TESTIMONY OF
FRANKLIN D. RAINES
DIRECTOR
OFFICE OF MANAGEMENT AND BUDGET
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES HOUSE OF REPRESENTATIVES

February 11, 1997

     Mr. Chairman, Members of the Committee, I am pleased to be here this afternoon to discuss President Clinton's fiscal 1998 budget, which reaches balance in 2002 while investing in the future.

     I will later submit additional written testimony that will provide further details of our balanced budget plan. For my oral remarks, I would like to make five points. I would then be happy to take your questions.

We have already done much of the hard work

     My first point is that, over the last four years, we have already done much of the hard work of achieving balance.

     Before the President took office, the deficit reached a record $290 billion in 1992 and was headed up. In 1993, he worked with Congress to enact his economic program of lower deficits and more investment. Since then, the deficit has fallen by 63 percent -- from that $290 billion to $107 billion in 1996. We have the smallest deficit since 1981 and, as a share of Gross Domestic Product (GDP), the smallest since 1974.

     The President's plan has exceeded all expectations. It was designed to reduce the accumulated deficits over five years, 1994 to 1998, by $505 billion. In just its first three years, 1994 to 1996, it has already reduced the deficits by $485 billion. We now project that over the same five years, the plan will reduce the deficits by $925 billion.

     More than that, we now estimate that the plan will reduce the deficits through 2002 by $2.5 trillion -- the difference between where our original baseline said the deficits would be from 1994 to 2002, and where we now project them over those nine years. Our new projections are based on the steps we have already enacted into law. The 1998 budget calls for a net $252 billion in additional savings to reach balance in 2002 -- just 10 percent of the savings that we put in place in the 1993 plan. Having done much of the work, we surely can finish the job.

     We also approach the task in better shape, from a fiscal standpoint, than the world's other major industrialized nations. Both our deficit and our public sector are substantially smaller. Combined outlays for Federal, State, and local governments in the United States measure 33 percent of GDP -- compared to 54 percent in France, 53 in Italy, 50 in Germany, 46 in Canada, 42 in the United Kingdom, and 36 in Japan. (Our 33 percent includes 21 percent by the Federal Government and 12 percent by State and local governments.) We also have the lowest combined tax burden, as well as the lowest combined deficit. Our Federal Government is neither vastly too large nor out of control.

We are enjoying the fruits of our labor

     My second point is that, we are clearly reaping the benefits of our success to date in cutting the deficit.

     We inherited an economy that, in the previous four years, had barely grown and had created few jobs. As I previously said, the deficit had hit record levels. Savings and investment were down, interest rates were up, and incomes remained stagnant, making it harder for families to pay their bills.

     Since then, the economy has performed well across the board. Business investment has grown at double-digit rates. The private sector has grown faster than under either of the previous two Administrations, while the Federal Government component of GDP has shrunk at an annual rate of almost three percent.

     We have over 11 million new jobs, 93 percent of them in the private sector. Wages are beginning to rise. Inflation has remained remarkably low -- below three percent by most measures. Interest rates are under control. And unemployment, which measured 5.4 percent in January, is nearly two percentage points lower than when President Clinton took office.

     Also, partly due to a strong economy (and partly to the Administration's policies), poverty, welfare, and crime are down substantially all across America. For instance, poverty has fallen from 15.1 percent in 1993 to 13.8 percent in 1995, the last year for which we have data. And violent and serious crime has fallen five years in a row, marking the longest period of decline in 25 years.

     With strong growth, low interest rates, low inflation, millions more jobs, record exports, more savings and investment, and higher incomes, it's no wonder that such experts as Alan Greenspan, the chairman of the Federal Reserve, have described this economy as the healthiest in a generation.

We are proposing a credible budget to finish the job

     My third point is that, the President is proposing a credible budget with real savings, based on conservative assumptions.

     It wasn't too many years ago that Presidents would routinely send to Congress budgets that had little relation to reality. They were based on what became known as "rosy scenarios" about how the economy was likely to perform, with unreasonable assumptions about growth and interest rates. They pretended that the deficit would come down. Not surprisingly, it never fell in a sustainable way. Of the 12 budgets submitted by the last two Administrations, the economy performed worse than the forecast 10 times.

