be exempt from PAYGO.
And I think there is an issue of budget functions. I think the Chairman is right. I think the functions do need to be modernized. There are twenty-some certain budget functions. Obviously, Homeland Security needs to be a part of that. Do we need 20? No, we probably don't need 20.
But I would argue, though, not to eliminate the budget functions. I know there is this macroeconomic proposal by some Members that would just have basically three big numbers: Revenues, total spending, and deficits. And I would argue that is not enough.
I think Members, even though the functions are not binding on anyone, I think it does provide members with an opportunity to see a theoretical, hypothetical breakdown of where we are going to spend our money. How much for defense? How much for foreign aid? How much for Medicare, Social Security, et cetera?
So it needs be modernized. We can probably shorten the list a bit, add maybe one for Homeland Security. But to eliminate them all, I think, would be a disservice, because I think Members need to have some sense of where the money is going. And I think the budget functions in a way do that.
Biennial budget. As a former staffer in the Ohio Senate, I lived through biennial budgeting, and there are a lot of attractive aspects to biennial budgeting. And before I became the staff director of the House Budget Committee, I was a supporter of biennial budgeting.
However, I am not so much a supporter today as I was then. And I just think it is partly Members -- I am not telling Members anything they don't know. Members talk about oversight, but Members really don't like oversight. And part of that, I think, is not the Members' fault.
First of all, Members sometimes do not have historical knowledge of the programs. There is a high turnover of staff on the committees, and oversight really requires a major historical understanding of the committee -- of the program.
So I guess I am dubious on whether Congress would use that second year to do oversight.
Plus, I don't think Congress -- I mean, like in Ohio today, they are using biennial budgeting, but they are constantly updating the budget. They are constantly offering budget cuts, et cetera, because things change so quickly in our economy that two years is really a long, long time. And I don't really know whether Congress is ever going to divorce itself from doing budgets year-by-year anyway.
So with that as a closing, I am thrilled to work with the committee. I would like to commend the staff. Michelle has done a terrific job. Of course, Mr. Pitts back here. They are great staff, and the committee is very lucky to have them as well.
[The statement of Mr. May follows:]
Ms. Pryce. Thank you.
Well, I have several questions, but let me go to the last one first.
I mean, Mr. May, I think that even though members may not like to do oversight, I certainly think it is the responsibility of Congress to do oversight. And perhaps the reason we don't -- some may not like to do it is because they just never have had the opportunity to take that responsibility seriously. And the Speaker has given each committee extra funding to do it, and it still isn't getting done.
And it is my impression that there just isn't time to get to the hard work of it, to understand the historical perspective, to develop a staff that can get down in the weeds and have an accurate picture of what needs to be done. And I mean, without the time to do it, I just don't see it ever happening. And so I am not sure that I agree with your argument necessarily. So, just to note that.
Mr. May. Sure. If I could respond just briefly. I was not trying to imply that oversight is not important. It is important. And I am not trying to imply that Members don't understand that importance. I think they do as well.
All my point was -- is that biennial budgeting is just simply not going to create, I don't think, the time that Members are going -- think they are going to have to do oversight. I think there would be -- even though this pseudo-annual updating of numbers or economic changes, there would be, you know, other things would be going on, you know, unknown events that would change the budget plan.
I mean, can you imagine what the plan, the budget plan, was today versus what it was two years ago? If we were doing one today versus two years ago, we would modify it, I am sure, once or twice.
And I understand the frustration that the institution has of seemingly always doing budgets, always doing appropriation bills. And I don't know the answer to that problem. But I just don't know whether by biennial budgeting is that panacea because of the nature of our economy, the nature of the oversight process. And it is a worthy goal, but I am not sure that biennial budgeting is really the tool that is going to force more and more oversight.
Ms. Pryce. Well, to Mr. Berthoud's point. If we did biennial budgeting, we would have half as many points of order to waive.
Mr. Collender, how can we get consensus around here? I mean, you say, don't do it now because we don't have a consensus. I mean, I don't know what is going to give us consensus. As long as we have this political split that is so narrow and as long as we have committee turf, jurisdictional wars, and as long as we have, you know, just people thinking differently about this process -- I mean, if we wait until we get to consensus, will we ever do it?
