Testimony of Jacob Lew

TESTIMONY OF
JACOB J. LEW
DIRECTOR
OFFICE OF MANAGEMENT AND BUDGET
BEFORE THE
HOUSE COMMITTEE ON THE BUDGET

FEBRUARY 3, 1999

One year ago, President Clinton set the course of the Nation's budget policy with his charge to "Save Social Security First." The President recognized that we were entering a new era as we left behind the decades of large budget deficits. He was building the foundation for budgeting in this new era of surpluses.

Fiscal progress has produced a strong economy

The year 1998 was one of the most extraordinary in modern U.S. economic history. We enjoyed the first budget surplus in 29 years -- the largest ever in dollar terms, the largest as a percentage of the economy in more than 40 years. And this budget surplus was not the result of a temporary wartime policy, as was the last surplus in 1969. We will have a budget surplus again in the ongoing fiscal year -- at an estimated $79 billion, larger than last year's -- which will mark the first back-to-back surpluses in more than 40 years. The budget I present to you today proposes a third consecutive surplus -- the first time that will have happened in half a century. And our 1998 budget surplus was the sixth consecutive year of improvement in the U.S. fiscal position -- the first time that has happened in American history.

The private sector is the key to economic progress, but we have clearly seen in the decade immediately past that the Federal Government can either hinder or promote economic progress. If the Federal budget deficit is high, so that the cost of capital is driven up and the financial future is uncertain, the private sector cannot yield the progress of which it is otherwise capable. But if, instead, the Federal Government declares its intentions of responsible fiscal behavior, and lives by those intentions -- and if the Federal Government supplies the public investments that America needs -- then the economy is free to prosper. This is the path that this Administration has taken.

In 1998, we reaped the fruits of five years of fiscal responsibility. After the best sustained growth of business investment since the 1960s, the U.S. economy fueled that decades-absent budget surplus. And the economy itself defied the pundits, staying on a pace of solid, above-trend expansion, in the face of an international financial disruption that broke the stride of most other economies around the world. Unemployment and inflation both hit three-decade lows, with the lowest unemployment rates for African Americans and Hispanics in the history of those statistics; real wages continued to grow after more than a decade of stagnation, and a record percentage of adult Americans worked in those higher-paying jobs; the percentage of Americans on welfare fell to a 30-year low; the 10-year Treasury bond rate reached its lowest level in 30 years; and a higher percentage of Americans attained home ownership than at any time in our history.

The President deserves a great deal of credit for the virtuous economic cycle that we now enjoy. The announcement of a firm intention of fiscal responsibility in 1993 was greeted by a continued reduction of interest rates, which helped to trigger the investment boom that has proved central to sustained strong, non-inflationary economic growth. The two other pillars of the President's policy -- investing in our people and our technology, and opening foreign markets to U.S. exports -- complete this winning economic strategy.

The 2000 Budget is a defining moment

This extraordinary budget-and-economic performance -- with the budget setting historical standards and the resilience of the economy setting global standards -- tells us something. It tells us that we have developed a winning economic policy and that we must not turn back. We must not discard the economic philosophy that got us here, to this confluence of economic indicators that all sides now agree is the best in modern memory.

So in one sense, our budget policy now clearly should be built on continuity. We have achieved a sustained fiscal improvement, and we should continue to sustain that improvement. We have an economy that achieved a record sustained peacetime expansion, and we should continue to sustain that expansion.

But in another sense, we have stepped into a new world. Where our budget used to be written in red -- for so many years that people came to take it for granted -- now we are in the black. And this change has tempted some to throw away all of the policy principles that got us here.

For two decades now, there has been much discussion about fiscal discipline, restraint, and deficit reduction. Since 1993, we have taken action; and far beyond the expectations of even the most optimistic, we now have budget surpluses as far as the eye can see. But now, as the first surpluses appear, it is important that we not revert to the practice of cutting taxes and raising spending first, and thinking about the fiscal consequences later.

As the President suggested in his State of the Union address two weeks ago, this is a moment that will do much to determine the character of our country at the end of the next century. We can build and strengthen the fiscal foundation that first arose in these last few years. Or we can sweep it away, before it is firm and strong, and set our economy to foundering again. The choice is clear and the President is determined to pursue a balanced program of fiscal discipline and prudent investment for the future. This budget charts that course into an era of surplus.

