MITCHELL E. DANIELS, JR.
OFFICE OF MANAGEMENT AND BUDGET
SENATE BUDGET COMMITTEE
July 12, 2001
Thank you Mr. Chairman, Senator Domenici and Members of the
I appreciate the committee's invitation and this chance to discuss the
nation's constantly shifting fiscal situation. Permit me to start by
noting the persistence of two striking phenomena that distinguish today's
environment from any we have seen: first, a tremendously positive national
fiscal condition despite a nearly stagnant economy; second, a strong
bipartisan agreement to preserve very large surpluses as a threshold
condition of public finance.
I am glad to report that, in stark contrast to past economic turndowns,
the nation's finances are in remarkably strong shape. Even in the midst of
a year-long slowdown in the economy, we continue to accumulate enormous
surpluses, and to use the extra receipts to steadily reduce the nation's
outstanding public debt.
This is an historical phenomenon without precedent in modern times; the
almost invariable pattern is for countries to run deficits, often very
large ones, during economic difficulty. In all modern U.S. slowdowns, the
nation has run in the red, often by very large amounts. In 1982, the
deficit was $128 billion, or 3.4% of GDP. In 1992, the deficit reached
$290 billion. By contrast, this year we will enjoy the second largest
surplus in American, which is to say world history.
But in the last few years, a unique bipartisan consensus has arisen in
our country, one at variance with preceding economic theory. In large part
due to the work of this committee, notably its chairman and ranking
member, an agreement has been forged to run very large surpluses as a
matter of course, in strong economic times or in weak. Both parties and
both the legislative and executive branches, in this administration and the
previous one, have concurred in maintaining a surplus at least the size of
the Social Security surplus.
Many would like to set the minimum surplus level even higher, using as a
target the artificial overage in the Medicare Part A trust fund. This is
a relatively modest difference, amounting to whether the minimum surplus
should be more like 8% or 9% of revenues, some $160 billion or closer to
$190 billion. Between those two figures lie some hard disagreements, to be
sure, but that should not obscure the radically different nature of the
current situation and the new consensus.
It is fascinating to note how far this consensus departs from
traditional economic thought. Only yesterday, slowdowns were said to call
for deficit finance, for governments to take in less in taxes than they
spent. The nation conducted a decades-long, spirited debate about the
wisdom of a balanced budget amendment to the Constitution. Now, suddenly,
we find ourselves in strong and healthy agreement on maintaining a fiscal
position vastly stronger than the mere balance such an amendment would have
Whatever differences may prove to separate us during the course of this
morning's hearing, I hope we can all agree that the matter of most urgency
must be the resuscitation of economic growth in our country. The
President and a bipartisan Congressional majority agreed to utilize a
portion of our unified surpluses to try to stimulate the economy through
tax relief, and that action came just in time. I am submitting for the
record the comments of a host of economists forecasting a boost to growth
stemming from the tax cut ranging from 3/4% to 1 1/4% in the second half of
this year. Just this week, the Blue Chip Consensus of the nation's top
analysts expressed this view, writing "The tax cut effects could not
have come at a better time..."
Mr. Chairman, you have asked for an update on our fiscal expectations.
I can report that we see continued large surpluses at least at the size of
the Social Security surplus for all years in the budget horizon. The
President is determined to preserve surpluses at this level, and to
continue using these funds for the steady reduction of outstanding national
debt, a cause of which you are a leading champion.
In the 2001 fiscal year now winding down, we are of course dealing with
the budget agreed to by the last Congress and the last President. That
budget, passed last December, contained the largest one-year spending
increase in history; obviously, a smaller surge in spending would have
ensured a larger surplus today. But the major reason for a surplus that is
merely immense, rather than gigantic, is of course a shaky economy.
Due to the dramatic economic slowdown, starting about a year ago but not
fully measured until the last few months, revenues for the current fiscal
year will grow more slowly than previously forecast, on the order of +3%
rather than the expected +5% or more. Because OMB was overly cautious in
estimating outlay rates, 2001 spending will also be somewhat lower than
expected, and the net change in the surplus will be somewhat less than the
drop in revenue.
I would point out that, in missing by 2-3%, this year's revenue
forecast was substantially more accurate than its recent predecessors.
Also, please note that all OMB projections of economic growth and revenue
growth have been completely in line with those of the Congressional Budget
Office, the Blue Chip private consensus, and other private estimates. When
we produce our Midsession Review later this summer, once again we will use
future estimates that match closely the most credible third party
predictions available. Such forecasts are always destined to miss by some
margin, but we take it as our duty to work with well-founded assumptions
and to strive for accuracy as far as is humanly possible.
The Social Security surplus makes a good target for several reasons.
First, unlike Medicare, or Military Retirement, or Civil Service
Retirement, or many other of the government's 100-plus other trust funds,
Social Security is in true surplus for the moment, taking in more than the
program costs. Secondly, there is some symbolic value in reaffirming the
special commitment we all share to protecting older Americans. Third, the
President and a majority of Americans hope for reform that converts a
portion of Social Security receipts from a mere IOU to real assets, owned
by the worker who paid those taxes. At that point, the notion of a
"lockbox" will take on real, literal meaning.
But the best reason for choosing this surplus target versus any other
arbitrary goal is that, as we apply these amounts to debt reduction, we
achieve with some room to spare the maximum amount of such reduction
possible. Over the next ten years, Social Security will take in excess
funds of some $2.5 trillion, whereas maximum debt retireable without
incurring unjustifiable premium expenses is about $2.2 trillion. This
year, we will eliminate over $100 billion of existing debt, marking the
fourth year in a row of such reductions, and further such shrinkage is
scheduled for each succeeding year. This is an important accomplishment
for both political parties, both branches of government, and both the last
two administrations all deserve credit.
So the nation's finances are in extremely sound condition. Only
persistent, long-term economic weakness can threaten this position, so
promoting a return to vigorous growth must be our common objective. The
best course forward is clear: first, pass this year's appropriations at the
level of the 2002 Budget Resolution, including the defense amendment
recently proposed by the President.
Second, work together to continue restraining total spending in the next
few years. Businesses, states, cities, and families have no hesitation to
limit their spending when revenues subside. The fifty state governments
recently reported that collectively they are lowering spending growth from
nearly 8% last year to around 3% in FY 2002. Spending in the domestic
agencies exploded during the last three years, including growth of 45% at
HHS and 27 % at DOT. These departments can benefit from a period of
digestion without great growth beyond these expanded levels.
Restraint does not mean paralysis. We can make room for new
initiatives, and for reasonable spending growth in good programs by finally
becoming serious about the review of antiquated, duplicative, and
non-performing programs. We must reverse the bizarre presumption, which
operates nowhere else in life, that the burden of proof rests with those
who challenge any penny of current spending. As in any business or family,
the burden must be placed on those accountable to justify the ongoing
value of whatever money is being spent today. Any healthy organization
constantly searches for ways to redeploy money from less efficient to more
efficient purposes; we must weed the garden if new plants are to sprout and
Finally, we must be prepared to collaborate on additional moves to
strengthen the economy. This might involve approaches unrelated to fiscal
policy; trade liberalization, and the alleviation of paperwork or other
regulatory burdens come to mind.
Mr. Chairman, I commend your concern in calling this hearing, and your
vigilance in seeking to make sure that today's hard-earned fiscal vitality
is preserved. I am pleased to be able to report the strength of our
position, but also to associate with your determination to take nothing for
granted and to see that progress continues in both the near and long
Return to this article at: /omb/legislative/testimony/text/20010712.html