Mr. Chairman and members of the Committee, thank you for the opportunity to testify on the President’s Fiscal Year 2005 Budget and the budget outlook. My testimony makes several key points:
- o Using conventional economic tools and conservative assumptions that have previously been adopted by the Bush Administration’s Council of Economic Advisers, the deterioration in the official CBO projections since January 2001 will, by 2012, raise interest rates by 125 basis points, reduce annual national income by more than $300 billion, and increase U.S. indebtedness to foreign investors. The adverse effects would persist and grow over time.
o The conventional analysis may well understate the costs from large, sustained budget deficits such as the ones we now face in the United States. As Robert Rubin, Allen Sinai, and I recently concluded, “The scale of the nation’s projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur.”
- o Among other factors, under the Administration’s policies, more than 33 million taxpayers would be on the Alternative Minimum Tax (AMT) by 2010 – and 34 percent of the 2001 tax cuts would be erased by the AMT. For households with incomes between $100,000 and $200,000, the AMT would take back almost two-thirds of the 2001 tax cuts by 2010.
o The Administration’s budget does not fully finance the Future Year Defense Plan and other likely defense costs.
o Because it leaves out many likely costs, the Administration’s claim to cut the budget deficit in half over the next five years is not credible.
Even if the Administration’s claim for the unified budget were credible, furthermore, the deficit outside Social Security under the Administration’s own projections would remain 3.4 percent of GDP in 2009. And after 2009, according to the Administration’s own projections of its extended policies, the budget would deteriorate rapidly.
- o Making the 2001 and 2003 tax cuts permanent would increase the deficit by $1.7 trillion over the next decade. The Administration’s budget shows a lower cost, but that is mostly because it assumes that the AMT “takes back” a growing part of the 2001 and 2003 tax cuts over time.
o The total budget cost (with interest) from extending the 2001 and 2003 tax cuts, along with other expiring provisions such as the R&E credit, exceeds $2 trillion. If these tax provisions are worth extending, they should be paid for.
o Over the next 75 years, the tax cuts would cost more than three times the actuarial deficit in Social Security.
- o First, it would fail to foster the atmosphere of fiscal discipline that can come only from restraining both sides of the budget.
o Second, it would create strong incentives for accelerating the trend of disguising spending changes as revenue provisions, thereby creating “tax entitlements.”
The Congress should restore pay-as-you-go rules to both mandatory spending and revenue changes, and should adopt more protections against gaming the rules with sunsets. It should also impose discretionary spending caps, although care must be taken to choose an appropriate level of spending allowed under such caps.