THE WHITE HOUSE
Office of the Press Secretary (Yulee, Florida)
Fiscal Policy at the Crossroads: Budget Choices, Fiscal Discipline and the Outlook for FY 2000 and Beyond by Jacob J. Lew Director, Office of Management and Budget The Brookings Institution May 26, 1999
Four months ago in his State of the Union address, President Clinton put forward a framework to save Social Security first and seize the historic opportunity of the first surplus in a generation to strengthen our Nation's future. The decisions we make about fiscal policy this year are defining issues not only for today, but for many years to come. With four months to go until the start of the 2000 fiscal year, and a season of difficult political decisions ahead, I want to address the choices before us.
Our prosperous economy has produced a surplus likely to exceed $100 billion this year, but this prosperity is not some happy accident of fortune. It is the product of hard work and unremitting fiscal discipline that has marked our budget policy from the start. Looking back at recent history helps frame the importance of the decisions before us.
In the 1980's, fiscal responsibility and the concept of discipline were largely absent from our political culture. Despite the knowledge that deficits and debt were drags on the economy and threats to our Nation's economic future, attempts at serious fiscal discipline always fell short of their mark. Fiscal responsibility was a word often invoked, but rarely applied. Individual Members of Congress undertook efforts to make what progress the system would allow. But between Administrations and Congress, there was no systematic or effective effort to put the ideological differences aside, to compromise between different visions of government and achieve the goal of a government that pays its bills while investing in our people.
The numbers tell the story:
The 1990 bipartisan budget agreement did provide real deficit reduction, and important improvements in the budget process. But unfortunately, a recession was underway and unexpectedly rapid growth of health care costs sent the budget deficit to new heights.
But 1993 marked a new era in Washington. President Clinton made fiscal discipline the cornerstone of his economic and budget policy. He proposed a plan to slow the growth of entitlements, limit Federal discretionary spending, and raise taxes incrementally on the most well off. This program passed the Congress in 1993 -- without bipartisan support -- and jumpstarted the deficit reduction of the past six and a half years. Critics predicted a recession or worse, but the opposite happened. The bipartisan Balanced Budget Act of 1997 provided the final push to reach a balanced budget, achieving the goal four years ahead of the original projections. We have outperformed our projections every year since 1993, and this is no accident. We have used cautious economic forecasts and pursued prudent fiscal policies.
Since 1993, cumulative budget deficits were reduced by $1.2 trillion compared to earlier projections. The Nation's debt has fallen from 50 percent of our GDP to 44 percent, reversing a self-sustaining vicious cycle of deficits and debt. And in 1998, for the first time in 29 years, the United States actually paid back part of its debt. In fact, on Friday, the President announced that we expect in this quarter alone to pay down $116 billion of privately held marketable federal debt - the largest sum ever in a single quarter.
Federal spending as a percentage of the GDP has declined in each year during the Clinton Administration. At the same time, Federal receipts have increased, because of a strong economy with rising wages, strong financial markets, and rapidly growing corporate profits. Some argued during consideration of the President's 1993 economic program that it would choke the economy, and that revenues would go down, not up. Now, some of those same critics argue that the budget has gone into surplus only because the economic program increased taxes too much. They cannot have it both ways. The fact is that the President's economic program has so invigorated the economy that revenues are strong and taxpayers are better off.
Our economic strength is self-evident. Real average hourly earnings in 1993 were almost 14 percent less than they had been 20 years before. From 1993 through 1998, real wages grew by about 5 percent. And in the last two years, real wages have accelerated; in fact, they have grown more than twice as fast as inflation.
In 1992, before the President took office, the Dow-Jones Industrial Average was running at about 3,300. Today, the Dow is hovering around 11,000. While this trend clearly benefits those who began with considerable wealth, it also improved the lot of tens of millions of American workers through their pension funds. Even those with modest investments have seen their wealth grow. With lower inflation, savings in fixed-income securities have maintained their purchasing power. Thus, whether before or after taxes, there is no doubt that the vast bulk of the American people are far better off under a policy of fiscal responsibility in Washington.
Unemployment and inflation are at 30 year lows. Interest rates remain well below the levels of the preceding decade, despite continued growth. Economic growth has exceeded expectations and inflation-adjusted business equipment investment remains strong. All told, we have a strong foundation for further non-inflationary, sustainable economic expansion. Good news, however, should not lead us to take for granted how much we have achieved or to put at risk our hard won prosperity. Our prosperity is the result of our fiscal discipline, and it would be a mistake to turn back.