Fiscal policy since 1993 was pivotal to our current good fortune

To see why fiscal responsibility matters, consider where this Administration started six years ago. In 1992, the budget deficit was $290 billion, the largest in the Nation's history. Between 1980 and 1992, the debt held by the public, the sum of all past unified budget deficits, quadrupled; it doubled as a share of our Nation's production, or GDP -- from about 25 percent to about 50 percent.

These adverse trends showed every sign of accelerating. Both CBO and OMB projected that, without changes of budget policy, growing deficits would add to the Nation's debt, and growing debt service costs would add, in turn, to the Nation's deficits. OMB forecast the 1998 deficit, in the absence of policy change, at $390 billion, or 5.0 percent of GDP; by 2003, we expected the deficit to be $639 billion, or 6.6 percent of GDP. And there was nothing in the forecast to indicate that this exponential trend would stop.

This threat was not turned back by accident. It required tough policy choices, which the Administration and the Congress took in 1993 and 1997. The President's initial economic program cut spending and increased revenues in equal amounts. Since that time, deficit reduction (and ultimately surplus increase) has more than doubled the estimates for the President's plan -- instead of the projected cumulative $505 billion, deficits have fallen by $1.2 trillion. That is $1.2 trillion less in debt that the American taxpayer must service -- forever.

And this deficit reduction has come as much from lower spending as from higher revenues. Spending has declined to its smallest share of the GDP in a quarter of a century. And thanks to the strong economy, receipts have grown beyond expectations, even though the tax burden on individual families is lower than it has been for about a quarter century:

The typical family of four -- with the median family income of $54,900 -- will pay a lower share of its income in income and payroll taxes this year than at any time in 23 years. Its income tax payment considered alone will be the lowest share of income since 1966.
A family with an income at one-half of the median level, $27,450, will pay the lowest share of its income in income and payroll taxes since 1965. Its income tax bill will be negative; it will receive money back because of the earned income tax credit. That was never the case before 1998.
Even a family at twice the median income level, $109,800, will pay less in combined income and payroll taxes as a share of its income than in any year since 1977. Taken alone, its income tax as a percentage of income will be the lowest since 1973.

Receipts have risen as a percentage of GDP not because of a heavier tax burden on typical individual families, but rather because of the extraordinary growth of incomes of comparatively affluent Americans (including capital gains and stock options that are not included in measured GDP); and because of the rapid growth of corporate profits.

The historic bipartisan balanced budget agreement of 1997 has reinforced expectations of Federal fiscal responsibility. This has had a favorable effect on interest rates, and the economy at large.

In the last six years, we have enjoyed an extraordinary economic performance because our fiscal policy was responsible and sound. If we want to continue to enjoy such strong economic performance, we must continue our sound fiscal policy. As the experience of the last 20 years clearly shows, budget problems are very easy to begin, and very hard to end.

Reducing debt burden is as important to the Nation as it would be to a family. The Nation must service its debt. If we gratify ourselves today by collecting taxes insufficient to cover our spending, and accumulate debt, our children and our grandchildren will have to service that debt. If, instead, we reduce our debt, our children and our grandchildren will be freed of the obligation to tax themselves more heavily in the future just to pay the interest on the debt they inherited.

The President's proposal will fully reverse the buildup of debt of the 1980s -- and then go further. By 2014, the end of the 15-year horizon of the President's program, the combined effects of the President's commitments to Social Security and Medicare will reduce the Nation's debt burden to an estimated seven percent of GDP. This will be the lowest ratio of debt to income that the Nation has enjoyed since before it entered World War I. And as most experts would tell us, this will be one of the greatest gifts that we could ever give our children, as we exercise our fiscal stewardship of these United States.

The President's policy would devote more than three-fourths of future budget surpluses to reducing the Nation's debt through contributions to Social Security and Medicare; and would dedicate another 12 percent to household savings through Universal Savings Accounts. This is important to our economic performance for four basic reasons: First, it increases the Nation's savings rate, which is critical to productivity gains and economic growth. Second, it reduces the debt. Third, it improves the fiscal position of the country, and puts it on a stronger footing for whatever uncertainties might arise. And finally, it improves the retirement security of all Americans.