     President Clinton has broken the pattern. For four years, he has submitted budgets that were based on reasonable assumptions about the economy and the deficit. How do we know? Look at the record. The economy has consistently performed better than the Administration had projected, bringing in more revenues and enabling the Government to spend less on unemployment compensation and other social benefits. As a result, the deficit has fallen more than we estimated, and by an average of $50 billion a year.

     Like its predecessors in this Administration, this budget is grounded in conservative economic and technical assumptions. With pleasant surprises such as the recent fourth quarter GDP figures, we expect that, if anything, the economy will continue to outperform our projections.

     In addition, the President is proposing significant savings -- including $137 billion by cutting discretionary spending, $121 billion by cutting mandatory spending, $34 billion by eliminating unwarranted corporate tax subsidies, $16 billion in net interest costs, and $42 billion by extending tax provisions that have expired.

     The budget savings total $350 billion over five years. At the same time, the President proposes to cut taxes by $98 billion, providing tax relief to tens of millions of middle-income Americans and small businesses. Thus, the budget calls for net savings of $252 billion.

     While shrinking Federal spending from 22.5 percent of GDP in 1992 to an estimated 19 percent in 2002, the President also proposes to continue the changes in the composition of Federal spending and revenues that began with enactment of his 1993 program. Before he announced his 1993 plan, mandatory spending was expected to rise, as a share of GDP, from 11 to 14 percent between 1992 and 2002, while interest payments rose from three to four percent. Defense was expected to fall from five to three percent, while non- defense discretionary remained at four percent. The rapid growth of mandatory programs would gradually squeeze out discretionary spending.

     Building on the 1993 plan, however, the 1998 budget would keep mandatory spending at 11 percent of GDP in 2002, while interest payments would fall to two percent, defense would still fall to three percent, and non-defense discretionary spending also would fall to three percent. The President wants to maintain an appropriate balance between the mandatory and discretionary parts of the budget.

     The budget also includes important changes to the President's balanced budget plan of last year, although both would have reached balance in 2002. For one thing, an improved economy and the savings that the President and Congress enacted last year reduced the size of projected deficits over the next five years, making the job of reaching balance a bit easier. For another, this budget includes a smoother path for achieving discretionary savings, making those savings more easily attainable.

     This budget does more than reach balance in 2002. It would keep the budget basically in balance until 2020. After that, demographic changes -- specifically, the retirement of the baby boom generation -- will present significant challenges in ensuring the continued viability of Social Security and Medicare. The President has called for bipartisan processes to address those challenges.

This budget invests in the Nation's priorities

     My fourth point is that, the budget invests in the Nation's priorities.

     Balancing the budget is not an end in itself. Rather, it helps fulfill the Administration's central economic goal -- to raise the standard of living for average Americans. So, too, do the spending priorities of this budget.

     Within tight constraints, the budget continues the President's policy of the last four years in shifting Federal resources to education and training, to science and technology, and to other investments to enable Americans to get the skills to acquire good jobs, and to give businesses the tools to become more competitive, in the new economy. The budget also continues to shift resources to the environment and law enforcement, raising the quality of life for average Americans.

     Let me take a few moments to walk you through the highlights.

     Strengthening Health Care

   Medicare:

     The budget preserves and improves Medicare, extending the solvency of the Part A Hospital Insurance Trust Fund into 2007. It gives older Americans and people with disabilities

     more choices among private health plans. It slows the growth rate of provider payments. It holds the Part B Supplementary Medical Insurance premium at 25 percent of program costs. And it proposes structural reforms to make Medicare more efficient and take advantage of changes in the health care marketplace.

     In addition, the budget proposes new preventive health care benefits to improve the health of senior citizens and reduce the incidence of disease. Specifically, it covers colorectal screening, diabetes management, and annual mammograms without copayments; increases reimbursement rates for certain immunizations to ensure that seniors are protected from pneumonia, influenza, and hepatitis; and proposes a new Alzheimer's respite benefit starting in 1998 to help the families of Medicare beneficiaries with Alzheimer's disease. 

