Mr. MCNAMAR. No, that is not the answer. We do not think that, given the proposals that we have made in the past to reduce spending that have been rejected by the Congress, that it would be realistic for us to propose a budget that was balanced, because it would require us to put in the budget a number of reductions in spending programs that would immediately be derided by the Congress as being an unrealistic request. And that would be politically naive on our part and would mislead the American people. Mr. DORGAN. In closing, let me say that I do not think that the party that I come from is absolved from responsibility for the Federal deficit at all, but I do believe this, that the highest deficit in the history of America was 1976, around $56 billion. Then we adopted a supply-side program that talks about continual cuts in revenues, that does not deal with the spending side the way it should, and we are seeing a runaway Federal deficit. Somebody has got to do something about it, and you are saying, no, you will not support increases on the revenue side, you will only support cuts on the spending side. But the fact is one of the major components of spending is going to continue to increase. That is defense. I am very concerned about increasing the debt limit to this magnitude without some admission that we need to change the fiscal program in this country. Our deficit is out of control and somebody has to do something about it. Mr. GRADISON. Would the gentleman yield? Mr. DORGAN. I would be happy to yield. Mr. GRADISON. I just want to point out that the administration has proposed a major increase in taxes on a standby basis if the deficit is not reduced in the outyears. Now, frankly, it has not generated much enthusiasm up here, but in fairness I think it is essential to recognize that it was a part of the President's budget program for the current year and the outyears. I thank the gentleman for yielding. Mr. DORGAN. That is an important point and I recognize that. Once again, it is a remedy in the future, as opposed to a remedy for today. Today's estimated Federal deficit is going to be $212 billion. I am saying the Federal deficit under supply-side economics is out of control and we have to do something about it. The administration does not seem to want to do anything about it. That is all I am saying. I am a junior member in this Congress. One of the first votes I made was on increasing the debt limit. I did it because it had to be done. But I am just saying that to be asked to continue to increase the debt limit, especially of this magnitude, without some admission on the part of the administration that we need to deal with the revenue side of the budget, gives me great concern at this point, and I think you ought to rethink your position about restoring part of that revenue base. It was washed away in a completely unjustified manner. You cannot balance a budget by saying it is good policy to wash away the revenue side and make everybody happy, while we want to increase defense and increase other spending items at the same time. You have runaway Federal deficits. I will tell you something: Anyone who says that $212 billion does not crowd out and therefore increase interest rates does not know what they are talking about. We are going to have increased pressure on interest rates, and that will abort this recovery just as sure as I am sitting here, unless someone starts doing something about it. I appreciate it, Mr. Chairman. Chairman ROSTENKOWSKI. Mr. Secretary, assuming that this committee might have difficulty in passing the $98 billion request of the administration which would carry the Government through September, what increase in the debt limit would you need through July 1, and then through August 1? Mr. MCNAMAR. Mr. Chairman, if we were to ignore the constant $20 billion cash balance, and the $5 billion for contingencies, to get through to the end of June, June 30, it would take $1,318.5 billion; and to get through July 29 would take $1,325.9 billion. Chairman ROSTENKOWSKI. What figure would be necessary through the end of September? Mr. MCNAMAR. The end of September, September 30, would be $1,388.2 billion, which we think is the appropriate number▬▬ Chairman ROSTENKOWSKI. That is your request. What about through August 31? Mr. MCNAMAR. August 31 would be $1,354.2 billion. So you can see that in terms of the order of magnitude here, it makes the most sense in terms of passing a straightforward clean bill that would take us through the end of the year, that would tie to the end of the fiscal year for the $1,388.2 billion. That would permit us to proceed with the regular financings through the summer in the most cost efficient manner. Chairman ROSTENKOWSKI. Mr. Secretary, do all those numbers assume a $20 billion cash contingency? Mr. MCNAMAR. That was the actual. Then you have to adjust that for