ORAL TESTIMONY OF

FRANKLIN D. RAINES

DIRECTOR

OFFICE OF MANAGEMENT AND BUDGET

BEFORE THE

COMMITTEE ON THE BUDGET,

UNITED STATES SENATE

February 4, 1998

Mr. Chairman, Members of the Committee, thank you for inviting me here today to discuss the President's proposed $1.7 trillion budget for fiscal 1999, the first balanced budget in 30 years.

I have a longer written statement that I would like to submit for the record. At this time, I would like to make brief oral remarks, and then I would be delighted to answer any questions that you have.

Mr. Chairman, the "Era of Big Government" Is, Indeed, Over.

Working with Congress, this Administration has made remarkable progress. We have brought the deficit down from a record $290 billion in 1992 to just $22 billion in 1997. This budget would finish the job by reaching balance in 1999 -- three years ahead of schedule -- and generate balanced budgets far into the future. In fact, although we project a deficit of $10 billion in 1998, if we maintain the fiscal discipline we have exercised for the last five years, we may very well reach balance this year.

As I would like to show you, by virtually any measure that you choose, the "era of big government" is truly over:

As you see on the chart, we will save a total of $4 trillion by 2003 -- through a combination of the previous deficit-reduction steps that we've taken and the President's 1999 budget.

Just through 1999, as the next chart shows, our cumulative savings will total $1.6 trillion.

The Administration has cut the civilian Federal workforce by over 316,000 employees, giving us the smallest workforce in 35 years and, as a share of total civilian employment, the smallest since 1931. In this budget, the size of the workforce declines by 13,000 employees.

The President's budget would not only reach balance, it would reach balance the right way. It proposes spending that equals 20 percent of the Gross Domestic Product, or GDP, the smallest budget as a share of GDP in 25 years.

As the next chart shows, discretionary spending as a percentage of GDP is at a historically low level.

As the next chart shows, non-defense discretionary spending as a percentage of GDP also is at a historically low level.

We have reached balance by both cutting outlays and increasing revenues. Revenues have increased through strong economic growth and changes in the tax law in 1993. Revenue has increased even though the 1993 and 1997 budget legislation cut taxes for millions of Americans.

As the next chart shows, the total deficit reduction that we have accomplished since 1993 has come 52 percent from spending, and 48 percent from revenues.

This budget continues the President's record of proposing budgets each year that are smaller, as a share of GDP, than any budget enacted during the previous two Administrations.

Now, in reaching balance, let me tell you what we did not do. We did not balance the budget on the backs of middle-income families.

As the next chart shows:

-- the income tax burden on a median-income family of four has fallen significantly since 1984, the year when the Reagan tax cuts became fully effective, from an effective tax rate of 10.3 percent to 7.5 percent, and

-- the combined Federal income and payroll tax burden on individuals also has fallen, from 17.0 percent to 15.1 percent. For families of four at one-half of median income, the 1984 income tax rate of 6.5 percent has been totally eliminated.

Balancing the Budget is Enormously Important.

As we have said, total deficits through 2003 will be lower by about $4 trillion -- that is, $4 trillion of debt that we will not incur; $4 trillion of debt that we will not leave to our children and grandchildren.

In fact, as the next chart shows, because we have reduced the deficit so dramatically over the last five years, we have added comparatively little to the total national debt -- compared to at least the last two Administrations.

In 1999, for the fifth straight year, we will reduce the ratio of debt held by the public to GDP, a ratio that almost doubled between 1981 and 1993. This lower ratio means lower Federal net interest costs in the future which, in turn, will mean that more of our Federal dollars can go to productive investments, rather than to financing the debt that earlier Administrations had incurred.

As the next chart shows, we now expect that debt held by the public, which was projected to reach 75 percent of GDP in 2003, will fall to just 35 percent.

Of course, the ultimate test of whether government is growing or shrinking is to look where the growth is in the economy.

As the next chart shows, the private sector has grown faster, and the public sector has shrunk much more, under this Administration than under the previous two.

The Budget Continues the President's Record of Investing in the Future.

From the start, the President recognized that deficit reduction alone would not suffice. He understood that we also needed to invest in the American people and to open foreign markets to trade.

Thus, the President's budget continues his efforts to help working families with their basic needs -- raising their children, sending them to college, and paying for health care. The budget invests in education and training, the environment, science and technology, law enforcement, and other priorities to raise the standard of living and the quality of life of average Americans, both now and in the future.

