is unacceptable because it increases or tax. these are social security is raising the mouse, left though. they don't want any changes in guaranteed benefits, particularly workers who are going to be deemed essentially retirement age rate of 68 by

former heads of the budget office. this is just under three hours. >> thank you for your presence and thank you for your participation. we'll go forward. we're going to turn it to my good colleague. i can't imagine the thrill that we had when joe biden called in january and said, al, the president and i have a tremendous deal for you. [laughter] >> i thought why do i answer the phone for joe after 30 years, i do. this is serious business. and the minute we hit it the shriek went up, ah, there they

are. we are stalking horses. we are stalks horses for our grandchildren. your the administrator, i do the color. go ahead. >> i tell you what, you will never have a better column man. >> chairman bernanke, thank you for joining us this morning. we are delighted to have you, we are honored to have you. few have played such an important role. you certainly had some forward looking statements about the fiscal crisis. we are all expecting if we don't make some pretty dramatic moves. thank you for coming. we look forward to hearing what you have to say. >> thank you. good morning. i appreciate the opportunity. i am pleased to be here today for the first meeting on the national commission on fiscal responsibility and reform. the president has assigned chairman bowles, chairman simpson, and their colleagues the very substantial task of charting a path of fiscal sustainability for the united states. the deliberations of the

commissions are especially timely, because some of the fundamental sources are no longer long-term fiscal imbalances, and no longer distant forests. the task of developing implementing sustainable fiscal policies is daunting, but meeting this challenge is absolutely essential. history makes clear that the failure to achieve fiscal sustainability will, over time, sap the nation's economic vitally, reduce our living standards, and greatly increase the risk of the economic and financial instability. our nation's fiscal position has deteriorated the appreciably since the onset of the recession and the financial crisis. the exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and

spending. along with the costs of policy actions taken to ease the recession and steady financial markets, as the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out. the budget deficit should narrow over the next few years. however, even after the economic and financial condition have returned to normal, in the absence of the further policy actions, the federal budget appears to set to remain on an unsustainable path. a variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of our economy show of truckture budget gap that is both large relative to the size of the economy and increasing over time. mover, as debts and deficits grow, so will the associated interest payment, an obligation that in turn further increase projected deficits.

unfortunately, we cannot grow our way out of this problem. no credible forecast suggests that future rates of growth of the u.s. economy will be sufficient to close these deficits without significant changes to our fiscal policies. among the primary forces putting upward pressure in the deficit are rapidly rising health care costs and the aging of u.s. population. federal spending of the medicare and mid cay has increased substantially as a share of our national income over the past several decades and will continue to rise. at this point, the recent legislation on the federal health care spending are in certain in part because they depend importantly on implementation. we do know that continued increases in health care cost at the rates seen in recent decades would put enormous pressures on the federal budget in comes heres. the controlling health care while still providing high

quality care to those who need it will be critical, not only for budgetary, but maintaining the broader economy as well. the aging of the u.s. population will also strain the social security program has the number of individuals expected to be working and paying taxes into

>> no laws are more basic than the laws of arithmetic. revenues must be sufficient to sustain that spending in the long run. at the same time, economic vital vitality is enhanced when the economic position is

inheritable. the u.s. tax code does not satisfy these criteria and is in need of reform. i suspect it's too much to ask the commission to review the tax code in detail. but the full picture will require attention to the strengths and weaknesses of the current system of raising revenue. the ultimate goal of commissions effort should be to put us on a path of sustainability. one widely accepted criteria is the ratio of federal debt held by the publish to national income remain stable or perhaps even decline in the longer term. this goal can be achieved by bringing spending of the exclusive interest payments roughly into line. unfortunately, most projections suggest that we are far from the goal. without significant changes to current policy, the ratio of federal debt to national income will continue to rise sharply. thus the reality is the congress, administration, and

the american people will have to choose among making modifications to entitlement such as medicare and social security, restraining

>> postponing those choices and failing to put the nation's finances on a sustainable trajectory will do great damage to the economy. i'd like to sincerely thank the members for the willingness to serve and urge them to demonstrate that serious, well intentioned citizens can come together to craft credible and sustainable solutions to our budgetary challenges. thank you, mr. chairman. >> thank you. we appreciate you taking your time out of what we know is a busy day and give us your thoughts. >> thank you very much. >> thank you. >> we're now going to hear from peter orszag who's the director of the management and budget. he's a guy that lives in a town that likes to hear yes, he also has to say no. peter, thank you for coming. thank you very much member

bowles, simpson, and members of the commission. thank you for inviting me to testify and thank you for your service on the commission. the president formed the commission because it believes it begins with bipartisan action. if we allow to not take action, it will threaten our economy and the living standards our people enjoy. sustained long-term deficits will increase our reliance on creditors from abroad were reduce investment in our labels, and weakness confidence in the federal government credit worthiness. easily put, it maybe easier to ignore long term problems, but we will pay a severe price if we do so. with that in mind, the task before you is critical and considerable. the administration looks forward to working with you in seeking the solution.

first, we need to address the short term. as an economic across the political spectrum has said, when the economy is weak, the reductions in taxes are precisely what one needs to do to boost economic growth and job creation. the key is incoming goods and services that firms could produce with capacity, and those moves that is additional spending and lower taxes help to fill in this so-called gdp gap. that's why it was necessary to enact the recovery act in the beginning of last year and additional measures since then to increase the short term demand for goods and services and encourage job creation. this is clear from the data the recovery act has played a role in rescuing us from a second great depression. as the economy recovers, however, deficits switch from being beneficial to harmful.

the focus must therefore shift to producing medium term and long term budget deficits. under the current policies, our deficits amount to 5% of gdp, much higher than would be prudent for sustainable. exacerbating the problems are the long-term trends that we face as the combination of rising health care cost and an aging population will if historical trends continue drive up the cost in the federal government's three main programs, medicare, medicaid, and social security. what will happen if we fail to address these medium and long-term deficits? large budget deficits have some combination of two affects. first they can elevate interest rates economy wide, not only raising rates on mortgages and credit cards, but also discouraging private investment and thereby robbing future workers of enhancing capital

that will make them better off. second, large deficits could require increased borrowing from abroad which will mortgage the future income to foreign creditors. either way budget deficits reduce the national income either because the nation does not have as much productivity, or because we owe a larger liabilities to foreign creditors. to put this in more tangible terms, if we take no action, anyone needing access to credit from entrepreneurs to invest in their businesses to families seeks to finance the purchase of a home will eventually have to compete with growing demand from the federal government for sparse capital and the nation as a whole will wind up poorer for it. urn stainable budget deficits could also generate adverse affects on the economy that are both larger and more sudden than the gradual crowding out of capital and borrowing.

although the interest rates on government debt remain low, debts projected part into the future could cause the market to rapidly lose confidence producing a spike in interest rates and fundamentally disrupting economic activity more broadly. the best way to minimize the probability of such a crisis is to act ahead of time. recognizing the future -- the fiscal future that we face, the administration has taken action to address both medium and long-term deficits. we work with the congress to enact statutory pay as you go legislation to make sure we don't make the problem worse. it includes more deficit reduction than imposed in the administration budget in more than a decade. by 2015, it would cut from 5% to 4% of gdp. or by about $230 billion in that year alone. further more, the comprehensive health insurance reform

legislation that was just enacted represents the first serious effort to address the forces underlying rising health care cost. and it's projected to reduce future deficits by more than $1 trillion over the next two decades. in addition to those measures, the president created this commission because the only way to solve the remainder of our fiscal challenge is to do so in a bipartisan fashion. as you know, the commission has charged with coming up with recommendations not only to address our long-term fiscal imbalance, but also to reduce the projected deficit of 2015 to 3% of the economy. that would stabilize the debt to gdp ratio. achieving both the medium term and long-term goal will require significant changes in policy that build on what we have done already. the options to further reduce the deficit may not be particular, -- popular, but they

are necessary. success will require a commitment from both parties to engage in constructive, honest dialogue, recognizing there's no easy way forward, accept through bipartisan cooperation. and in that spirit, i look toward to working with you in the weeks and months ahead, and i, along with the rest of the administration, again, thank you for your service. >> thank you. thank you, peter. >> we are now going to hear from rudolph penner and robert reischauer. rudy was head from 1983 to 1987, and rob reischauer directed from 1997 to 1999. >> thank you. i'd like to thank you for the opportunity to testify. the commission faces a

formidable task. the budget is on a ruinous task. getting off of the path is more than what people are used to. the arithmetic is fairly simple. three programs, social security, medicare, and medicaid, and now the new health spending. just those three programs constitute more than 40% of spending in a normal year. and all are growing faster than the economy, or tax revenues. the overall tax burden on the other hand, has been remarkably constant for the past 50 years. if you combine rapidly growing programs with constant taxes, obviously, you mean and imply the growing deficit for spending for other programs grows as it is in the past. as the deficit increases, the

national debt grows faster and faster. interest on the debt becomes a budget problem in itself. the debt eventually explodes. but the market for our debt would obviously collapse long before an actual explosion occurs. now because of the pick elness financial markets, it's difficult to predict when the crisis might hit the united states. if one examines crises in other countries, they have been set off in different circumstances and different places. my prepared testimony refers to sweden, australia, ireland, and greece that were set off in a variety of ways. similarly, it's difficult to point to a single fiscal indicator that signals that a crisis is eminent. the crises described above occurred with a wide variety of debt to gdp pay ratios. i think investors look at a wide

variety of variables to try to determine how serious the country is about fixing it's fiscal problem. as i travel abroad, i'm pleased to see that foreigners are often more optimistic than americans about our ability to fix things up, or to quote winston churchill, you can count on americans to do the right thing after they have tried everything else. even if we avoid a crisis for a good long time, the large deficits projected in the future will drain away domestic saving that could be better used in the investment in the united states. many committees have warned of the budget-related crisis and describe the harm down by large deficits. recently john palmer, syracuse university professor and i co-chaired by the national academy of science and public administration. the membership of the committee,

like this one, spanned a wide range of ideology. the committee report has the usual diagnosis of budget problem and warning about potential crisis if we do not change policy. however, i think our report is unique in it's contains unique policy options to obtain fiscal stability. first we green fiscal stability has chairman bernanke did, as achieving a stable debt-gdp ratio. we go further and think that a prudent ratio would be 60% of gd. my prepared statement rationalized that. i'll be glad to go into more details in later if you'd like. our policies were grouped in packages. in one, the committee asked what spending restrain would be necessary while avoiding significant tax increases.