Mr. Collender. I am not saying, don't have a debate. I am just saying, don't put a new process in place until it is destined to have some likelihood of actually being implemented. And that is the problem now, as I can see, a majority of Members putting a process in place now that a year from now wouldn't have majority support, or the situation would change, or it might not represent the majority really right now but people felt the need to vote for it.
Have the debate, absolutely. As I said, get this ad hoc group off. Let them have hearings. Let them talk amongst themselves. It should not be -- as much as I like Rick, it should not be people like Rick and me. It should be Members, absolutely.
Budgeting is the most political of all processes that exist. You cannot take the politics out of it. But until you get something -- is it limiting taxes or is it deficit reduction? They are not necessarily the same. Until you can answer a basic question like that, you are not going to be able to put together a process that will last more than a couple of months.
Ms. Pryce. Thank you.
Mr. Collender. May I? Just to comment on biennial. I shouldn't do this, but this is one of those places Rick and I half agree.
First of all, you just said the staff on the committee that is doing oversight is not necessarily the same staff doing budget. And they actually could be doing oversight now if they wanted to. My big fear about biennial budgeting is what Rick just mentioned, which is, essentially the budget barely lasts for a year now, and we would end up budgeting by supplemental.
However, I have come to the point at this point that I am convinced that it would be good for the Federal agencies if they had, at least a year in advance, some knowledge of what they would be getting. And under those circumstances, I -- rather than be tremendously opposed to it, I don't see why we shouldn't at least give it a try.
Now, the question, though. Are you talking about biennial budgeting or biennial appropriations or both? Because they are not necessarily the same.
Ms. Pryce. That is true.
Mr. May. Yes. And if you do one, you have to do both.
Mr. Collender. You really should do both.
Mr. May. You can't do biennial budgeting and then do yearly appropriation bills.
Ms. Pryce. Thank you.
Ms. Slaughter?
Ms. Slaughter. Thank you.
Stan, my staff and I both want to thank you for coming today. You have been fairly gracious to me. I remember, as a freshman, you came to try to help me understand this process.
Mr. Collender. And I had hair back then.
Ms. Slaughter. Well, we were all different. But I thank you for your testimony which pretty much contradicts everything else we have heard.
But I think I lean to your side. I really understand what you are saying here. I would much rather we spend our time at this point trying to get fiscal situations covered back in some shape and work the budget as we do.
And obviously, I don't have no axe to grind against any kind of changes that we would make, but I don't think that trying to do it in haste -- as you point out, there is no consensus here on much of anything, and I think it would be a better time if we were to do it later. Thank you very much.
Ms. Pryce. And, Mr. Chairman, for the last word.
Mr. Dreier. Thank you, Madam Chairman.
Let me just say that whether it is supermajorities, no reform, or biennial or functioning categories, all three of you successfully trashed my views, and congratulations to you for having done that.
And you have all gone through and pretty well touched on most of the issues that were raised, and so I thank you for coming here and putting me in my place. And you all did it so very diplomatically and very well. You led me to conclude that I am going to continue with my resolve in all of those areas.
I will say one thing to Rick on the issue of functional categories and a proposal that is out there on macroeconomic approach: There is flexibility on that. There is no rigidity.
Mr. May. Thank you.
Mr. Dreier. So that is something that there is an opportunity on a year or two-year basis to make modifications on that proposal.
Mr. May. Mr. Chairman, I am just concerned that if we become too simplified, then the Members will be concerned. I am not getting a picture of really where our dollars are going, and I think the functional categories do provide, as I said, that snapshot. And I am just concerned that if we get too small of a list, then too many things merge together, and then we really have no clue of what is going on. I mean, that is my only concern.
Mr. Dreier. And I will say, as you are a former staff member, on behalf of Michelle and Mr. Pitts, I know that your kind words are appreciated. Thank you very much.
Ms. Pryce. Well, Mr. Chairman, I don't know. I think I heard Mr. Berthoud champion some of your causes in his testimony. But I would apologize, since you had no input into the witness list. It was a terrific oversight.
Mr. Dreier. This is very important. This is very important.
Ms. Pryce. All right, gentlemen. Thank you so much for your time today. It was very instructional, and we do so much appreciate it. And the subcommittee thanks you very much. And the subcommittee is adjourned.
[Whereupon, at 12:43 p.m., the subcommittee was adjourned.]