The current challenge is to use the surplus prudently

In 1993, we faced the challenge of eliminating projected budget deficits of $4.3 trillion over ten years. Today we face the enormous opportunity of projected surpluses of more than $4.8 trillion over the next 15 years. The challenge is to use this surplus prudently -- to maintain our strong economic and budgetary performance.

We must save Social Security first. A statement of good intentions is not good enough for the millions of Americans, retired and working today, who rely on Social Security for their retirement security -- and for protection for their families against disability and premature death. From the beginning, this Administration has kept its eyes on the future, and taken policies that would benefit the Nation for generations to come. It has paid off. Saving Social Security first is precisely such a future-oriented policy.

The President's FY 2000 budget -- symbolically, as well as financially, "in the black" -- continues firmly on that successful path. The budget maps a course for the Federal Government after Social Security is reformed -- and makes its own policy recommendations for the beginning of the bipartisan Social Security reform process that the President inaugurated last year. But the budget also draws a line that this Administration will not pass without Social Security reform.

Thus, the FY 2000 budget is fully paid for within the existing budget law. Just as in every previous year, the President has specified his own priority initiatives, but has paid for all of them -- line by line, dime by dime -- with savings from elsewhere in the budget.

The President's policy calls for a bipartisan Social Security reform, this year. The President has already committed 62 percent of our projected budget surpluses -- enough to extend Social Security's solvency almost an extra quarter century, to 2055. We hope that this will launch a bipartisan process to address long-term Social Security solvency. We are gratified that several leaders from the Congress have already accepted this principle and hope that both parties, the President and the Congress, can follow through on this commitment and achieve sufficient additional reforms to extend the solvency of the trust fund at least through the traditional 75-year actuarial horizon.

If we achieve that objective, the budget makes further commitments of the surplus to priority National objectives in the future. The President proposes to dedicate 15 percent of the surplus to extending the solvency of the Medicare trust fund. This is a key element of the President's program, because the financial security of Medicare will be threatened even sooner than that of Social Security. In 1997, the President and the Congress, acting together, made Medicare financially sound through 2010. The President's 2000 budget would extend that lifetime ten years further, to 2020. We see the commitment of the surplus as a vital step to facilitate an environment in which a bipartisan effort -- including the current Medicare Commission -- can go even farther; with the time horizon so short, even after the contribution of 15 percent of the surplus, we cannot delay Medicare reform. As the President stated, he wants to consider, as a part of this reform process, expanding Medicare coverage to include prescription drugs.

The President also proposes using 12 percent of the surplus to finance his new Universal Savings Accounts -- "USAs." This proposal includes seed money for Federal contributions, plus additional funds for matching contributions if individual workers contribute their own money. The matching contributions will provide a larger percentage inducement for low-wage workers. The goal is for all Americans to see the rewards of saving building up in these USAs -- and with this introduction to the power of compound interest, to begin to save further on their own. The President believes that this program, with its Government seed contribution, has the potential to reach even those who have failed to respond to the generous subsidies in the current-law Individual Retirement Accounts (IRAs).

The President wants a fiscally responsible tax cut. He believes that the USA is the right kind of tax cut -- targeted toward the future, and helping the many American families who have the most difficulty saving for their retirement. It strengthens perhaps the most neglected of the figurative three legs of the retirement stool -- personal saving, to stand alongside Social Security and employer pension plans -- and for the many who have no employer plan, this initiative may be crucial. Most importantly, it is part of a plan that fixes Social Security first.

Finally, the budget proposes that the remaining 11 percent of the surplus be dedicated to other important priorities -- including education, National security, and health care. In last October's negotiations on the Omnibus appropriations for fiscal year 1999, Congressional leaders argued that our National defense needs had outgrown the existing discretionary spending caps -- and, indeed, defense received the largest share of the additional emergency funds made available in that legislation. Likewise, the American people have recognized that the quality of their children's education will determine how they progress in life -- and also the strength of the future economy. The President's budget is a sound, disciplined way to provide the additional resources for these priorities that both sides recognize will be needed if our country is to survive and prosper in the next century.

The President's framework for Social Security reform and long-term fiscal discipline works

The President's contribution of the surplus to Social Security will use many of the existing financial management tools of the Federal Government. It will be in addition to the accumulation in the Social Security trust fund that would occur with no change in the current law.