at the other extreme, the committee looked at what taxes would be necessary while other programs grew as determined by current law. and the two middle paths were also delineated. in the package that avoided any increase in the tax burden, the rate of growth to social security benefit was held to the level that could be financed by current payroll taxes. that requires increasing retirement age, reducing indexes for the more aflaunt, and switching to a different measure of the cpi, that's expected to grow more slowly in terms of making adjustments from year to year. when you look at options like that for social security, it's very important to differentiate an absolute reduction in the purchasing power of benefits compared to today's level from a reduction in the rate of growth of benefits. although the package that we put

forward in this option seems severe, it would more than maintain the purchasing power of today's level of benefits for all of the most aflaunt. the rate of growth of health spending and the low spending option had to be held to that caused only by the aging of population. that's to say all over causes of excess health cost growth have to be wiped out. a long list of health options appears in our health chapter, probably involve using every one of them to achieve our target. the brand new health plan, of course, adds to the federal health budgets, raises the tax burden, and changes the medicare and medicaid spending from that used in our committee's baseline. it contains some uncertain cost containment options. but not enough in my view to fundamentally alter the long run budget problem caused by growing

health costs. indeed, the addition of significant health cost to the budget make it is even more urgent to adopt rigid control. my own view, not that of the academy's committee that we will never reliability control the cost of medicare and medicaid. so long as they have open-ended budgets. medicare law defines the population and specified the treatment they can be given while excluding very few treatments. then the government pays for the cost of anyone who comes in the door. the total cost can only be controlled indirectly, and it's difficult to forest. in contrast, the universal coverage system of conda and -- canada and the united kingdom are limited. the budgets that go with the fixed budget are anything but transparent. a different approach, one more

meanable would use the voucher system to provide medicare, similar to one suggested by mr. ryan. it would be used by elderly and disabled to buy insurance, and it would vary with income. it might or not might vary with geographic location, age, and other risks, and could be combined with changes in insurance regulation. medicaid could be put on a fixed federal budget by shifting to a blocked grant. well, our low spending package also implies severely constraining defense and all other spending. in the package that attempts to maintain current law benefits, we consider three types of tax increases, radical tax reform that would provide growing revenues in the long run, the value-added tax, or increasing rates in the current system. the last and least desirable and

ineffect that it would possibility face the tax. the radical reformed income tax eliminates all reductions accept those related to saving. the health exclusion would be capped. we retain various low income tax credit. we can end up with only two tax brackets, ten and 25%. and the way the thing is trucktured, it resolves in rapidly growing revenue, even more you consider the beneficial affects on the economic growth. part of reason is the capping of the health inclusion becomes more valuable because of the rapid growth in health cost. the high spending scenario would necessitate the doubling of the medicare/hi tax and considerabler income and social security payroll tax. by 2040, the tax increases is

required by the high spending option would raise the federal tax birdie -- tax burden by 15% and it would continue to rise after that. i won't go into detail about the intermediate paths accept to say they are intermediate. no one believes the changes in the budget process can ensure that the congress makes the difficult choices necessary to obtain fiscal sustainability. our committee felt there were some reforms that could help the congress deal with the problem and my prepared statement out of line some of those. going to conclusions, and these are my conclusions, certainly not that of the committee. that i co-chaired. but it does seem to me a basic point screams out of our analysis, and that was hinted at by chairman bernanke.

regardless of how big you want government to be, there are enormous advantages to simplify the tax system. you can increase fairness, you can increase economic efficiency by lowering marginal rates, and you can therefore create an environment conducive to economic growth. moreover, you can design a structure without imposing the pain. as for the proper size of government, we all have our own views of that. i'd like to think of myself as a fiscal conservative. but i find it hard to imagine a vote that doesering on -- does everything on the spending side. on the other hand, the other side involves substantial tax income. it would imply an overall tax

burden somewhere less than 20% higher than what we've been used to in past history. thank you very much. >> co-chairman bowles, simpson, members of the commission, i appreciate the opportunity to discuss the challenges that you face as you craft a package of the specific measures that meet the immediate your and long-term goals laid out in the president's executive order. i don't have to tell you how daunting your task is or explain the risk that our nation faces if we don't put our budget on sustainable path. recently, the public has shown increasing concern over the large deficits and the growth of federal debt. it's clear that few americans understand the seriousness of the problem, the consequences of inaction, or the degree of sacrifice that's required to fix the problem. thus, the commissions first task should be to make a clear and

convincing case to the public that first significant adjustments to our current spending and tax policies are unavoidable. second, that if we don't again these adjustments soon, our economies vitality will gradually be zapped, our ability to chart our own course and standing in the world will erode. our government's capacity to meet crises and address priorities will be constrained and our dependence on foreign creditors and their influence on our policies will grow. the longer we delay, the greater the risk of a catastrophic, economic collapse. third, the magnitude of the required adjustments is so large that spending cuts will have to affect programs we all care about and benefit from and revenue increases will have to come from a wide swath of americans, in other words, raising taxes on the rich or on corporations, holding entitlement programs harmless,

closing loopholes, eliminating wasteful or low priority programs, prohibiting earmarks. things like that are not going to do enough to solve the problem. fourth and finally, the public needs to be informed that the sooner we start addressing the problem, the less wrenching the adjustments will have to be. and the more control we as opposed to market forces or our creditors or an extreme circumstances international agencies like the imf will have over the timing, the size, and the composition of these unavoidable adjustments. having analyzed and participated in several efforts to reduce the budget deficit, let me offer four pieces of advice. first, don't waste time looking for silver bullets or new approaches that hold out the promise of painless sacrifice.

already none to be found. the budget office, the government accountability, past budgets, and think tank university researchers and interest groups have put forward the proposals and enhancing revenues. use these selecting the specific measures that when combined into a single package, best meet the nation's economic, social, and political needs. second, don't take any category of spending, any specific program, or any revenue option off of the table until you have finished drafting your complete proposal. a particular option that may look very unappealing at the start could turn out to be a critical piece of the puzzle before you are done. our past experience suggests that successful deficit reduction efforts have balanced and have extracted sacrifice from all of the major budgetary food groups, taxes, fees, charges, entitlements, and

discretionary spending. third, don't assume that budget process reforms, that is new procedures for making decisions about spending and revenues can substitute for or create political will. the solution to our fiscal problems will not be found at a balanced budget amendment for the institution, line item veto, or beefed up decision authority for the president concurrent budget discretionary spending. this has shown that lawmakers do not want to reign in spending or taxes to the deficits, no procedure reforms can make them do it. most reforms can stiffen the backbones of lawmakers so that they stay a course that has already been enacted or provide some modest degree of political protection that's already committed to the reduction effort. fourth, stay focused on the ultimate objective of the

effect, -- of the effort, which is the nation's economy over the long run. this implies that spending programs and provisions of the tax code that rigorous objective analyses have shown contribute significantly to the economy's long run growth potential should if possible not be scaled back. of course, this is easier said than done because many programs and tax breaks without much hard evidence their comparative effectiveness claim to be growth promoting. it's also true that many programs from which there is evidence could be restructured in ways that would deliver a lot more bang for the buck. let me conclude with a couple of observations about tax burdens, entitlements, health care costs, and the appropriate long run goal. many observers have pointed out that revenues have averaged roughly 18% of gdp over the post

world war ii period. from this day, they have produced a natural law of america and political budgeting and assume that going forward revenues have to stay close to 18%. but -- and we then would naturally have to keep spending a couple of percentage points above that at most, 21, 20%. but since the mid 1970s, keeping revenues at about 18% of gdp clearly has not been enough to keep our debt from growing faster than the economy. looking forward, it is unlikely the spending can be held to 20 or 21% of gdp, unless we are willing to fundamentally rethink our entitlement commitments, downsize our defense capabilities significantly, or eliminate virtually all of the federal governments traditional nondefense activities. in short, to achieve fiscal sustainability, we're going to have to accept higher tax

burdens than we have enjoyed in the past. getting to a sustainable budget path over the long run will also require measures to moderate the growth of entitlement spending. but such measures are unlikely to contribute significantly to reduce deficits during the next five or ten years. because most of the entitlement spending goes to retirees and vulnerable individuals who have limited ability either to absorb benefit reductions or compensate for any cuts by working more. therefore, changes in entitlement benefits must be phrased in gradually over many years. while there maybe some short run scope for the disease enjoyed by upper income entitlement beneficiaries, the amount of deficit reduction that can be garnered this way is quite modest. as you know, most of the fiscal imbalance projected through the future derives through the expectation that health

expenditures will continue to rise more rapidly than the rate at which the economy will grow. it's thus natural to look at ways to curb the growth of federal health care spending which is concentrated overwhelmingly in the medicare and medicaid programs. however, this is doing to be very difficult over the next decade for three reasons. first, under the recently passed health reform, medicaid cost will rise significantly because the program plays the primary role in expanding coverage for low-income americans. while the recent report from the united health concludes the savings are possible, realizing them will require adopting effective coordinated care and community-based coordinated care for medicare, and medicaid's long-term care beneficiaries. effective coordinated care of this sort is both unpopular and quite difficult to do well.