the constant $20 billion cash balance and the $5 billion for contingencies. In other words, I can give you a table that has those numbers laid out, the $20 billion balance and then the $5 billion contingency. Chairman ROSTENKOWSKI. There is some concern in the committee as to whether or not the House of Representatives will approve the long-term increase requested by the administration. What we would like to do is be in a position of offering some compromises with respect to the length of time for the debt ceiling extension. Are there further questions for the Secretary? Mrs. Kennelly will inquire. Mrs. KENNELLY. Thank you, Mr. Chairman. To continue along that line, you requested $20 billion for operating cash and $5 billion for the contingency allowance. Historically, have you had these funds available? Mr. MCNAMAR. Yes. Typically, we have ended the fiscal years with about a $20 billion cash balance. I reviewed that last night and it has bounced around. I think the highest I found over the last 5 years was $29 billion and the lowest was about $18 billion. Typically around $19 billion to $21 billion over the last 5 years. Mrs. KENNELLY. Is it possible for you at this moment to assure me that asking for the $25 billion does not mean that our deficit will increase another $25 billion over what is estimated for 1984? Mr. MCNAMAR. No, it will not increase the deficit. It is simply the amount of money that we can finance, that is correct. Mrs. KENNELLY. Thank you, sir. Chairman ROSTENKOWSKI. Mr. Pease will inquire. Mr. PEASE. Thank you very much. Mr. Secretary, I believe in a colloquy with the gentleman from South Carolina earlier you were establishing that part of the reason for your request now for a debt limit extension is that some programs were set in motion under the previous administration that have caused expenditures or outlays in the last 2 years. How long a period is involved in that delayed reaction? In other words, how long before the actions of the last administration will no longer be creating deficit problems for you? Mr. CAMPBELL. Would the gentleman yield 1 minute? Mr. CAMPBELL. I appreciate it very much. The question I asked, not programs set in in the previous administration but the dynamics of it because of the inflation and the high interest and the automatic expenditures and the carryover. It was not an attempt to say they established so many programs in that administration. I was saying that under both administrations there were plenty of problems; that was the point that I was trying to bring out. I wanted to clarify that. Mr. PEASE. I appreciate that clarification. Mr. MCNAMAR. To reinforce that point, let me make it very clear that we are paying for spending under the Nixon and Ford administrations just as much as we are under the Carter administration. Mr. PEASE. I see. Well, then you are talking about things like inflation over 1979 and 1980, which caused some outlays, a carryover effect. Now we have a very low inflation rate. Does that mean that that will show up in a year or two in outlays and deficits? Mr. MCNAMAR. Yes, there will be some reduction in the interest costs for the Treasury's borrowing. Let me be quick to say, though, that I do not know that I would necessarily characterize today's inflation rate as low. Mr. PEASE. David Stockman told me last week that he thought that as a result of the deficits being added during the first term of the Reagan administration we would be building in $45 billion a year in extra interest costs. Do you really expect interest to go down over the next couple of years? Mr. MCNAMAR. I think that interest rates are going to continue to go down through this year and into next year. About as far as I can see ahead would maybe be the first 6 months of next year. I think they will continue to trend somewhat as they have in the past months, on a downward path with some blips up and down. The banks and savings and loans, for example, because of the money market deposit accounts and all that the DIDC has authorized, have attracted substantial numbers of new funds, and a large proportion of those have been going into the Treasury bills and that has exerted a very healthy downward trend on the market. Mr. PEASE. Do you expect the total outlays for interest to go down over the next couple of years? Mr. MCNAMAR. No. Over the next couple of years we would estimate-this year, for example, the interest on the public debt to be about $127.7 billion. We would estimate next year that it would be about $145.7 billion. So the interest expense would in fact increase next year. But that is because we are borrowing more money. It is interest on a larger amount of principal, if you will. Mr. PEASE. You have deficit projections through 1988 of $117 billion even with the standby tax increase, is that correct? Mr. MCNAMAR. Yes. Mr. PEASE. Those are rather large deficits