Families and children: For five years, the President has sought to help working families balance the demands of work and family, and he now proposes a major effort to make child care more affordable, accessible, and safe. His Child Care Initiative provides tax breaks to help families pay for care; tax incentives to help businesses create or expand child care facilities; direct subsidies for over two million poor or near-poor children; increased funding for before- and after-school programs; and funds to help States enforce safety and quality, to train child care staff, to promote early childhood development, and to improve the health of young children in child care. Also, the President proposes tax incentives to encourage small businesses to create pension plans for more workers.

Health care: The President has worked hard to expand health care coverage and improve the Nation's health. The budget gives new insurance options to hundreds of thousands of Americans aged 55 to 65 and proposes new initiatives to ensure that as many uninsured children as possible are covered. In addition, it provides for unprecedented investments in biomedical research at the National Institutes of Health; advocates bipartisan national legislation that would reduce tobacco use among the young; expands access to new AIDS therapies through the Ryan White program; enables more Medicare recipients to receive promising cancer treatments by participating more easily in "clinical trials"; expands substance abuse prevention and treatment activities; and enhances food safety. The budget also funds full participation in the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), which will provide benefits to 7.5 million people by the end of 1999.

Education and training: The President has worked to enhance access to, and the quality of, education and training, and the budget takes the next step -- helping States and school districts to reduce class size by recruiting and preparing thousands more teachers and building thousands more classrooms, and creating new Education Opportunity Zones to provide needed support for high-poverty, low-achieving urban and rural districts while holding them accountable to boost student achievement. The budget also proposes to move further toward the President's commitment to put a million disadvantaged children in Head Start by 2002; begin field testing voluntary national tests; mobilize and train reading tutors for children; help parents, teachers, and communities create more charter schools that are free of most State regulations; integrate technology into the classroom as we connect every classroom to the Internet; enable more Americans to serve their communities and earn money for college; expand college work-study to a million students; make it easier for parents and students to borrow and repay college loans; raise the maximum Pell Grant college scholarship to its highest level ever; expand assistance to workers dislocated as a result of global trade and technological change; increase G.I. bill educational benefits for veterans; and expand resources for veterans who lose their jobs.

The environment: The Administration, which helped engineer the global agreement in Kyoto to address climate change, proposes to launch the U.S. effort with tax incentives and spending that will spur energy efficiency and help develop low-carbon emission energy sources. The proposal includes incentives for buying new, highly fuel-efficient cars; for investing in energy-saving equipment for commercial and residential buildings; for commuting by public transit or vanpool; and for developing innovative energy generation techniques, such as biomass, wind, and photovoltaics. The budget also would restore and rehabilitate national parks, forests, and public lands and facilities; expand efforts to restore and protect the water quality of rivers and lakes; continue efforts to double the pace of Superfund clean-ups; extend the "Brownfields" initiative to promote local cleanup and redevelopment; better protect endangered species; continue to restore Florida's Everglades and California's Bay-Delta and protect Yellowstone National Park and California's Headwaters Forest; improve the roads through national parks; and expand the public's access to information about environmental conditions in their neighborhoods.

Research: The President has sought to tap the full potential of our boundless future by investing heavily in basic and applied research. Along with increasing funds for biomedical research at the National Institutes of Health, the budget would promote science and engineering research at the National Science Foundation; support space-related activities that enhance our knowledge of Earth; invest in Federal-private ventures to more quickly develop cutting-edge technologies that create jobs; strengthen university-based research; invest in environmental research on safe food and clean air and water; expand support for energy efficiency and renewable energy programs; enable Americans to travel more safely, more quickly, and more efficiently; and put commercial industry's technical know-how and economies of scale to work for national defense.

The Budget Creates Three New Funds for America.

Challenging times demand innovative solutions, and this budget meets the challenge by proposing three new investment funds for America -- for research, the environment, and transportation -- that will focus attention on these critical priorities. Together, the funds provide $75.5 billion, a $4.7 billion increase over the 1998 level for the programs they contain. Because the funds rely on budget offsets to help finance the spending, they, in effect, apply pay-as-you-go principles to discretionary spending.