After the trust fund is credited for all of its own receipts, exactly as in current law, the Treasury will be left with the unified budget surplus. Each dollar of that unified surplus can be used only once -- for cutting taxes, increasing spending, or buying down the debt. The President has brought the debate right to the point: What should we do with that surplus? Or to put it another way: If we were to look back fifteen years from now, or at the end of the next century -- what would we want to be able to say that we had accomplished with this opportunity? The President wants to leave a legacy of building for the future: saving Social Security and Medicare; encouraging Americans to save for their own futures, build wealth, and prepare for retirement; investing in education; ensuring our National security; and making other key investments.

So the President started by committing 62 percent of the surplus to save Social Security first. Most of the share committed by the President to Social Security will be used to buy down the publicly held Federal debt through the periodic debt refundings of the Treasury Department, in exactly the same way as debt was retired last year. That same amount will be credited to the Social Security Trust Fund, in the form of Treasury securities. This same procedure will be followed for the President's contribution to the Medicare trust fund.

This commitment will significantly extend Social Security solvency. At the end of 1999, the currently estimated combined balances of the OASDI trust funds is about $850 billion. Through 2014, we estimate that additional contributions to the trust funds under the current law, including interest, will total about $2.7 trillion, leaving a total balance of about $3.5 trillion. The President's program would contribute an additional $2.8 trillion to the trust funds over the next 15 years. Taking into account additional interest earnings, that would leave a balance in the trust funds of more than $7 trillion -- instead of the approximately $3.5 trillion under the current law. The President's program will more than double the balances in the trust funds over the next 15 years -- without accounting for higher earnings on the portion of the surplus invested in corporate equities.

Because the President's plan will reduce the public debt, the total obligations of the Federal Government will not increase. We are already committed to paying benefits beyond 2032, when the trust fund is now expected to be exhausted. The President's proposal would deposit assets in the Social Security trust fund to pay these obligations, and reduce by an equal amount the debt borrowed from the public. Interest payments will go to the trust fund, to cover future Social Security benefits, rather than to banks, individuals and other investors in Government bonds.

A small portion of the President's commitment to Social Security (21 percent of the commitment) will take the form of holdings of corporate stock. Because the Social Security trust fund will need that amount of the cash surplus to purchase the shares, this contribution will not reduce the public debt. However, it will improve the Federal Government's implicit balance sheet -- to the same degree, but in a different way. While the reduction of debt will reduce the Federal Government's liabilities, the corporate shares will increase the Federal Government's assets. The salutary effect on the Government's balance sheet will be the same, but it will appear on the other side of the balance sheet.

Thus, the President's policy in no way increases the total obligations of the Federal Government. In fact, by retiring part of the public debt, it strengthens our economy in exactly the same way that reducing the budget deficit, and avoiding the accumulation of debt, has helped the economy over the last six years. The President's program does shift the Federal Government's commitments to Social Security, however, and in that way improves Social Security's solvency for the next century. This will give Social Security a first call on the economic benefits associated with long-term reductions in publicly held debt.

The President believes that budgeting in an era of surpluses requires a focus firmly on the future. We must put money aside against our current obligations before we incur any new obligations. The President's program does that, by retiring debt and accumulating assets against the Social Security commitments that we already have.

We must balance fiscal discipline with prudent investments for the future

In addressing these priorities, the FY 2000 budget builds upon the investments in our people and our technology that were set in motion by past budgets.

Last year's budget implemented the Balanced Budget Act of 1997, maintained fiscal discipline -- reserving the surplus until we save Social Security first -- and provided a strategy of targeted investments to help sustain economic growth. For example, last year's budget provided resources for:

The first year's investment to reduce class size by hiring 100,000 new teachers. Smaller classes ensure that students receive more individual attention, a solid foundation in the basics, and greater discipline in the classroom. In this year's budget, the President proposes investments in this area, ultimately to reduce class size in the early grades to a national average of 18.
Investments to protect our economic interests at home by responding to international economies in turmoil. The disruption in financial markets last year lead to economic dislocation in Asia, Latin America and the Soviet Union. This, in turn, hurt American exporters, farmers and ranchers, who found that markets overseas were beginning to dry up. With President Clinton's leadership, Congress approved nearly $18 billion for the International Monetary Fund, a stabilizing force in the world economy.
A guaranteed, record-level investment for the next five years in the Transportation Equity Act for the 21st Century to continue rebuilding America's highways and transit systems, which are essential to continue the growth of modern commerce. This legislation also funds programs for highway safety, transit and other surface transportation, while safeguarding air quality, and helping former welfare recipients get to their jobs.