We face both long-term choices about maintaining fiscal responsibility and short-term choices in the form of our 2000 budget. I would like to first focus on the long term and defining choices for our future. The President announced in the State of the Union a plan that reduces the debt held by the public and increases our ability to meet existing commitments to Medicare and Social Security. The President proposes to devote 62 percent of the budget surpluses over the next 15 years to safeguarding the solvency of Social Security, and another 15 percent to Medicare. Simply put, the President wants to meet our current commitments before we undertake new ones. The President's framework would lock in debt reduction and target a tax cut to promote savings in Universal Savings Accounts rather than encouraging more consumption through across-the-board tax cuts.
Others have proposed that the surplus be used for massive tax cuts. The short-term satisfaction of a massive tax cut would be soon forgotten if even a brief economic decline were to bring back deficits which we only recently consigned to the past. Yet that is precisely the gamble made by the Republican budget which bets the ranch -- committing the entire non-Social Security surplus to a tax cut - starving Medicare and debt reduction, and calling for unrealistic and unachievable savings in discretionary spending.
We know that the baby boom will begin to retire in 2008 when those born in 1946 turn 62. We are generating a surplus we sacrificed much to achieve. We face a certainty of growing demographic pressures in the decades ahead. This would be precisely the wrong time to return to failed policies of the past.
But the fact of the matter is that Congress is considering a budget that severely underfunds critical programs. We have been down this road before and we know where it leads. The Congressional budget severely underfunds discretionary spending in each of the five years covered. Last week, this was proven unworkable when the House of Representatives allocated discretionary resources to its appropriations subcommittees. In the words of Republican Representative John Porter, who heads the labor, health and education subcommittee, "We are heading for another debacle." He is right. The Appropriations Committees are now implementing an untenable budget resolution which is a blueprint for chaos.
The Labor-HHS- Education funding bill in the House faces cuts of 18 percent below the FY 1999 spending levels. This means a reduction in Head Start funding of $500 million below current funding, actually removing from the rolls 50,000 children who now participate in Head Start. This would also mean sacrificing our new initiative to reduce class size by hiring 100,00 new teachers. More than one billion dollars would be cut from this year?s spending on Title 1, Education for the Disadvantaged. Roughly 2 million children who now take part in this program to improve their educational skills -- most of them in our inner cities -- would be denied this help. The budget for the Centers for Disease Control would be cut below this year's funding by some $380 million, cutting childhood immunization, reducing HIV prevention and breast and cervical cancer screening.
These are not examples of cuts from the President's budget, which points us in the direction the country should move, in many cases to higher funding levels. These are deep cuts from current levels of funding and step backwards into the past instead of forward into the future.
Similarly extreme cuts are called for in the House bills for the environment, in veterans' programs, law enforcement, foreign policy, and more -- reducing by 12% funding to the Departments of Commerce, Justice, and State with severe cuts to the FBI, the Drug Enforcement Administration, and other law enforcement programs; these allocations call for cuts of 19% in the Interior Department, and of 23% in Foreign Operations below current spending levels. Again these double-digit cuts are not just below proposed increases in the Administration?s budget for FY2000. Cuts of this magnitude would make it impossible for us to protect our borders, keep our citizens safe or conduct foreign policy at a crucial time in a dangerous world.
Consider for a moment the effect of these across-the-board cuts on certain programs like the National Institutes of Health or Veterans Affairs. If the cuts required by the allocation were applied, it would reduce the NIH budget by $1.1 billion. And the 16% across-the-board cut to the Veterans Affairs/HUD appropriations bill would seriously hinder the delivery of vital medical care to hundreds of thousands of our Nation's veterans. Surely, you are thinking, "that's politically preposterous. Congress would never do such a thing." If these programs are protected, Appropriators would be called on to make even deeper cuts in other programs leaving the CDC and other health programs, job training, or housing for the needy even more vulnerable that they already are.
A few select bills are headed for quick action. It appears that the leadership plans to proceed with funding for the activities of Congress, defense and military construction, creating untenable choices for the rest of the appropriations bills. The Appropriations Committees appear to see no immediate alternative but to allow more than half of the funding bills to languish, leaving the programs they fund in limbo, or to provide funding levels that are clearly unacceptable to the American people and quite possibly to a majority in Congress. Parents whose kids will not get Head Start, Americans abroad serving in embassies whose security will be cut, citizens who count on a fully funded FBI, will not view these as acceptable policies.