     Medicaid:

     The budget preserves the guarantee of high-quality health care for the most vulnerable Americans -- millions of children, pregnant women, people with disabilities, and the elderly. It also reforms Medicaid to give States much more flexibility to manage their programs. It helps an estimated 3.2 million families, including 700,000 children, keep their health care coverage for up to six months until their breadwinners find new jobs. It provides health insurance coverage for up to five million of the 10 million children who do not now have it. And it helps States to create voluntary health insurance purchasing cooperatives.

     The budget imposes a per-capita limit on future spending to increase the financial viability of the program. Finally, it cuts Disproportionate Share Hospital (DSH) payments and retargets them to hospitals that serve large numbers of Medicaid and low-income patients.    

 Public Health:

     To promote public health, the budget invests more in biomedical research, in programs to combat infectious diseases, in the Ryan White AIDS program that provides life-extending drug therapies to many people with AIDS, and in programs that serve critically underserved populations.

     Making Welfare Reform Work

     To help welfare recipients move from welfare to work, and to help communities help them do so, the budget proposes: a performance-based Welfare-to-Work Jobs Challenge to help States and cities create job opportunities for the hardest-to-employ recipients; and a greatly-enhanced and targeted Work Opportunity Tax Credit (WOTC) to provide powerful new, private-sector financial incentives to create jobs for long-term welfare recipients.

     In order to address the overly deep cuts affecting single people, legal immigrants, and children that Congress attached to last year's welfare reform law, the budget proposes several steps. It corrects the deep cuts in nutrition programs by: restoring the link between Food Stamp benefits and housing costs; eventually re-indexing the standard deduction; raising and eventually re-indexing the vehicle asset limit; and providing 380,000 jobs for single adults, while restoring Food Stamps for those who are looking for work but cannot find it and for whom the State does not provide workfare or a training opportunity.

     In addition, the budget revises the law so that legal immigrants who become disabled after entering this country can get Supplemental Security Income and Medicaid assistance. And it proposes to delay the ban on Food Stamps for legal immigrants until the end of September 1997, giving immigrants more time to naturalize.

     Investing in Education and Training

     The budget maintains and expands the President's investments in: Head Start, providing opportunities to 36,000 more children to participate in 1998 and a million children to participate by 2002; Goals 2000, providing a 26 percent increase to help States, each of which has chosen to receive funds, to continue to plan and implement steps to raise educational achievement; the Technology Literacy Challenge Fund, more than doubling funding to help ensure that all children are technologically literate by the turn of the century; and Pell Grants, proposing the largest increase in the maximum Pell Grant scholarship in 20 years and changes to bring at least 348,000 more students into the program.

     The budget also proposes important new initiatives. It proposes a $1,500-a-year HOPE scholarship tax credit to make two years of college universal and ensure that all Americans have access to the high-skill training needed for today's workplace; and a tax deduction of up to $10,000 to help middle-income families pay for postsecondary education and training. It also proposes the America Reads Challenge, a five-year, $2.45 billion investment to help ensure that all children can read well and independently by the end of third grade; and a $5 billion new school construction fund to leverage new construction or renovation projects.

     Protecting the Environment

     The budget increases funding for the Environmental Protection Agency's (EPA) operating fund, which includes most of its research, regulatory, partnership grants, and enforcement programs; and funds the Kalamazoo Initiative, a new national commitment to protect communities from toxic pollution by the year 2000, specifically by accelerating the pace of Superfund clean-ups and cleaning up another 500 sites over four years.

     It funds start-up activities at the Grand Staircase-Escalante National Monument; increases funds for the National Park System to help improve park facilities and further protect our natural and cultural treasures; and re-proposes the President's "Everglades Restoration Fund" to provide a steady source of funds mainly for land acquisition to maintain the South Florida Ecosystem -- $100 million a year for four years to establish the Fund, and a 1- cent-per-pound marketing assessment on Florida sugar production to help finance it.

     Promoting Science and Technology (S&T)

     The budget maintains the President's commitment to biomedical and behavioral research, which promotes the health and well-being of all Americans. For the National Institutes of Health, in particular, the budget includes increases for HIV/AIDS-related research; research into breast cancer and other health concerns of women; minority health initiatives; high performance computing; prevention research; spinal cord injury; and developmental and reproductive biology.