second, under the health reform law, medicare spending has already been reduced significantly. so much so that the chief actuary of medicare has warned that beneficiaries may face access problems in the future if the required reductions and payment updales are adhered to. while the health reform act contains many promotioning demonstrations and pilot projects designed to test incentives that might slow spending growth, it will be more than five years before the results from these experiments can reform policy. third, the growth rate of the cost of the government's health programs cannot be reduced for any significant period of time below that of the private sector without creating access problems, inferior care, or burdensome cost shifting on to the project sector. for this reason, systemwide reforms and incentives are the

only way to reign in the growth of medicare and medicaid cost over the long run. it will take time before we know which measures can affectively hold down system wide costs. finally, while the medium-term missions spelled out in the president's executive order is specific, the long-run mission is less clear. some may argue that you should strive to balance the unified budget by some date certain. others will say as several independent groups, including the run that rudy chaired, that the goal should be to sustain lose the debt to gdp ratio at some level like 60% or 70%. there's no need to strive for a balanced unifified budget. this is about between 1946 and 1974 when we averaged deficits a bit over a half of percent of

gd. and the debt to gdp fell from 109 down to 24%. stabilizing the debt to gdp is an important goal. whether the target is 60%, 70%,

>> you put your finger on the elephant in the room. we look at the reliability of the government which is estimated to be around $3.6 billion and about 38 of that is medicare. and the large percentage of it is also medicaid. it's essentially that you don't think because of the health care -- health bill, there's a whole lot of places to go in the health area that will adjust those numbers. is that what you are saying?

there's an opportunity to the health area where most of the issues were taken off of the table. >> if we leave medicaid structured the way it is now, unmanaged fee-for-service care, it is unlikely you can ring significant savings out of it. without adopting measures that will slow down the growth of health care spending across the entire system. namely, across the private sector as well. because there would be too great of disparity between payment levels in medicare versus the rest of the health sector. and that would have undesirable consequences for medicare beneficiaries if access became a problem. because physicians and other providers didn't want to serve medicare patients, or if through government regulations, you

required access to be preserved, but providers then shifted their medicare losses off on to the private sector. >> accepting that, if i could follow up, what -- >> max is trying to hear. >> if you started with the system that's maintained on the present structure, what's the alternative? >> well, rudy laid out an alternative. which is restructuring it more along the lines of premium support. a voucher system. i think it's unlikely that we are going to find that desirable if what we are doing is saying folks under 65 have one form of insurance and delivery system, and folks over 65 in the disabled are operating in a

different system. and so that's why i'm saying that i think where we have to go is more systemwide reforms. one effort along those lines was the tax on -- a fee on high premium plans that is included in current reform measure. but there are other ways of refining that. >> if i might add, it is difficult to imagine another debate after the recent one was so intense and ended such a short time ago. i really do think we have to think radically on the health side. and i mean the kind of reform that i'm talking about could be systemwide. but somehow or another, we've got to get more control over the budget than we do in this

open-ended system. >> senator baucus into representative murkowski, and then mr. ryan. >> i think we are delivering under a false assumption. mr. reischauer, you said if fee for service continues, that was your premise of the answer. the health care bill is not hemsed on that. it's moving off of fee for service and moving towards reimbursement or medicare based on the outcome and quality. you did mention the pilot projects. it might take some time. it's true. the basic underlying premise of the health care reform is to decrease cost and improve quality at the same time. it sounds paradox. it's true. moving towards the reimbursement based on quality and outcomes.

just want to make that clear. i think you congratulation you and others who are instrumental in putting forward these changes in what you are doing is building a foundation upon which that can be done. >> that's the thought. that's the attempts. that's right. >> we don't have the plans for that. >> right. that's true. >> that's correct. >> talking about systemwide reform, the real driver of the increases in government spending has been that medicare and medicaid are reliant unlike the veterans administration negotiating on prescription drugs and things like that has more control over it's cost is reliance on the private insurance. that is it's based on that. so clearly as you say, clearly

if we were to cut medicare and medicaid the disparity between what the revenues are from the private sector would be so great that people would be denied access to care. so we have considered as senator baucus correctly pointed out, ways that we can change the system. but we've also built in some things like 80%, 85% of every dollar must go to health care costs from the insurance companies. if they don't reduce their -- if they increase their cost too much, they won't be eligible to go into the exchanges. but i'm wondering don't you think there might be other ways dianne feinstine and i have legislation that would give the

government some rate-making authority or rate-control authority over dramatic increases in

>> not in your one or two years, but over a decade. but the profit margins and the economy as a whole. i don't kno

we know about domestic programs. but where in that daily week would you put the age of the $700 billion top a lot of the financial service industry, which president bush proposed

back in 2008, which the taxpayers have to frontload on a deficit basis through deficit spending. for us to really tackle the problems we have is a government and as people, we really have to look behind just what we categorize as the budget, to get a grip system wide of what feels this system economically. >> in terms of the other fish in the sea, there's this great future they are pushes health that we just can't avoid it. and it really dominates everything. in the shorter run, social security will grow sufficiently to take up the growing proportion of gdp. but when you get jan., the rest of government have a long enough

historical timeframe. the rest of the government really hasn't expanded that much relative. defense has gone up and down with national attention. the real welfare programs are very crudely stating the same proportion of gdp as they have been over the long haul. now that's very different than saying that a solution to the problem should focus only on those things that are growing. i mean, there's a wide breadth of the cool feeling that everybody has to get in the boat. and so, you have to talk about things like agricultural subsidies and all sorts of corporate welfare and on and on through the system. so we had in our report here a very, very long list of programs

that we thought were of dubious value or could be handled much better at the state and local level. >> like rudy, i think there's one big big shark and will sardines. and the sardines are difficult to catch. you know, they are zipping around here and we can make lists of those in cbo and others have, but they have strong protect. and they don't have huge visibility among the public. and so, it's difficult to catch them. we are however feeding another shark. and not shark is interest on the national debt. and over time, if we continue on this current path, you know, it

going to be an equal competitor to health care cost. and the big problem of courses that interest on the debt are from the public standpoint is in a sense worthless. health spending, you're getting health care. you're getting something for it. interest on the debt is payments that go out for goods and services that the public has enjoyed in the past, but gives them no benefit now. and where we run up huge debts and then seek the balance budget using large amounts of taxes for which they saw no services in return because those services have been enjoyed at their parents grandparents.

>> thank you, mr. chairman. i think one thing all four of us agree on is the status quo sustainable, but unsustainable is the challenge that is before us. if i took good notes, use the phrase we are in a crudeness path. i want to ask for the cost of that ruinous path on the tax side on page nine of your testimony. i want to make sure i understand it properly. you talk about, i think, if we attempt to maintain current law benefits under our three big entitlement programs at least under one scenario in the ten-year budget window, that tax rates would have a top bracket would have to go to 50% and a value added tax would have to be imposed. is that correct? >> one of our scenarios, yes. >> he said to maintain current law benefits by 2040 roughly

over the course of the next generation since early this morning we talked about her children and grandchildren coming to see the value added tax reaching 7.10%. you say you also believe it is not prudent to consider a top rate above 50% top marginal rate? >> yes, given the inefficiencies for the current fiscal. >> by inefficiency, you mean? >> well, our system has become so complicated with so many incentives to do so many things that it completely distorts choice from what the real economic incentives would tell you to do or what before tax income would tell you to do. so we put the different sides, which is all over economy between before tax and after-tax income. and it creates enormous cost in terms of economic efficiency and economic growth.

>> and i think he said by 2040 i cannot for the course of the next generation of maintaining the status quo, the overall federal tax burden would increase by 50% compared to 7.7% of 2008. so are we talking relative to gdp? is that what i'm -- >> yacht. >> are you saying we are going to 50% on the tax side? or 27, 28%, never than not this. >> to 50% just referred to the top rate to be tried to finance the high spending path increasing all the all the recent our current systems fortunately. and then we have the other scenario which is ever so much more desirable of raising revenues to a very fundamental tax reform. >> last point and then i'll yield. he finalizes portion of your testimony by u.s. total tax burden which is considerably

below the oecd tax average would have to be higher than the oecd average by midcentury and within a few years after that we would be the highest tax nation on earth. >> that's including state and local. >> thank you. thank you, mr. chairman. >> will now look to senator durbin. [inaudible] >> it strikes me, stepping to the side and looking embedded social security's math and medicare's calculus, the tax code of quantum physics or something of that nature. and you just touched on it here. because each year we go through a very public display in preparations process involving very small amounts relative to the size of the federal budget. and yet when it comes to tax expenditures, which we are making each year, there are very few sunsets and very little

annual review about where we are going. i don't know if this qualifies as selling them short, the amount of money we expend in tax expenditures, which he said can distort business and economic decision exceeds the amount we appropriate. in domestic programs each year. so, would you say among the things we should consider are not only the entitlement programs and the spending programs, but also this tax code that is literally spending tax dollars or forgoing tax dollars each year in the name of social policy and goals? >> absolutely, senator. as i said in my testimony, i mean, i think it just screams that we have to do something about this tax code. now there are different approaches an extremely radical types do we have senator gregg and senator wyden's bipartisan

approach that is maybe somewhat more realistic politically. the problem on the tax side is the you also have some really big sharks they are. and i guess unlike most sharks, they're very popular sharks. so, we're talking about things like the house explosion, huge amount of money they are. >> home mortgage. >> home mortgage option. all of our -- we have an incredible array of different things to try and encourage savings and they're so complicated. i'm supposed to know something about tax policy, but i can't figure out to save my soul. it's the one for college savings just my mind. so i just very, very much agree with you. but then after the sharks, i

think cbo lists about 70 -- is that budget i should say with about 70 tax expenditures of various sizes, most of which are small compared to them. >> if i could ask one follow-up question. following up on this, do you believe in addition to sustainable -- to sustainable debt of our nation deficits and economic growth, we should also take into consideration the growing income disparity in america? >> well, i think indeed this is very important and that relates to congressman ron's question. can you develop for tax those most in need while closing this deficit? and as i said before, i think what you have to design your initiatives very carefully, certainly can be done. i mean, the benefits we have now on social security and medicare go to everybody, whether you

need them or not. so i'm in the fortunate position to get almost 20,000 a year from social security. i'd like it, but i find it very hard to rationalize. >> congressman spratt. [inaudible] >> -- medicare and set of social security also would barely touched upon. bob, he wrote one of the best of the monographs of readable by almost anybody sometime ago. how immediate is that problem? how urgent is that problem? and what are some of the options available to give an in some years to come? >> well, looked at compared to some of the other contributors,

to growing deficit, social security may not look like a prime suspect. but as we look over the next half-century as we showed what we think about social security policy, it's clear that some significant changes are going to have to be made. those changes can be quite modest if we begin doing that now. social security is also a program which has not been changed in significant ways over the period since 1935 notwithstanding the fact that the demographics of the country have changed the patterns of marriage and work have changed and income levels have changed.