for an administration that promised to balance the budget in 1984. At what point does the administration have to ascribe to its economic policies these large deficits? Mr. MCNAMAR. Well, the projected deficits are a result of a number of factors, not the least of which is failure to reduce Government spending. The recession that we have just gone through, which as you know is the longest and the deepest we have had since the Second World War, while it may have had some salutary effects, has been very, very costly on the American people and on the Federal budget deficit. And we in effect have to finance that as well. I think that as we continue into the future, if we are able to sustain the economic recovery that appears to be started rather firmly in the United States, appears to be started somewhat more tenuously in some other countries around the world, I think that we may be able to, if we are able to reduce Government spending, improve even a little more in those budget deficits. If we are able to reach a major breakthrough on strategic arms limitations, we can improve those numbers. There are a number of positive contingencies out there, including reducing inflation to a truly low level, say 1 or 2 percent. Mr. PEASE. Thank you very much. Thank you, Mr. Chairman. Chairman ROSTENKOWSKI. Mr. Matsui will inquire. Mr. MATSUI. Thank you, Mr. Chairman. Mr. Secretary, we are going to be marking up the debt ceiling increase bill this afternoon. How many Republicans on this panel do you think will be voting for the measure? Mr. MCNAMAR. I am sorry, I do not have the vote count for you. Chairman ROSTENKOWSKI. Would the gentleman yield? Chairman ROSTENKOWSKI. Mr. McNamar, you will be asked to help us with the vote. We want to know how the administration plans to help pass your debt ceiling increase request. Mr. MATSUI. I hope that the President works as hard on this issue as he has been on the MX missile, not only this afternoon but also on the floor of the House. Are you making that commitment to us right now? Mr. MCNAMAR. Yes; I am making that commitment. Mr. MATSUI. In other words, he will call them in and wine and dine them on this issue as well? Mr. MCNAMAR. I do not know how much wining and dining he is going to do on this issue. As you know, he is in the process right now of getting ready for the Williamsburg summit. Mr. CONABLE. Would the gentleman yield? Mr. MATSUI. I am sure that will be very productive. Mr. CONABLE. I hope, Mr. McNamar, he will not give a blank check for any type of debt ceiling increase that comes out subject to any type of possible institutional mischief. Mr. MCNAMAR. I hope I did not imply that. Mr. CONABLE. We on the Republican side reserve a degree of right to exercise our judgment about what is happening on this process. I do not wish to make any accusations until I see what happens. Mr. MCNAMAR. I think the gentleman's question was if the administration would work very hard with the Republican side of the aisle, and it was to that that I was making the commitment. Mr. MATSUI. I was not at all implying that the Republicans would act as robots in this situation; in fact, I am sure they will use their discretion. I would hope though that you could assist them in coming to their conclusions. Chairman ROSTENKOWSKI. Are there any further questions? [No response.] Chairman ROSTENKOWSKI. Thank you, Mr. Secretary. Mr. MCNAMAR. Thank you, Mr. Chairman. Chairman ROSTENKOWSKI. The Chair calls Mr. Lawrence Kudlow, Associate Director of the Office of Management and Budget. Welcome, Mr. Kudlow. The committee is ready to hear your testimony. STATEMENT OF LAWRENCE A. KUDLOW, ASSOCIATE DIRECTOR FOR ECONOMICS AND PLANNING, OFFICE OF MANAGEMENT AND BUDGET Mr. KUDLOW. Thank you. Let me apologize initially, Mr. Chairman, for the lateness of this testimony. The request came in late and the assignment for me to appear came in late, so we are running up at the last minute. I beg your pardon. We will have more copies of my testimony as soon as possible this morning. So I am sorry for being a little bit behind the eight-ball. Essentially, I want to address myself to two issues. First is the Treasury testimony on the debt limit and the long-term bonds. We of course agree with what Mr. McNamar has discussed. I would be happy to answer any additional questions on that subject if they come up. But we are in full agreement with his views. The second matter that I wanted to focus on, at the committee's request, was H.R. 2868, which deals with the disposition of the Federal Financing Bank. The bill proposes that the Federal Financing Bank outlays be placed on budget and charged off against the agencies which control and generate the programs. I want to focus on this issue. Let me try to briefly summarize my testimony. First, as we know, in recent years the U.S. Government has become one of the 21-675 0-83--4 |