     The budget also maintains a strong investment in technology to foster high-priority civilian S&T industries and jobs, continuing or expanding funds for the Advanced Technology Program, which works with industry to develop high-risk, high-payoff technologies; and Manufacturing Extension Partnerships to help small business battle foreign competition by adopting modern technologies and production techniques.

      Enforcing the Law

     The budget puts 17,000 more police on the street, continuing the progress toward the President's goal of 100,000 by the year 2000. To fight drug abuse, it increases funds for the Drug Courts initiative, for drug testing, for the Safe and Drug-Free Schools and Communities program, for interdiction efforts along the Southern border, and for disrupting the drug industry and its leadership overseas. To strengthen efforts to control illegal immigration, it increases the number of Border Patrol agents, continues Port Courts to expedite removals, and expands efforts to verify employment eligibility of newly hired non-citizens.

     Providing Tax Relief

     The budget provides a $500 tax credit for dependent children under 13; a $1,500-a-year HOPE scholarship tuition tax credit for the first two years of postsecondary education in order to make two years of college as universal as high school; a $10,000 tax deduction for postsecondary education and training; and expanded individual retirement accounts.

     The budget exempts 99 percent of all home sales from capital gains taxes by excluding up to $500,000 in gains for married taxpayers, and up to $250,000 for single taxpayers. It includes tax incentives to rebuild American communities, such as by allowing businesses to deduct certain costs associated with cleaning up "brownfields"; providing for a second round of Empowerment Zones and Enterprise Communities; and offering non-refundable tax credits for equity investments in qualified Community Development Financial Institutions.

     In addition, the budget cuts unwarranted corporate tax subsidies, closes tax loopholes, improves tax compliance, and extends various excise and other taxes that were allowed to expire.

     Projecting American Leadership

     International:

     The budget continues support for democratic reform and free markets in Russia and the New Independent States (NIS) of the former Soviet Union, with a 44 percent increase in NIS funding. It ensures that the United States continues to play a vital role in crafting a lasting Middle East peace, with more funds for international security assistance to support the peace process in that region.

     The budget fully funds our 1998 assessments for the United Nations, affiliated organizations, and peacekeeping (along with some arrears), and proposes a mechanism to liquidate our arrears, presuming that these organizations undertake the management, budget, and assessment changes that we and others have urged. Finally, it proposes a $583 million increase, to $1.6 billion, for the multilateral development banks to meet our annual commitments and begin paying off the large arrears that we owe to these organizations, which help further U.S. strategic and economic goals abroad.

     Defense:

     The budget continues the President's policy of sustaining and modernizing the world's strongest and most ready military force, capable of prevailing with our regional allies in two nearly simultaneous regional conflicts. It continues our commitment to maintaining high levels of training and readiness for that force and to equipping it with technology second to none. And it continues to strongly back programs that support military readiness, directly or indirectly. For instance, it provides military personnel a 2.8 percent pay raise, effective January 1998, and increases funding to upgrade and improve military barracks and family housing.

We need bipartisan cooperation to achieve a five-year agreement

     And my fifth and final point is that, we need bipartisan cooperation to achieve a five-year balanced budget plan.

     We obviously think that the President's budget is the best plan for reaching balance by 2002. And, we think his budget is the right starting point for our discussions. But we understand that the executive and legislative branches share responsibility for enacting a budget.

     The President's senior advisors have already met with many of you. And we want to continue those discussions. We want to get your reactions to our budget, and we want to hear your ideas. Working with you, we want to develop the best balanced budget plan that we can for the American people.

     The time to balance the budget is now. Our economy is strong, so it can absorb the spending cuts that we would have to put in place. And the political stars seem to be lining up in the right orbit. Everyone learned the lesson of the last two years -- that conflict over the budget is not a path to success. Both the President and Congress have voiced their commitment to reach an agreement this year.

     So I am cautiously optimistic. But I am realistic as well. Mr. Chairman, as you know, we have been down this road before. You know that agreements that seemed inevitable have eluded our grasp. If we are to avoid that fate, we have to work together, in good faith. I want to assure you this afternoon that, from the President on down, this Administration is prepared to do that.

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