and i think there is lots of steps that could be taken to modernize the program and make it better meet the needs in an equitable fashion of today's population while solving the longer runs on solid b. problems that will face. >> you describe these options is modest. a minute ago you said there's options that can be taken that our quote bodice. could you touch upon those? >> well -- [inaudible] [laughter] well, first of all, changes didn't affect current and fisheries, what we're talking about is those who will begin to retire in years and beyond from

now as rudi suggested there are ways of making the benefit structure a bit more progressive. we should think about indexing the program to longer life expect these. we have a program which when i started, there were large numbers of people going to college, people were living this long. publicly we should index the program to adult life expect that the and make modest changes in that way. we have seen a growing fraction of compensation paid in the form of nontax fringe benefits and

health benefits and vacation pay, insight that. raising the threshold which makes a lot of sense. you know, there is clearly a problem with respect to widows and individuals who lived very modest means for long. and adjusting the benefits of stem for that would make sense. i could go on forever, that just may be say some things a bit more controversial. you know, we have a spouses benefit in the system now, which

a spouse who does not work at all is given the equivalent and a half of his or her spouses benefit. another spouse could work at a low-wage for a long period of time contributing to the system the whole time and not get more than 50% of the primary workers benefit, which might have made sense in 1945, but certainly doesn't make sense now was virtually all men and women are in the labor force. >> if i could just briefly make two points about social security. one, when you talk about modest changes, i mean, most of the changes that bob is talking about tonight in light cutting the standard of living of the elderly compared to today's

level. were talking about slowing down growth and benefits, the way the system is structured it is the elderly ever-growing real benefits. the other point that i make about social security, though it's not as important in the budget problem is how, it covers so much more simple to understand. we know the effects of every option path mentioned. we know who would be affect did, how much they would save. we know all that with a considerable degree of confidence, whereas we do not know the same sort of things about the various health options that you're talking about. so to me, that really makes a strong argument that this commission should look very carefully at social security. moreover, it made some suggestions for improving its financing. i think it would be very helpful

in showing we are serious about the long-run problem and what does maybe make foreign investors were calm but it in their discipline. >> were going to conclude the session with questions from three people and then we'll go to the five-minute statements. the questions are from senator conrad, representative camp and senator crapo. >> thank you, mr. chairman. i just wanted to get both of your reactions to two concepts. one of the spending side, one on the revenue side. on the spending side, but it's always struck me as an medicare, 5% of the beneficiaries use 50% of the money. when i went to business school, they taught us to focus on that kind of statistic like a laser. so 5% use 50%.

they are the chronically ill. the multiple serious conditions. we do a very poor job of court meeting their care. i'm the one attempt we had to better coordinate the care, at least test better coronation of care, we did a study with 20,000 patients who are in this category. and they put a care accord nader on each of their cases. and the results i got were so striking. dramatic reduction in cost, significant improvements in health care outcomes. because what they found as these people are getting duplicate past. they're taking prescription drugs that actually don't help them, but hurt them. so it seems to me there is a major opportunity in health care to revisit that issue. on the revenue side of the equation, again what's very striking to me is under the

current system, we'll may collect about 80% of what's owed. if we collected all but factually owed, we would dramatically reduce structural deficit. at the same time, we've got a tax system that doesn't help america's competitive position in the world because this tax system was written about time we didn't have to worry about that. now we do. i'd just like your reactions on those two points. one on the spending side. >> let me take the revenue side where you feel confident. i think part of the difficulty in collecting taxes again goes back to the complexity of the system. with all of the deductions you can claim, you can shoot a lot. i mean, the irs is very limited capacity for auditing. while we could undoubtably do a lot better in the collection, the problem on the other side of

courses that there's a big cost and increasing collections. money costs in terms of the budget of the irs, but i think much more important the kind of harassment caused. you know, you don't want an irs agent calling every one of us around as we do our work. so you have to balance those two things. but having said that, there's absolutely no doubt in my mind that right now we're striking the balance too far on the side of lenient view. >> with respect to coordinated care, i think you're right on the money. and the question is, why don't we do this? and there's two simple answers. one is that the structure of our delivery system is pernicious to coordinated care. it's a fragmented system and, you know, efforts to consolidate

its have not been very successful. and secondly, there were very few in them to get into providers to coordinate care. it's just the opposite generally. so, it can be done. you're right. but it involves some very significant structural changes in the way we organize health care. >> thank you. thank you, mr. chairman. i mean, there is a lot of court they should go in on a medicare. it's called coronation of damage an interview of mention. it's correct, isn't it? >> there is sound. there are many medicare advantage plans that are virtually no care accord nation. in the majority of individuals of the people in medicare advantage are in those plans.

it has potential, but the potential is far from being realized. >> mr. penner, you're simplified tax approach, at what rate would you have investment taxes like capital gains? >> well, under the actual proposal we wrote down they would be taxed at the same kind of rates that i mentioned. we had two brackets, 15 and 25%. one could of course conceive of moving the system much more to our consumption in non-taxing saving investment at all, but developing a progressive set of rates on consumption that would duplicate roughly the same income distribution we have today. >> you both mention this increase in health care expenditures greater than the rate of the growth of the economy. and i think you both use pretty strong language.

i think it dominates the whole issue. and you mentioned, mr. reischauer, in your testimony, that if the medicare reductions in the bill, they determine that would actually hurt seniors access to medicare as you commented in your testimony. but what she boasted of mention was that the actuaries found that this new bill actually increases help your spending over the long-term. the problem is that is the biggest problem we're facing is actually exacerbated by the recently passed legislation. would you care if there be to comment? >> well, i did say in my prepared testimony, sir, that i think it just means that we have to get cost control higher priority. i think we really have to work on it much harder now that we've expanded the federal health budget. >> the actuaries know was referring to national health

expenditures overall throughout the economy, not the government portion of those. and given not people without insurance are going to be required to pony up out of their own pockets, their firms that offer adequate insurance are going to have to raise the level of their insurance and many more people are going to be covered by health care -- buy health insurance, you know, over the medium term anyway it would be very surprising if there wasn't an addition to national health expenditures from covering 30 odd million or more people. but i think you're right. >> the health care expenditures are going to increase 50% more that were initiated under the revised actuary of this bill. >> okay, we'll go to senator

crapo. [inaudible] >> i was -- i was interested in one of your comments about budget process reforms. and you indicated you thought that was not a very productive area for us to look at. and i think your words, it was history a show lawmakers to want to rein in spending or raise taxes. to curb deficits, no procedural reforms can make them do it. believe me, having served in congress for some time now, i know what you're talking about. i think all of us has the congress go into contortions at times to try to get around budget reform. >> that's fair enough. we don't want to limit it to just congress because that's correct. that being said however, i believe process reforms can be it should be pretty big part of the effort to try to make sure that we get it right and keep it right once we move forward.

i have seen circumstances. in fact, not infrequently in congress at least her process reforms have inhibited spending or other tax policy changes that might otherwise have been undertaken. and so, i guess i just wanted to raise that issue with you because although i totally understand the dynamics are talking about and i know that no congress can find the future congress in any specific way, forcing some of these books to move forward or forcing books to be highlighted in a specific way -- maybe there's some other process we can come up with that would be even more effective i think is helpful. in fact, the process i think our congressional leaders have agreed to compare to the recommendations of this committee will actually i think the beneficial in helping us to get a vote on them. so i just wanted to ask you to discuss that issue with me a little further. i don't want to see this commission leave that topic off

the table. >> if you're asking me to process reforms have some modest -- can i have some modest impact on deficit growth, my answer would yes. i think gramm-rudman holland found deficits of the. i think even measures like the sgr and medicare in fact have moderated the growth of medicare spending. but what i was trying to point out is these aren't the silver bullet. and no, you're going to have to raise taxes. you're going to have to cut spending. it's going to have to her. and it can be reinforced through some progress reforms. but don't count on them to do the heavy lifting. >> if i cannot, i believe exactly the same thing and i

think you described it very well in the process can accomplish. but i do think there are major flaws in our current process. and the number one thought i would point to would be that i think it's much too short-term oriented. i think one could do things which would bring long run considerations into the early process that would be very helpful. and even just increasing the information, australia has this very interesting process where they report every three years on what the budget does two different generation. and that provokes an interesting debate, which i gather is somewhat influential. so i think there are kinds of things like that that could help a lot. >> thank you all very much. that was all very helpful. i certainly learned a lot. we're not going to have

five-minute statements. we're going to go in alphabetical order, with the exception of senator simpson vocal for a sabbatical last. in alphabetical order because senator baucus down through ms. fudge. >> well, i want to thank eyewitnesses. was very provocative, showing how tough a role. watch me closely because i have said that cory stone hear five-minute. >> will raise a red flag. >> i didn't intend you to do that. a red flag at the table. okay, quickly. i want to thank the president for his act of participation here. it is absolutely critical. i think we appreciated his presence this morning. he had been very supportive of her skin and myself that told you about the call to arms here.