I have described cuts in the House allocations that were determined last week, but the depth of the cuts in the Senate allocation is equally troubling. These funding levels are a direct result of a budget which creates a false choice between chaos in the form of irresponsible appropriations or abandonment of fiscal discipline. These allocations will almost inevitably delay many of the appropriations bills until the very end of the fiscal year, and leave Congress with no apparent alternative but to break the budget caps and spend the surplus. This is a risky way to govern. It is dangerous and risky to abandon the discipline that brought us success just at the moment we have turned a historic corner - only to return to bad habits that were the source of our problems to begin with. To start spending the surplus, without a broader plan to address Social Security and Medicare or to promote long-term fiscal discipline, is simply a mistake.
But these draconian cuts are not necessary. There is another way to govern --- by exercising responsibility, looking to the future and making tough choices. The President?s FY 2000 budget offers tough choices that advance good policy. Congress can address Social Security and Medicare and then proceed to allocate the surplus in a systematic and prudent manner. This would put first things first -- addressing the need to save for the future and reduce our National debt. The Congress can also choose to implement the politically tough, but fiscally responsible offsets in the President's budget.
Our tobacco policy is the clearest example. It is central to our 2000 budget because we are fully committed to the view that one of our greatest public health challenges is to curb teen smoking. Three thousand young people become regular smokers every day, and 1,000 will have their lives cut short as a result. The Federal government spends $8 billion a year on Veterans, military, and Indian health programs to treat tobacco related illness.
Building on increases already legislated by Congress, we can reach our target to reduce underage smoking with a legislated increase of half the $1.10 per pack amount, effectively transferring $8 billion from tobacco revenues to programs that will save lives, reduce medical costs, and make Americans healthier. It is good public policy. It is good fiscal policy. Interests opposed to our anti-tobacco policy have blocked it at every turn. It is not a difficult choice to be in favor of reducing teen smoking; but it is, in fact, a tough decision to take on the industries that profit greatly by selling tobacco products.
Our 2000 budget also includes user fees, which place the costs of certain government services where they belong -- on private sector companies that benefit directly rather than on the taxpayer at large. For example, our 2000 budget contains harbor fees which require that shippers, rather than other taxpayers, bear the cost of maintaining harbors they use. Likewise, we believe the costs of food safety inspections should fall not to the taxpayer but to the company whose products go to market certified to be safe. Again these are examples of policies that benefit the American people but require courage for Congress to make tough choices.
There are many other examples. We propose reducing unwarranted taxpayer funded subsidies of student loan guaranty institutions. Congress has allowed these agencies to receive large fees, even though the Federal government is the actual guarantor of those loans and no students would be adversely affected by lower subsidies.
The Administration has also advocated a new round of military base closure legislation. Our military leaders planning for post-Cold War needs would close underutilized facilities and invest in the force structure and facilities needed for the future. In the absence of Congressional approval, the Nation will waste defense dollars that could be better used.
The President's budget also includes important tax cuts which are paid for and do not violate the principle of saving Social Security first. These tax cuts are targeted to help families with long-term care needs and child care challenges. They will help our communities by investing in public schools, environmental cleanup, and by opening new markets. They will help smooth the transition from welfare to work.
These tax cuts are fully paid for through important savings in obsolete or inefficient tax benefits enjoyed by businesses. These include 16 separate proposals aimed at corporate tax shelters, and many others relating to methods of business accounting that overstate expenses or understate receipts in an attempt to reduce taxes due.
But all of these policies - tobacco, user fees, student loans, base closings, and paid for tax cuts - require the courage to make tough choices.
In the next several weeks and months, we will face numerous decisions about our fiscal future which will shape both the years and the decades to come. With regard to our most immediate choices, will we as a Nation accept policies that decimate the basic functions of government and deny us the ability to invest in new initiatives for the future? Or should we instead enact policies that advance public health and put the costs of private sector services where they belong, even if they are politically tough choices to make. Are we as a Nation better off with a massive permanent tax cut, even though the surplus that provides the funds has no guarantee? Are we better off adhering to the successful policy of fiscal discipline or turning our back on policies that are producing outstanding economic results?
In my view, it comes down to a choice between gambling with our future or planning prudently for our prosperity. And for the sake of our children, and for our children's children, I would argue that there really isn't any choice at all.
The Congressional budget does nothing to extend trust fund solvency for either Social Security or Medicare. At the same time, it calls for immediately using the entire non-Social Security surplus for a tax cut - without committing to address either Social Security or Medicare solvency first.
Add to this the unrealistic and unachievable discretionary spending levels for 2000 and beyond, and the Congressional budget charts a path to the failed policies of the past.
The President's budget offers a choice which only looks better as the alternative becomes clear. I hope the Congress will join us in working together to address these important policy concerns, and as the President has said many times, "fix the roof while the sun is still shining." Together we must seize this historic opportunity.