Over the past six years, the President also worked with the Congress to establish and build upon significant investments in education and training, the environment, law enforcement and other priorities to help raise the standard of living and quality of life for average Americans both now and in the future. For example, the President's commitment to fund key domestic investments has:

Advanced cutting-edge research, putting the National Institutes of Health on a path to doubled funding for research including intensified work on diabetes, cancer, genetic medicine, and the development of an AIDS vaccine.
Established the children's health care initiative, the largest investment in health care for kids since Medicaid was created. Last year, 47 states began programs designed to provide meaningful benefits to as many as five million uninsured children.
Increased Head Start's ability to provide greater opportunities for disadvantaged children to participate in a program which prepares them for grade school. Last year, a boost in Head Start funding put 835,000 children into the program, making further progress toward the President's goal of putting a million children in Head Start by 2002.
Invested in public schools to help States and communities raise academic standards, strengthen accountability, connect classrooms and schools to the information superhighway, and promote public school choice by opening 900 charter schools.
Protected and restored some of the Nation's most treasured lands, such as Yellowstone National Park, and the Everglades; provided the funds to conserve others; and accelerated toxic waste clean-ups.
Built the COPS program to support community policing. This year COPS will reach the goal of putting 100,000 more police on the streets of America's communities. COPS has helped reduce violent crime for six straight years. The 21st Century Policing Initiative proposed in this budget will expand on the number of police and provide other law enforcement tools to the community.

This year's budget builds on the President's efforts to invest in the skills of the American people. It continues his policy of helping working families with their basic needs -- raising their children, sending them to college, and expanding access to health care. It also invests in education and training, the environment, science and technology, law enforcement and other priorities, to help raise the standard of living and quality of life of Americans.

Families and Children: For six years, the President has sought to help working families balance the demands of work and family. In this year's budget he proposes a major effort to make child care more affordable, accessible and safe -- by expanding tax credits for middle-income families, and for businesses to expand their child care resources; by assisting parents who want to attend college meet their child care needs; and by increasing funds with which the Child Care and Development Block Grant can help more poor and near poor children. The budget proposes an Early Learning Fund, which would provide grants to communities for activities that improve early childhood education and the quality of childcare for those under age five.

Education: The President has worked to enhance access to, and the quality of, education and training. The budget takes the next steps by continuing to help States and school districts reduce class size by recruiting and preparing thousands more teachers and building thousands more new classrooms. The President proposes improving school accountability by funding monetary awards to the highest performing schools that serve low-income students, providing resources to States to help them identify and change the least successful schools, and ending social promotion by funding additional education hours through programs like the 21^st Century Learning Centers. The budget also proposes further increases in the maximum Pell Grant to help low-income undergraduates complete their college education, and more funding for universal reemployment services to help train or find jobs for all dislocated workers who need help.

Environment: This Administration proposes a historic interagency Lands Legacy initiative to both preserve the Nation's Great Places, and advance preservation of open spaces in every community. This initiative will help address sprawl and air and water pollution, through land acquisition, preservation efforts, environmental protection and local growth management. The Administration also proposes a new financing mechanism, Better America Bonds, to further creation of open spaces in urban and suburban areas. The Better America Bonds initiative is an example of our use of targeted, paid-for tax cuts to achieve the Nation's priority goals. In addition, the budget 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; and better protect endangered species.

Defense: The President is committed to maintaining world military leadership to provide for the safety of American citizens and the primacy of American Armed Forces. To ensure America's Armed Forces are fully prepared to meet the challenges of the next century, the President proposes a long-term, sustained increase in defense spending to enhance military readiness, improve recruitment and retention, and provide the most modern and effective weapons. In addition, these resources will reinforce the ability of the Defense Department to counter emerging threats such as terrorism, reduce threats from weapons of mass destruction, maintain the nation's nuclear deterrent, and provide humanitarian and disaster assistance.