when they told me i would be involved with her skin bowls, i was very pleased and hunted deepest admiration and regard for this man. they say every time our names came up with a shriek when upcoming here they are, we said were stalking horses for her grandchildren. i have six, he has seven. the problem has been described as unsustainable. i say this unconscionable. that's where we are. since i took this time, i'll share with you i've been called mr. toady of the republican faith. covering the president's danny. let's see, their other great adjectives. attacks are all-time, all headed for better prison because in my presence here. as you get it rained on you from those in the extreme wing of my party, i have never been their very favorite. i believe that abortion is a deeply intimate and personal

decision. i know that's a sick idea, but i've worked with a community and i realize that is a very strange idea. i had cousin who is gay. i've been called a lot of things, but i don't let them distort who i am. your job before, bonehead, and everything else in this game, but never let them distort who you are as a person. i never allow that. furthermore, i never figured out too many ways to develop the other side or my colleagues. that is a thankless way to live. hatred corrodes the container is carried in. furthermore, i love the aa. if you can't forgive a person it's like letting them live in your head referee. [laughter] and the word tolerance is in size to the speaker's platform in the house. right there, right in the french

would be to the state of the union address. let me just give you one other example. i >> looking at my scribbling. we came here together and he never could read my notes. >> you haven't changed. >> a quick example, i've been here two years. reagan takes over. i've become the chairman of immigration, nuclear regulations of veterans affairs, the three ranking members are out cranston, ted kennedy and gary hart. i've been here two years and these fine gentlemen, all three were running for president. i said now look guys, don't use this committee or the subcommittee for your quest and i won't use it in any way to embarrass you. we shook on not, never broke her word. i was bob dole's assistant leader for 10 years. one great american letter in his

art he contacted me and is ready to help in any way. i've also had encouraging calls as erskine has the leadership of both houses of congress and host parties. here is my naïve vision, that av, just maybe we can all agree on where we are by more than a vote of 14 to 18 of us. i think we might get there by using honest figures and honest facts. we will use the actuaries of the social security system. we're poised and ready to assist what he is the actuaries of the health care system and we will use cbo figures. to me, what would be a remarkable first step would be for us to say look, i don't know where we're going. i have no idea where we're going, but i will agree that those are the figures, but those are the figures. those are the things we face.

those are the liabilities, debt, the dataset, the unfunded liabilities, the works. and if we could possibly do that and then go from there to try mightily to suggest some options and solutions for america. if what we may be able to get to that point, maybe not slip back to decide that we have just given up, not only given up, but decided to score more points to demagogue and a week, i'm sure our work, then fine, i'll head back to cody and my son and say i did my best. the american people have always been smarter than their politicians. they know that some pain is terribly, terribly wrong. they feel the people they help elect did, both parties have done nothing to stem this

unstoppable tie. i was in the senate for 18 years. it was always out, go bring home the bacon. well, the has died. [laughter] and the confectionery store window will close and an evil wish for the boil on her nose will be servicing the candy counter. we are in it. this is it. there is no game for me or any of you. none of you looking for this. none of us will gain from this. so we share all do have skin in the game and that's our children and grandchildren. anything we eventually do in any way will be met by howls of anguish. not me. how could you? you uncaring slobs. i mean, get ready for it. the extreme right and extreme left was savage our final

product. whatever it may be, forgetting that we are not democrats and republicans and ballots first we are american citizens. so we have to establish and reestablish trust. i think that's the key. trust. and we must do that in this commission. the coin of the realm in legislating this trust. i didn't agree with max. we came here together, boy trusted each other and never violated that trust. judd gregg, the same thing, conrad comeau trusted each other. so it's a tough order. in the coin of the realm in legislating and here is trust, not more career or bs. that's it. that's where we are. so erskine and i will only ask for your honest participation, your intelligence, your wisdom, your honesty, your goodwill. and as corny as it sounds, your patriotism. no one will ever do this fateful

exercise again because it seriously messes up what we, you and me, politicians were trained by her handlers to do. and that is to get good at all cost and whatever caused. there is no easy answers that we will be better served. we will be better served by our better natures as each and every one of us knows deep down in our gut that this might be the last best hope to write this listing ship state of ours. and i thank you, each and every one of you for your willingness to pitch in to see if we can make a difference. and i believe we can. and i feel we must. thank you very much. >> thank you. i want to make a couple of

suggestions. why do we care about deficits? obviously when deficit and debt are too high, things cannot sing. both are bad. first, deficits could drive up interest rates. short run could cause recession. long-run could reduce investment and growth. but produces standard of living. second, we can go more of our debt to foreigners. if we pay on that i would ship taxpayer money overseas. i would also lower standard of living. the size of the foreign holding that also puts our country at risk. other nations decide at some point too risky to hold u.s. treasury securities and start to sell them they could drive interest rates through the roof and that could lead to recession. in short, letting deficit puts america at risk. so we here have to work together. when previous commissions have succeeded, they've bridged party divisions.

the 1983 greenspan succeeded. it was bipartisan. the budget summits in 1987, of 1989, 1990 succeeded. they were bipartisan. so was the budget agreement of 1997. so our commission has completed its work and i hope we can say the same. i have an idea for the first step to achieve bipartisan agreement. the first thing that this commission should do is to focus on what i call the three gaps, the tax gap, spending gap in productivity gap. the tax gap is the amount of taxes that are legally 02 federal government today, but not family collection. the irs estimates that there is a $345 billion tax gap ever hear. that figure was in 2001. iris does not know the current tax gap.

there's $345 billion every year legally owed paid. that's about half the total budget deficit currently projected for 2015. the target for the commission to reduce the deficit. there are three sources of this room for a $5 billion tax gap. 80% is from understated income were overstated deductions and credits. 10% from non-filers and 10% for taxpayers who fail to pay their taxes on time. if we can put a man on the man, we can think about landing an astronaut on mars, we can collect more. and we should not cut one dime in federal benefits or raise one dime in federal taxes and so we have done everything we can to let the taxes that are already owed. these taxes without raising taxes on anyone. the spending gap is the amount of fraud, waste and errors in federal spending. a boy there's a lot of it. we all know that.

take medicare. it's estimated $25 billion of medicare provider payments are made in error every year. once again, $25 billion every year. there are lots of ways you can use the same kind of systems that the credit card reporting companies use to identify outlier payments. there's a lot of things done to reduce that fraud and not waste. my guess is probably higher. there is a task force working on reducing fraud in medicare. the departmental tax for us. i think our commission should meet with that tax worse. third is the productivity gap. that's the amount of technology and efficient these successfully employed by the other would put to use in the federal government. the white house has just announced the creation of the presidents management advisory board. jeffrey science is currently the director of management at the office of management and budget will head up that new board.

they see mr. cody here. other members of the private sterno deficiencies that occur in the air and in the public sector as well. but he asked me to points about social security. first, changes to social security will do little to meet our deficit target for 2015. this argument stated by our similar panelist. it's just the nature of social security that they play out over long periods of time. paquette, some people think it's easy to address social security, but cutting social security benefits or payroll taxes will be far from easy. and not for the first thing we should do about social security is just like the first thing we should do for the deficit generally. we should look at the $50 billion annual tax cap for social security payroll taxes. at least 50,000, not collection. and so by closing the tax gap, will address the current activity s. work together to

reduce the deficit and improve american standards of living for years to come. [inaudible] >> you bet. >> mr. chairman, thank you to the two of you for hosting us. i would say were off to pretty good start. i hope we can continue to check our egos and our kool-aid and out the door. i honestly believe if we portray an honest picture of our nation's economic diet, americans won't be afraid to eat their vegetables. and that's where we should go. to me the principal question i want to see answered as we explore the economic condition we're in is what kind of nation do we want to be? because we can balance our budget. if we sacrifice educating our children, china will overtake us a lot faster than most people expect. we could balance our budget, but if we did at the sake of making

smart expenditures for national defense, we may not be around very long to see the fruits of a balanced budget. and so i hope what we do is answer the question, what kind of nation do we want to be? last year, general electric generated over $10 billion in pretax income. they ended up knowing nothing to uncle sam. in fact, they got $1.1 billion back in a tax rebate. that's what happens when we are out of whack tiscali and economically if the country. today, someone under $20,000 will be spent on capitol hill by 25 of the top banks in america, most of which benefit directly or indirectly in the t.a.r.p. financial bailout, that they will spend about $120,000 today lobbying, in most cases against wall street reform. they've done not for the last several days. in fact, in the first quarter of this year, they have been

spending at that clip $120,000 a day lobbying. to put it in perspective, that's more than two and a half times what the average salary is of an american working for a full year. to me, rebuilding the middle class will be paramount in discussing all of what we do over the course of the next several months. the best thing we can do for our fiscal future and future generations is to rebuild america's middle class. to me that means decent jobs and a visit climate, been able to send our kids to college. i say that as the first in my family took the opportunity to get a bachelors. homeownership, dignified retirement at an affordable quality health care. i think there we have made the first big step of the passage of historic health care reforms. too often greed gets in the game, will the people get the game. and i believe it is time for us