The funds are:

The Research Fund for America, which includes a broad range of investments in knowledge, including programs of the National Institutes of Health, the Centers for Disease Control and Prevention, the National Science Foundation, the National Aeronautics and Space Administration, the Energy Department, the Commerce Department's National Institute of Standards and Technology, Agriculture Department research programs, the multi-agency Climate Change Technology Initiative, and other programs. The budget finances this Fund, in part, through receipts from tobacco legislation and savings in mandatory programs.

The Environmental Resources Fund for America, which encompasses the multi-agency Clean Water Initiative; the new Land, Water, and Facility Restoration Initiative of the Interior and Agriculture Departments; the Agriculture Department's water and wastewater program for rural communities; and the Environmental Protection Agency's programs for cleaning up hazardous waste sites (within the Superfund) and upgrading clean water and safe drinking water infrastructure. The budget finances the Fund, in part, through an extension of Federal taxes that support the Superfund.

The Transportation Fund for America, which includes the Transportation Department's highway, highway safety, and transit programs; the Flight 2000 free flight demonstration program; and the Federal Aviation Administration's programs, including Airport Grants. The budget finances the Fund, in part, through a new Federal aviation user fee.

All of our Investments are Fully Paid For.

The President's budget continues the fiscal discipline that we have exercised for the last five years by fully paying for all of our investments. For every additional dollar that the President proposes to invest in health care, in education and training, and in other priorities, he proposes to offset the cost.

In that way, the President's budget is consistent with the Budget Enforcement Act, with its pay-as-you-go rules for mandatory spending and tax cuts and its yearly "caps" on discretionary spending. It is also consistent with last year's Balanced Budget Act. In fact, the budget deviates from the BBA in only one respect -- it reaches balance three years ahead of schedule, in 1999.

On behalf of the President, I would ask that as we move ahead, let us continue to abide by the discipline that has proven so successful. Let us agree that we will not pursue tax cuts or new spending unless the proposals meet a simple test -- they do not add a dime to the deficit or subtract a dime from the surplus.

And speaking of the surplus...

The President Believes that We Should "Save Social Security First."

As you know, Mr. Chairman, prospects for a budget surplus are spurring a wide array of ideas about how to use it. At this point, the Government has not yet reached the surplus milestone, and the President believes strongly that "we should not spend a surplus that we don't yet have."

More specifically, he believes the Administration and Congress should not spend a budget surplus for any purpose until we have a solution to the long-term financing challenge facing Social Security. With that in mind, the budget proposes a reserve for the projected surpluses for the years 1999 and beyond.

A Balanced Budget and a Strong Economy Go Hand-in-Hand.

When the President announced his 1993 economic plan, long-term interest rates fell. After Congress enacted the plan, rates remained low. Those lower rates spurred a chain reaction of lower financing costs, more business and personal investment, more rapid productivity growth, and new job creation.

That cycle has sustained itself over time. Interest rates have fallen further and investment has continued to grow at unprecedented rates.

As the next chart shows, in inflation-adjusted terms, business equipment investment has grown at over 11 percent a year under this Administration -- almost three times faster than under President Reagan, and six times faster than under President Bush.

With this boom in investment serving as its foundation, the economy has created over 14 million new jobs in the last five years, 93 percent of them in the private sector. The economy as a whole has grown at a 3.0 percent annual rate, while the private sector of the economy has grown at an even faster 3.7 percent a year -- far faster than the growth under the two preceding Administrations. The Federal Government's share of the economy has actually shrunk by 2.6 percent a year.

As the next chart shows, the current economic expansion is the third longest in our history and the second longest in our peacetime history.

At the end of this year, the Administration, and the overwhelming majority of economic forecasters, expect the expansion to become the second longest, behind only the war-related growth of the 1960s.

Unlike earlier expansions, the current expansion is not fueled by deficit spending. Quite the contrary, the economy has been expanding at the same time that the deficit has been shrinking as a percentage of GDP.

In this way, as the next chart shows, the current expansion is unique among the four longest post-war expansions.

The unemployment rate in November hit 4.6 percent -- the lowest figure since 1973. Core consumer price inflation in 1997 was at its lowest level since the mid-1960s.

And, as the next chart shows, the "misery index" -- the combined rates of inflation and unemployment -- is at its lowest level in 30 years.

Clearly, our efforts to reduce the deficit and, by 1999, balance the budget have served us well. The President believes strongly that we should continue to exercise budget discipline as we move ahead.

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