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 it advocates bipartisan national legislation that would reduce tobacco use among the young. The President's budget proposes initiatives to help patients, families and care givers cope with the burdens of long-term care; and it helps reduce barriers to employment for individuals with disabilities. The budget also enables more Medicare recipients to receive promising cancer treatments by participating more easily in clinical trials. And it improves the fiscal soundness of Medicare and Medicaid through new management proposals, including programs to combat waste, fraud and abuse.

Embassy Security: The bombings of U.S. embassies in Kenya and Tanzania highlight the dangers faced daily by Americans who work in U.S. facilities abroad. The budget proposes an increase to the State Department's operating budget to ensure protection of embassies and other facilities, and the valuable employees who work there. The budget also includes a request for $3 billion in advance appropriations for a multi-year security construction program.

The 2000 Budget saves the surplus until we fix Social Security first

The President's FY 2000 budget is fully paid for, in compliance with the discretionary caps and the pay-as-you-go budget rules. The budget allows for appropriations for important domestic and national security priorities by limiting other discretionary spending and achieving mandatory savings. Offsets to discretionary spending include the President's tobacco policy (which would reimburse the Federal Government for tobacco-related discretionary health care costs), FAA user fees, health care savings, Superfund receipts, student loan savings and the recall of additional federal fund reserves at lending guaranty agencies, and reform of the existing harbor maintenance excise tax. With the use of these offsets, in keeping with longstanding budget practice, the 2000 budget complies with the discretionary spending caps.

The budget provides targeted tax reductions, financed by the elimination of tax loopholes, and inefficient or obsolete tax subsidies. Important tax cuts and incentives, in addition to the President's USA retirement savings program, include the tax credit for long-term care needs, the public school construction and modernization bonds, the expansion of the child and dependent care tax credit, the new Better America Bonds, extension of the R&E tax credit, the work opportunity tax credit, the welfare-to-work tax credit, and the tax incentives for reductions of carbon emissions that cause global warming. Important mandatory initiatives include child care, the Medicare buy-in, disability and cancer clinical trials programs, and extension of health-care programs to immigrants. Taking all of these policy steps together, the budget complies with the pay-as-you-go rules, and the tax cuts and mandatory initiatives are fully paid for.

We need adequate resources for a strong defense and critical domestic priorities

For future years, the budget includes the discretionary resources contemplated as a part of the plan for Social Security reform. While these funds will only be available if Social Security reform is enacted, the Administration's policy is categorically defined including those resources. Social Security reform is one of the President's highest priorities for this year and we must work on a bipartisan basis to accomplish this important goal. The comprehensive framework for allocating the surplus will also provide these critical discretionary resources.

The President believes that his discretionary priorities are important to economic growth, and to the Nation's well being and quality of life. Some have disagreed, and have argued that Federal spending in general is too high. This debate requires some perspective.

First, and perhaps most fundamentally, consider the record. Over the years 1980-98, Federal spending averaged 21.9 percent of GDP. But Federal receipts averaged only 18.5 percent of GDP. Thus, the Federal budget averaged a deficit of about 3.4 percent of GDP. When this Administration set out to cut the budget deficit that we inherited, our original plan called for roughly equal spending cuts and revenue increases (with spending cuts in fact slightly larger). While the results of this plan have been far beyond what we ourselves anticipated -- with the deficit falling by more than twice as much as our original estimates -- they did maintain the balance between spending cuts and revenue increases.

In balancing the budget, this Administration has controlled Federal spending well beyond the record of its predecessors. As a percentage of GDP, spending in every year for which President Clinton submitted a budget has been lower than in any year of the two preceding Administrations. In every budget year from 1994 through 1998, Federal spending as a percentage of GDP fell. Spending as a percentage of GDP in 1998, at 19.7 percent, was the lowest in almost a quarter century.

Some argue that "Federal spending is still going up." In the simplest terms -- total dollars with no discounting for inflation, no allowance for the growth of the economy, and no allowance for the growth of the population government serves -- that is true. But even in this format, the analysis tells a great deal about the record of Federal spending under this Administration.

