Federal Budget

This statement, which was originally prepared for a hearing before the Senate Budget Committee, discusses the President's Midsession Review and the implications of the President's proposals for fiscal policy and the federal budget. After years of budgetary belt tightening and difficult policy decisions, the goal of budget balance has finally been achieved. Congress and the President now face a series of choices that will have a major impact on the nation's economic future. Despite the euphoria surrounding the projected surpluses, the reality is that the country has run up a large debt from years of deficit spending. Using a significant portion of the surplus to pay down the debt would ultimately lower interest costs and spur economic growth. The miracle of compounding means that interest payments saved today will yield huge dividends tomorrow. Few, however, expect the entire projected surplus to go to debt reduction, and choices will have to be made about shoring up entitlement programs, boosting defense spending, and providing tax cuts. At the same time, looming demographic trends demand that the surplus be put to good use. The fact remains that our society is aging. Less than 10 years from now, the baby boomers will begin drawing retirement benefits. GAO projects that even if the country were to save the entire surplus and adhere to the budget caps, the combined spending pressures of Social Security, Medicare, and Medicaid would eventually reignite the vicious circle of escalating deficits, debt, and interest costs. Debt reduction must be accompanied by entitlement reform. In his midsession budget review, the President proposes to reduce publicly held debt more than he did in his February budget. He also wants to increase spending in several areas. But the big items in the budget continue to be Social Security and Medicare. Until these two programs are fundamentally reformed, their long-term solvency and sustainability will remain in doubt. The surplus presents both an opportunity and an obligation: to reduce the debt burden, to provide a strong foundation for future economic growth, and to ensure that government's future commitments are both adequate and affordable.

GAO noted that: (1) the large on-budget surpluses are still projections; (2) even in the near term these projections are optimistic and may not be realized since they assume full compliance with existing tight caps on discretionary spending; (3) absent any changes in social security, Medicare, and Medicaid, the budget will increasingly be absorbed by payments to the retired--making it more difficult to meet other priorities; (4) bills will also come due for a variety of other commitments and contingencies, such as cleanup costs from federal operations known to result in hazardous waste, including defense facilities and weapon systems, and federal insurance programs; (5) overall, the President proposes to reduce debt held by the public by more than he did in his February budget; (6) he also proposes to spend more in several areas; (7) the big items in the budget, however, remain social security and Medicare; (8) there is still a need for fundamental reform of these programs to ensure their long-range solvency and sustainability; (9) the President has changed the form of his social security proposal; (10) instead of transferring to the Social Security Trust Fund additional Treasury securities equal to a share of the unified surplus, the President proposes to use the social security surplus to reduce debt held by the public and then to transfer to the Trust Fund securities equal to the fiscal dividend that results from lower publicly held debt; (11) the Social Security Trust Fund already earns interest on its surplus; (12) under the new proposal, it will receive, in effect, a second interest payment equal to interest savings that result from paying down publicly-held debt; (13) the policy in the Midsession Review envisions more debt reduction than that in the President's February budget; (14) under his most recent proposals, the entire social security surplus goes to debt reduction; (15) the debt reduction proposed by the President would confer significant short- and long-term benefits to the budget and the economy; (16) if all assumptions hold, interest would fall from $229 billion in 1999 to about $10 billion by 2014; (17) while the President is to be commended for the amount of debt reduction, GAO remains concerned about the consequences for trust fund financing and reform; and (18) the President's proposal to grant additional securities--to both Medicare and the interest transfer to social security--creates the risk of reducing transparency about the underlying financial condition of these trust funds.