to recognize that during the height of oration say the depth of this economic recession, do not worth of american households dropped more than $16 trillion, far more than what it's going to take us to balance the deficit and balance the depth of this country as we see them. and so, i hope what we're asking ourselves is what does it take to restore the quality of life for the middle-class? how do we rebuild the american middle class? and to me, the largest deficit we face as a jobs deficit. if you put americans to work, america will work. jack, in the last year alone we lost over 1.2 million manufacturing jobs. if we have an efficient protective governments, i think we can take a lesson from what drew weston said. he said it's time politicians stop running for or since government and started burning up well. if we ensure that our people are

getting the money's worth from every dollar we spend is the federal government, americans will reward us, whether it's because we've dealt with all the tax expenditures, which by the way it added to about a trillion dollars every year is a need. those tax loopholes. or whether it's dealing with direct spending through government programs. a couple of quick examples. the department of defense not long ago in the early 2000 bided aircraft refrigerator. they ended up paying twice as much as they had expect it. instead of paying $13,825, they paid $32,642. cost overruns the general accountability officers told us have cost the department of defense and american taxpayers over $296 billion. that's larger than the amount that were trying to find to cover the deficit for the 2015

budget. and so, i conclude by saying this. i hope we take a look under every rock there is. and i hope we do it for the american public. it is at the end of the day, we hope the middle-class middle class bully victims of the kids to college and believe we are restoring the government, will benefit we will be rewarded rather than going for or against our government, were prepared to help it run well. and so, mr. chairman, i look forward to working with pepper and hear and appreciate the opportunity to serve. >> thank you very much. >> thank you, chairman walls and chairman since then, fellow members of the commission. we've heard from a number of people this morning, president, federal reserve chairman, for mercy of directors and i know we're going to hear from many more in the months ahead and i look forward to that. as many have stated, the problem is obvious. we simply can't sustain the level of spending and taxing is

being pursued in washington d.c. the americans know what do we know it. while tax revenues have dipped during the recession, spending has skyrocketed to 25% of the gross domestic roddick and is forecasted to remain well above historic averages even after the economy recovers as we heard this morning. this has created a record deficit of over 1.4 trillion the debt now totals $12.9 trillion, nearly $42,000 for every man, woman and child in the nation. and these problems have been decades in the making that happen him both parties lodge. unfortunate citizen under the situation has been more difficult to overcome this would hurt from the cbo directors because the congressional budget office and the medicare actuaries have just confirmed what most americans already believe. and that is the hope your lot does not reduce health care costs. it increases them yet and in a similar fashion, we have not seen the jobs created that americans were promised like the

stimulus bill, but yet our deficit can worsen your so i say these things not to create a partisan debate, but to point out we have not one deficit to close, but two. a budget deficit and a public trust deficit. we cannot solve the first without addressing the second. so the questions before the commission remains clear. while we listened to the american people, what together to get our country back on track. we say everything is on the table, does not include the health care a lot and are we willing to make the tough choices needed to restore a budget to past levels of spending and revenue that are consistent with robust economic growth. i certainly hope the answer to each of these questions is yes. and i pledge to my fellow commissioner and my constituents of the american people that i'm ready to listen and ready to help find solutions to her spending problems. let me close with just one final thought. i'm the only member on this commission from michigan. over the last four years, my home state has led the nation in

a very -- actually the worst possible way. the highest unemployment in the country. in my district alone in five counties dangerously close to 20% unemployment appears above or here to address our nation's fiscal responsibilities, we must wake of a solution against our current and future economic conditions. under the president has set up a separate task worse by paul volcker on tax policy. mr. volcker has hinted at adding a value-added tax or a system. but given the national unemployment rate stuck at almost 10% and the precarious position of american families and employers, difficult to imagine asking them to pay on top of everything else when they can least afford it what amounts to a national sales tax on everything they buy, including food, clothing, medicine, housing. washington is burned out from the american taxpayer and future generations. it's time for us to prove we can responsibly manage the people's money by getting spending under control. the problem before us is daunting and it's not one that

lends itself to a quick fix. but i look forward to working with all of you to try and find a progrowth, pro-jobs solution. thank you. >> thank you. thank you for taking on that task. and i think the president for naming this commission. i think this is the right approach and the one that has the best prospect for suspect. it's going to be extraordinarily challenging. i think we all understand that. but we've heard here today as we are at an unsustainable course. i don't know if anything could be more clear. where had it very quickly for a debt that will be 100% of the gross domestic roddick of the united states. and the current trendline cbo tells us were going to have a debt that will be 400% of the gross domestic product of the united states. we've never had a debt anything like that in the history of the

united states. and we know we will never get there because those weren't lending us the money to float this boat would never permit it. already, the chinese have warned us publicly and privately that they have grave doubts about continuing to lend money to this country. i just talked to a former top government official who just came back several months ago from a trip to china. he was at a bar or partisan group of former top officials, republicans and democrats. and some of the top chinese leadership took him aside at one point inside, you know, we've concluded that your system is simply unable to face up to your diet. and as a result, over time, you will become a second peer power. it's not quite happy immediately. but over time we have concluded that she don't have the will to face up to this problem. you're too divided, to split

along partisan lines and he will not be able to respond. i hope very much this group proves them wrong. because if we don't, we all know where this is headed. if we stay on a path towards a debt that's 400% of the gdp of the country, at some point there will be a dollar crisis. the dollar will collapse. interest rates will skyrocket. economic growth will be badly impaired. and that's the courseware on. we don't have the will to face up to it. i personally believe that saying everything is on the table is critical. i hope none of us will take things off the table prematurely because i think it's clear it's going to take dramatic changes on the spending side of the ledger and it's going to take changes on the revenue side of the ledger. and this should be seen as an opportunity to right size our

government long-term injury farmer tax system to help america be fully competitive in this new world that we confront. with that, i just want to conclude right-thinking al and thank you, or skin for sending rates home. you know, we've been handed a very serious responsibility. i hope that history will write that we were equal to this challenge and we produced a result those critically important important for this country. >> i've been asked by many about my participation in this group and i think this could easily fall into the category that it goes unpunished. i understand that. i'm the ceo were about a $33 billion company, 120,000 employees at about half of those sales and have those employees outside the u.s. so i travel a lot and i go to a

lot of converging reasons. one of the things i end up seeing there is a strong hunger to make a difference. to work hard, to create conditions for growth and to be especially competitive with developed economies. her faced with a tough problem as we all saw today. and i think it's important for us to recognize it's one that does affect our global competitiveness. and while i'm not a student of history, i would like to build on senator conrad's comments because in the course of my career, one of the things i have observed is that the root cause for failure in most institutions, whether that's government, business or organization is when they abuse that hunger, when they lose that ability to deal to coalesce politically to make the tough decisions as we progress as a society or institution. i do applaud the creation of

this group and the willingness of all the participants to work together and make those tough decisions but i really think are needed to make is globally competitive. i go into it with high hopes, that by working together we will accomplish a good deed and it will be reported with a dynamic and growing economy that i think it's something that the american public would like us to achieve and i think were fully capable of doing. >> thank you, sir. >> thank you very much, mr. chairman. i also want to start out by thanking our cochairman for being willing to undertake this task. like a suspect everybody on the commission here, i also wonder how the needle turned to me and i got appointed. but i also agree that serving on this commission is an honor. and i look forward to working with each of you on a task that is critically important for the american people. as we've heard from eyewitnesses

today, we are on an unsustainable course. several of them said it's a matter of arithmetic here and frankly the american people have this figured out and about a figured out for a long time. and that is the math just doesn't equate. we are spending far more than we are bringing in revenue. we are not the unsustainable debt and deficits that will cause the same kind of impact that we've heard now for many lessons from eyewitnesses. to just look at it again very briefly, it was eerie how consistent the advice of eyewitnesses here today was, that if we don't get a handle on this record is the interest rate grow up, foreign borrowing, higher taxes, disincentives to save and invest our policy options will be fewer want we take as a nation with this issue. we will crowd out capital and result in a collapse of the dollar and the economic loss of investment and productivity in the economic slump that will

follow that. there's many other ways you could describe it but again, the american people understand it. and they want us to get past the politics to the solutions into what is necessary to put before congress in the industry should the recommendations i can give us a path forward. it's going to be tough. and i agree with the comments of a number of those of us here already today, that we've got to be open-minded, bipartisan and fair and look at every option that is necessary to help us get there. that being said, i'm one of those who believes that we must recognize that we have -- that our country is spending far in excess of our capacity and that a significant portion of the solution will be found on the spending side of the ledger. i'm also a strong -- strongly willing to reform our tax code. i know they're going to be a lot of differences of opinion here.

i've been fighting for reform of the internal revenue code for my entire career in congress. and will continue to do so. i hope that we are going to be able to get some of the solutions on the tax side that will not result in increased tax burdens on the american people, but will result in our ability to have a fair, more effect is and frankly simpler tax code. again, our witnesses today told us could be very helpful to our economy. and i like the idea of looking under every rock, as i think was mentioned. i like the idea senator baucus mentioned. we should look at some of the areas we know what the tax gap in the spending gap in the product to be god. we've got to look at everything. i also believe that we must not fall to the notion that some have put out that it will be hard for this commission to do much of significant that we can maybe talk a little bit of the

low-hanging fruit and hope we can call a success. i think we need to have a much larger and a much more powerful vision than that. and i believe we can achieve it because the american people needed and expected of us. we have a unique opportunity to really do something that make the huge difference for this country. >> thank you very much. i want to thank mr. bowles and mr. simpson for chairing it. i want to thank the president for giving us this opportunity. i want to give special credit to two members of this commission. it is a little overt a year and half ago when senators gregg and conrad approached me with an idea that really spawned this commission. and they built that idea into a political force in the united states senate. a special credit to kent conrad, who can really be a burden your saddle when he gets focused on

an important issue. we would be sitting here today were it not for his dogged determination that we address this issue honestly. so cans, thank you ramat for your leadership on that. i think the issue before us is not just an issue of quantifying the cuts will make in spending and what we will do with taxes, but making some important decisions about what we're going to do with this nation and its future. it is true that our largest creditor and the world is china, but it's also true that china is fast becoming our greatest competitor. they have a vision. they have a plan and they are executing it i wouldn't say flawlessly, but with great impact. ..