From 1993 through 1998, 31 percent of the simple dollar increase in Federal outlays came because more elderly people retired on Social Security benefits, and prior retirees received cost-of-living increases; 26 percent arose because of additional beneficiaries and higher costs under Medicare; 18 percent arose because, even with a rapidly declining budget deficit -- and by 1998, a budget surplus -- there was more debt to service, and so net interest costs went up; and 10 percent came from increased costs under Medicaid, more than two-thirds of which went for the expenses of the indigent elderly, blind, disabled, and mentally retarded, many of those in long-term care.

Thus, there has been almost no spending growth in programs other than Social Security, Medicare, Medicaid, and net interest. Spending of the entire remainder of the Federal Government over 1993 to 1998 shrank by 5.4 percent in inflation-adjusted dollars, and fell from 11.5 percent to 8.8 percent of the Nation's GDP.

This shrinking of core government operations cannot go on forever if government is to accomplish the missions assigned to it. We all take for granted the obligation to maintain critical core functions like the FAA, the FBI, and the administration of Medicare. As we consider how to budget in this era of surpluses, we must consider carefully the resources available for these often-anonymous functions that the Nation has a right to expect its government to perform well.

A key element in the Administration's ability to expand strategic investments, while balancing the budget, is the reinvention of government -- doing more with less. Efforts led by Vice President Gore's National Partnership for Reinvention have streamlined government, reduced its workforce, and focused on performance to improve operations and delivery of service. And these efforts, by reducing the cost of government operations, have improved the bottom line and contributed to our strong economy.

Since 1993, the Administration, working with Congress, has evaluated and eliminated hundreds of unnecessary programs and projects. The Administration has cut the size of the Federal civilian work force by more than 365,000 people, creating the smallest work force in 35 years and, as a share of total civilian employment, the smallest since 1931.

The Administration, however, is working to create not just a smaller Government, but a better one -- a Government that best provides services and benefits to its ultimate customers, the American people. It has not just cut the Federal work force, it has streamlined layers of bureaucracy. It has not just reorganized headquarters and field offices, it has ensured that those closest to the customers can best serve them.

For 2000, this Administration once again is turning its efforts to the next stage of "reinventing" the Federal Government. It plans to dramatically overhaul 32 Federal agencies to improve performance in key services, such as expediting student loan processing and speeding aid to disaster victims. It also plans to tackle critical challenges, such as ensuring that Government computers can process the year 2000 date change, and making more Government services available electronically.

Under the 1993 Government Performance and Results Act, Cabinet departments and agencies have prepared individual performance plans that they will send to Congress with the performance goals they plan to meet in 2000. These plans provided the basis for the second Government-wide Performance Plan which is contained in this year's Budget. For the first time in 2000, agencies will submit to the President and Congress annual reports for 1999 that compare actual and target performance levels and explain any difference between them.

We have an historic opportunity for long-term prosperity if we rise to the moment

There is much to be proud of in America today. By balancing the budget, we have not just put our fiscal house in order; we have left behind an era in which the budget deficit, as the President said recently, "came to symbolize what was amiss with the way we were dealing with changes in the world." Today we have risen to the challenge of change -- by preparing our people through education and training to compete in the global economy, by funding the research that will lead to the technological tools of the next generation, by helping working parents balance the twin demands of work and family, and by providing investment to our distressed communities to bridge the opportunity gap.

If the deficit once loomed over us as a symbol of what was wrong, our balanced budget is proof that we can set things right. Not only do we have well-deserved confidence, we have hard-earned resources with which to enter the next century.

As the President said, what we do now -- after having balanced the budget -- will shape the character of the next century. We can build upon our newfound firm economic foundation; or we can squander it.

The President has brought the debate right to the point: What should we do with the surplus? Or to put it another way: If we were to look back fifteen years from now, or at the end of the next century -- what would we want to be able to say that we had accomplished with this opportunity?

The President wants to leave a legacy of building for the future: saving Social Security and Medicare; encouraging Americans to save for their own futures, build wealth, and prepare for retirement; investing in education; ensuring our National security; and making other key investments.

There is no more pressing issue facing us as a nation than the need to guarantee that Social Security will be there for generations to come. And there is no better time to act than now while the system is still strong. This is truly an exceptional moment in America -- the economy is prosperous, the budget is in balance, and the President's commitment to national dialogue has created conditions for constructive action. We must seize this moment.