September 04,2001

Grassley Statement on the Budget Outlook

Opening Statement of Senator Chuck Grassley
Budget Committee Hearing
September 4, 2001

Mr. Chairman, we’ve seen a lot of hand-ringing and hyperventilating over the latest
projections from the Congressional Budget Office. According to some people, we are on the verge
of a crisis because the $5.6 trillion surplus projected in May is now only $3.4 trillion. But, before
we join the Chicken Little chorus and proclaim “the sky is falling,” we should take a look at what
happened to the surplus.

First, the bipartisan tax relief plan enacted this spring reduced federal revenue by $1.3
trillion. I believe this was necessary to reverse the rising tide of taxes; to respond to current
economic conditions; and to avoid excessive federal spending. Over the past two years, federal taxes
have risen to the highest level since World War II [20 percent of GDP]. Individual income taxes have
risen to the highest level ever recorded. [10 percent of GDP]. Without tax relief, federal taxes would
continue to rise due to the progressive nature of the tax code. Despite tax relief, federal taxes will
remain well above the average level we’ve seen since World War II.

Critics have denounced the bipartisan tax relief plan as reckless and irresponsible. But, I
would remind my colleagues on the other side of the aisle that 48 out of 49 Democratic senators
voted for the Daschle/Carnahan amendment that would have provided $1.2 trillion in tax relief. It
seems those who voted for the Democratic alternative have developed amnesia. Or, perhaps they
never really supported tax relief in the first place.

The second reason the surplus is smaller than projected is the economic slowdown that began
last year. According to CBO, our economy will grow only 1.7 percent this year. Slower growth, and
other technical revisions, have reduced the surplus by nearly $500 billion. If we had not already
passed a tax relief plan, we would certainly want to pass one now to stimulate the economy. If the
economy continues to slow, we’ll not only be glad we cut taxes, we might even wish we had done
more. But, one thing is certain, no one can seriously believe we should be raising taxes, or repealing
the tax cut, given the current state of our economy.

The bipartisan tax relief plan will not only stimulate the economy in the near-term by putting
more money in the pockets of consumers, but it will improve the economy in the long-term by
reducing marginal tax rates, thereby improving the incentive to work, save and invest.

The final reason the surplus has declined is interest on the national debt. Before the bipartisan
tax relief plan was enacted, CBO assumed all of the surplus would be used to reduce the national
debt. Now that the tax plan has been enacted, CBO assumes there will be less debt reduction and
thus $400 billion in additional interest payments.

However, bigger surpluses do not automatically translate into more debt reduction. Back in
1997, Congress agreed to strict limits on discretionary spending in an effort to balance the budget
by 2002. When favorable economic conditions balanced the budget five years ahead of schedule,
spending discipline broke down. Congress exceeded the discretionary spending limits every year,
adding more than $1.7 trillion to projected discretionary spending over the next ten years. It seems
pretty clear to me that bigger surpluses lead to higher spending.

Senator Conrad claims federal spending as a percentage of GDP is now at the lowest level
since 1966, but I would point out that – excluding defense – all other federal spending has increased
by 50 percent. That’s hardly a record of frugality.

Finally, I would like to remind my colleagues that no one is “raiding” the trust funds. When
Social Security and Medicare collect more than they spend, the surplus is credited to the trust funds
in the form of government bonds. These bonds can only be redeemed to pay for Social Security and
Medicare. The balance in the trust funds will be exactly the same – with or without the tax cut.

Many people claim that using the Social Security and Medicare surplus to pay down the
national debt will reduce government interest payments and alleviate the Social Security and
Medicare shortfall. But these interest savings will cover less than 5 percent of the long-term deficit
in Social Security and Medicare. If the government borrowed from the public to cover the rest, it
would take only 10 years to run the debt back up again to its current level. Debt reduction will not
save Social Security and Medicare. We need real reform.

Once we get done with all the hand-ringing and hyperventilating, I’m hopeful we can all sit
down and work together to develop a plan that will truly address the long-term problems facing
Social Security and Medicare. Until then, we all need to calm down and recognize the “sky is not