they are not being rewarded for effort and they are falling behind. as we come up for a solution need to be able to say to those working americans, we have not only the best interests in mind in terms of their grandchildren and legacy, but also in terms of their productivity and their rewards to that productivity. let you also say that the president was very careful in his executive order to assign responsibilities for the medium and long-term. it did not include the short-term because the short-term as the president notes in his order is a recession. a recession were too many people are out of work across the nation. at least 8 million currently unemployed and another 6 million discouraged in each one of our

states there is a sad story to tell her go there is a lesson in history about that incidentally when franklin roosevelt faced an even greater economic challenge. he faced in on employment rate in the early days of this demonstration of 23% nationwide. me started on his new deal program to try to inject money into our economy and brought the unemployment rate down to 14.3%, but four years into it, there were voices in congress saying but what about our national debt? we have got to be worried about this debt, so they started retrenching and backing off of the earlier commitments and they watched at the unemployment rate crept up again to over 19%. sadly it took a shot of economic activity involved in world war ii to get us completely out of the depression. let's make the same stake. read the executive order carefully and in the short-term we need to make sure that we have an aggressive effort to rebuild its economy and rebuild jobs. the last thing i would like to say is there are some that have

a thing preconceived notions of why we are here. i don't believe this commission is a trojan horse for a fat tax that we are defaced a vote on the senate floor as to whether we are opposed to a vat tax. i don't know where this came from. i was not given any sick good marching orders about attacks before it was appointed to this commission. i also want to say that this really shouldn't be a forum for revisiting the greatest hits of the latest health care reform debate. you know that was the contentious debate and went on for a long time and part of the decisions made there have to be reconsidered here i am sure. but i think we need to get beyond that. the last thing i would say is this, this commission is going to make an historic contribution to america, the conservatives on this commission need to open their minds to the safety net in our country and the troubling plight of many working americans, and a bleeding heart liberals on this commission have to open their mind to what it

takes to inspire competition and economic growth in our economy to make real sacrifices to strengthen our nation. thank you mr. chairman. >> i did your work for 18 years, 10 years as assistant leader and it takes guts to say those. >> excuse me and company. >> first of all, let me thank the chairman and also my fellow members from the commission. this is my first participation in any effort of this sort, and i had many questions before finally saying yes. but i too was driven by the importance of the issue that we are dealing with, which leads to my comments. i thought it was interesting that oath-- and rudy in their comments talked about quote, the path we are we are on involves far more significant changes in the american people are used to and also the comment that quote it is clear that few americans

fully understand the seriousness of the problem, the consequences of inaction or the degree of sacrifice required to ensure that our children and grandchildren enjoy an economy that provides rising income and expanded opportunities. i come to this commission obviously with my 30 plus years in business and that is a lens through which i am dealing with. i also come to this commission as a mother and a grandmother, and so that is another lens through which i view my participation. it has been interesting over the last several weeks, i have read a lot of information. today, i have been again hearing the facts and the numbers, but ultimately i think that we are here to serve our fellow americans. and the biggest service that we can do during the process of this commission is to help the public understand the issue that we are dealing with.

the one thing that i have learned consistently and i'm sure dave would agree with the me in business, it is great to come up with strategies and policies, but if we can't execute and executed in a way that people are accepting of these recommendations, then the work will be for not. and again, we could have a great business strategy, great policies, but poor execution will ultimately yield failure and on acceptance of the policy recommendations. and, we are all in agreement that we are not in a position, and we cannot afford to fail. we cannot afford to fail our fellow americans. we cannot afford to fail one another in this effort to work together and my god, we cannot afford to fail our grandchildren. so, as i look forward to my participation and the collective work that we are going to do together, i think it is important that we we and you stand that we are in a position

to create a framework, a framework for sustainability for fiscal sustainability. we may not come up with all the solutions that might god, the information that we have available to us today is rich with options for us to consider, and i was really happy to hear many of you say that we have to look at everything on the table. it is not an either/or solution here. we have got to look at it with everything and every option. and finally, i just want to reiterate the importance of going through this process and making sure that we engage our fellow americans in this discussion. we cannot sit in the small group and have this discussion and get the information in a world where people want to know what is going on, want to have an understanding and want to participate in determining the solution.

>> i thank r. company chairman and certainly all the fellow commissioners to say that our challenge is daunting again is an understatement. i approach my service as i approach my service in maine, washington and challenges and that is with high hopes and below expectations. my high hopes are based on the fact that history has shown that in challenging times, americans, even members of congress, capable of rising to the occasion. and, my hope is also based on the fact that a number of these commissions have been successful. eyewitness the 9/11 commission and brac. not to mention social security which was mentioned earlier perhaps i think by senator conrad. my low expectations are based on the fact that unfortunately more often than not a commissions turn into obscurity and i do have some concerns over the design of this. unlike the 9/11 commission, know that two-thirds of the members of this commission are either

appointed by the president or by his party. i know that the results of this commission are not due until after the next election, and according to press reports, some innate administration would like to take health care off the table. time will tell whether or not this commission is an exercise in political expediency, an exercise in futility, or an actual first step in saving america from fiscal calamity. i certainly believe that they can be the latter. i think the first challenge that we have in the commission is whether or not we can even agree on what fiscal responsibility looks like. although i believe most of us believe in a balanced budget, i truly believe that the deficit is a symptom and spending remains the disease. we can debate the desirability and the necessity, but i do know that we have now seen in 84% increase in non-discretionary spending and less than two

years. a $1.2 trillion stimulus plan, when you add in debt service, a new health care plan that just last week was certified by cms to increase the national health care cost and then we get to the real-- and that as we all know a federal government which is on automatic pilot to grow government from 20% of our economy to 40% of our economy over the course of the next generation. so, for those who think we are approaching this problem on the tax side and know that over the ten-year budget window, we could balance the president's budget and increasing the tax burden 50%, income taxes go up 50%. according to the numbers, i think run by cbo and gao, over the long term we could balance the budget by increasing taxes 2.5%. this means that 10% bracket goes roughly to the 25% bracket.

the 35% bracket would increase to 89%. i think at that point we all know that number one, economic growth would clearly stagnate and in fact government revenues would decrease. i think at that point, our children and grandchildren would be living in smaller homes. they would be driving less reliable and older cars. they will be competing for shrinking jobs with shrinking paychecks and be limited to small timid dreams. raising taxes to that level, either by income tax, corporate tax, death tax, excise tax or european-style vat tax is not my idea of fiscal responsibility. i think ultimately to simply tax our way out of this crisis will lead us to be the first generation in america's history to lead the next generation with a lower standard of living. historians one day might note that although the 20th century

belonged to america and perhaps the 21st century ended up belonging to china. my idea of fiscal responsibility is the federal budget that does not grow faster than the family budgets ability to pay for it. my ideas the current generation that does not settle future generations with more debt. my ideal is a government limited in its power, scope and and expense, enabling americans to enjoy the highest standard of living and freedom the world has ever known. to achieve this idea, i would humbly and respectfully submit a couple of ideas to the commission for its consideration. one would be h.r. 3964, the spending deficits, debt control act that i co-authored along with their fellow commissioner, paul ryan. it is not a silver bullet. it is the budget process reform bill, but i do believe that it would impose statutory spending

caps on mandatory and discretionary spending, a cap on our deficit and include such reforms as biennial budgeting and sunsetting agencies. is already been mentioned, but our fellow commissioner, paul ryan has offered h.r. 4529, the roadmap for america's future. you may not consider it the plan, but it is at least a plan that secures our social entitlement programs for current generations and reforms and preserves them for future beneficiaries without bankrupting our nation, and i think it is critical for each of us to know, although there are many ideas that can be helpful in achieving fiscal responsibility, that unless we build fundamentally with reform of our entitlement spending in general and health care and specific, believe it will be all for not. finally, i would submit to hj read 79, a spending limit amendment to the constitution i

have offered along congressman mike pence and congressman john campbell. i might want to differ slightly with one of our witnesses in my memory of the winston churchill quote, my memory serves me correctly this quote americans can usually be counted upon to do the right thing once they have exhausted every other bus ability terkel unfortunately we are out of time to complete that exercise. i do sincerely look forward to considering all of the proposals by members of this commission. i will have an open mind and not an empty mind on every one of those proposals and finally i am mindful that we will one day face the judgment of history. i have heard almost to a man and woman people speak about their children and grandchildren, and i know that one device i use and picture my children are my black area that if you will each take out a photo of our children and grandchildren as we go through these deliberations, we will

probably do the right thing. thank you mr. chairman. >> thank you very much. ms. rivlin. >> i too am very pleased and humbled to be on this commission. i think we are a group assembled to deal with some very big problems, but at the moment in which we have a chance to make a real difference. i was struck by the fact that there was almost no disagreement among the people who briefed us, starting with the president, and going through the chairman of the federal reserve and various experts, on the dimensions of the problem. we are not arguing about that, and we are not arguing about the dangers. people put them in different terms, but i think we all realize that we are facing a serious, perhaps catastrophic

threat to the prosperity, the future prosperity of the united states. and, whether it comes, the threat comes in the form of reducing our standard of living gradually over time, or in the form of a tremendous unpredictable crisis, none of us know that the threat is there. now, the problem that both tenor and reischauer emphasized, the long-run problem of and sustainability of the federal budget, is not a new problem. i have been making speeches about this for a very long time. [laughter] like 20, 30 years. we have known that social security, but more importantly medicare and medicaid, are growing faster than the economy and it doesn't matter what they

are, taxes will not grow faster than the economy. so we have got a problem of this growing wedge. the reason it is so much more urgent now is really two things, the baby boom generation is in some distant thing. they are retiring now, and in the last couple of years we have had this to read this recession that has thrown us into a very different debt situation with rapidly rising debt. that wasn't true three or four years ago. our dad was still sort of modest but now we have got a rapidly rising debt. instead of having one problem the problem of sustainability, which is big enough, we have got two problems. we have got the medium-term problem of how do we keep this debt from rising faster than the

gdp. we have got to stabilize it somewhere. there are no magic-- but we have to stabilize its cinematic means getting that medium-term deficits down, and senator baucus is obviously right. the things we need to do about the long run aren't going to take us through that very much because we can't do them quickly. we need to do them, so we need to think about some of the things we can do more quickly that will not derail the recovery and that is going to be tough. one more thing, i want to take issue with, with bob reischauer on process is is not so important. processes and everything, but i do believe that when the budget enforcement act of 1990 was in forest, bipartisan way supported from 1990 to 2002, that we used

paygo and the caps to get to those surpluses from the '90s. it is harder now. paygo will only help us not make it worse, but the programs that are already on the books are what are driving spending, medicare and medicaid particularly, so we have harder problems. but, i am optimistic and excited to be part of this group. thank you. >> thank you. when your name is ryan and you go by alphabetical order just about everything has been said that let me try to say something a little different. first, to the two chairmen senator simpson, mr. bowles. each of you have a great reputation of integrity and i look forward to working with you in this effort. most of us were in congress

during the last economic crisis and that was a crisis where the chairman of the federal reserve and the treasury secretary came rushing to the hills in panic mode. we all got together and we governed in a panic situation. well, we have before us the most predictable economic crisis that we have ever had in this country. so, we all know, we also i think we are getting a good grasp of the size and the magnitude of this crisis. sovereign debt crises are popping up all over the world and we are kidding ourselves if we don't think he can come to us next. here is one of the problems though that i think they are going to have to end up discussing. as we know, health care is the biggest part of this. unfortunately, doesn't matter how you voted on this last bill, it is law now. we just took $529 billion of savings out of medicare not to go toward extending medicare solvency but to go toward a new entitlement. we just increase the size of medicaid by one third, and we have a new entitlement.

and the entitlement speech many of us has been in this, weiss to call it the big three, medicare and medicaid and social security now does the big four. that is an issue we are going to have to talk about. what do we do about this new entitlement. the fact that in this session of congress we have passed into law $1.8 trillion in new spending, coupled by $670 billion in new taxes. >> i would argue our fiscal trajectory was bad and now it is getting worse and that is just for my personal perspective. i put a number of ideas out there myself. i kind of think of myself as a canary in a mine shaft on entitlement reform that and if there's anything anything i've learned from that experience is that the american people are ready to be talked to like adults. they are ready to note the fiscal facts and if there's one thing we can accomplish with this effort it is better public education about the nature of this problem and educating our colleagues in congress about the nature of our problem. i too, like jeff said, look at this with an open mind, not an empty mind. i really think if you look at

the map of all of this, spending is the culprit. mathematically speaking you literally cannot tax your way out of this problem so i don't think we should try to go down that path of taxing our weight of this problem. if you look at the congressional budget office model, the model of the future of our country, the economy shut down mid century and the computer cannot think of any way out of this fiscal problem we have. we know for a fact that we are giving the next-generation and interior standard of living. we have never done that before this country. the legacy of this country has always been you take on the challenges before you and make sure that your kids and grandkids have a better life. all of us agree with that challenge with that legacy. is going going to take a lot of heavy lifting and i would just simply say when you look at the spending problem, the sooner you act the much better off you are going to be. we have got millions of our fellow citizens to a party organized their lives around these programs, acting very soon

you can ensure that their life won't be operated. and we can make prospective changes going forward so that people have time to organize their lives, running room so to speak, but if we keep kicking a stand on the road and not confronting these massive spending challenges, that kind of assurance to those who a party organized their lives in these programs cannot be maintained. so really we are in a situation where time is of the evidence-- essence to deal with this and i were just simply say we have got to spend most of our time and think on the spending side of the ledger is after all that is what is driving us at the end of the day on the level of her son economic freedom, living standards, jobs and international competitiveness. it has to be the overarching concern that drive the decisions we are making. >> i am very honored to be honest commission. i look forward to working with all of you and agree with the

statements that everything does need to be on the table, but i want to say that we are gathered here not as accountants or actuaries, bean counters who are looking through columns of numbers, but as policymakers and its leaders who care deeply about the lives of the american people of today and tomorrow, who are impacted by these economic policies of our country. the president said last week, quote, some on wall street forgot that behind every dollar traded or leveraged there is a family looking to buy a house or pay for an education, open a business, save for retirement. what happens on wall street has real consequences across the country and across our economy. and the same thing can be said about the path that we are engaged in now. balancing the budget and reducing the debt in my mind are not in and of themselves the

welfare of the american people has to be the goal of our fiscal policy. everything we do here should be measured in terms of the impact on the well-being of our people, the opportunities we provide to our children and grandchildren and the values of our democratic society. so much is going to be said about what we can afford to do and what we can't afford in these questions in my view have to be considered in the biggest context possible. for example, believe we can't afford to skip-- skimp on our children's education, sharing access to quality affordable health care, retirement retirement security, cheating energy independence, investing in our infrastructure, supporting medical research, creating more jobs and the bottom line is, while we are committed to bring our children and grandchildren from crippling debt, we must be just as committed to assuring that they are not ignorant, sick and unemployed. there are many items and

practices that we can afford to continue that i intend to put on the table. for example i do think we can't keep up with the double digit trimming them increases and private health insurance. we can't afford costly procurement and contracting policies that result in fraud and abuse. we can afford to incentivize moving american jobs overseas. we can't afford to build, to pay for outdated and ineffective cold war weapons systems or deploying 200,000 american troops, servicemen and women plus as many contractors in iraq and afghanistan indefinitely. we can't allow wall street to run amok and frankly, i have heard enough sanctimony statements by the most entitled about entitlement programs, wall street bankers who pay themselves tens of millions of dollars in bonuses while lecturing retirees who bring home an average of $18,000 a year about tightening their belts.

tax entitlements as well as programmatic entitlements need to be on the table. we have to acknowledge that the current deficit is not solely the result of spending and tax policy. a substantial cause of the current deficit was the recklessness of big wall street banks that cost 8 million american jobs and the failure of our regulatory policies that we needed to prevent our financial sector from spinning out of control. a recession as senator durbin said, like the current one, is no time to make the same mistakes that led to a double digit-- double dip downturn in the 1930s, a short-term reduction of the deficit i think is the worst thing we could do for the economy. we need government spending to create the jobs that drive continued economic growth. and, i am absolutely certain that we are not engaged in mission impossible. we have done it before. just a decade ago we ushered in

an era of fiscal responsibility during the clinton administration, creating over 20 million jobs, producing budget surpluses and rapidly declining debt and we can do it again. we are a hardy beginning to signs of progress. american should be confident that we have it within our power to fully restore the economy and the soundness of the federal budget while keeping our commitment to both our grandparents and our children. americans should feel confident, this great country can continue the american tradition of each generation, looking forward to an even better life than the one that came before it. it is up to us to show the way. >> erskine and allen thank you for taking this on. this is vitally important. this commission faces a great challenge, but one that is worthy of our best efforts. the public debt is rising relentlessly as a result of the

worst recession since the great depression. .. current law assumption, devastates in 2020 would total $687 billion. that assumes of course that the tax cuts passed in 03 would not be renewed and carried forward.

once in current policies will stay large and change, and deficits in 2020 would be what $20 billion. everett at this table, the budgetary warning signs but he does to even more questions about our current education. how long can we choose to borrow from future generations to satisfy our current needs? how long will we remain the world's greatest superpower? on the fundamental raised by someone earlier, who will tell the people? by the fiscal challenges it faces are daunting, the historical record provides some cause for hope. in 1990, under president bush, we have a bipartisan process, a bush budget summit, which resulted in a significant reduction vested. the results were clipped by a recession. is that clinton came to office built on that foundation

successful budget that in times paid off in 1997, both sides came together in a bipartisan effort to pass the balanced budget agreement of 1997. we've done it before. we can do it again. i had a small hand of an 1897 after a night have got away with it some lessons i like to share with you. the common sense lessons. first of all, everybody needs to be at the table. in that regard the compensation commission strikes me about right. were democrats and republicans. we are members of the house and the senate. we have representatives from public sectors as well as yours. we need this diverse mix. but we need to do more for everyone to lean into the problem and look for common ground. secondly, everything needs to be on the table. it was in 97. it has to be a kid. we kick out of these discussions successfully. if we had with richard discussions about candy cannot it be done.

the problems that confront the site clear. so are the elements of a constructive solution. i look forward to working in a collegial way with all members of the group's commission. i hope we can set a fiscal policy on the right to a long-term. thank you. >> i just want to say i was enormously honored when the president asked me to serve on the commission because you can call me old-fashioned, but i love this country. i happen to think america is a gift. and it's greatest gift is that people have come here generation after generation, like my grandfather, lewis, who became a butcher in north new jersey. all my grandfather ever wanted from america was a chance to work really hard. all he ever hoped for was maybe his work would be rewarded. nobody really trimmed about is his is his son milton and his grandson would get to live a

better life than he did. that is the wonder is, remarkable and incredible american dream. and despite the civil war, two world wars and recession, that dream. as mishandling and ryan hunt said, need not anymore. 79% now say their kids are going to do worse than they do. and that is not what any americans want or need to create. so, i think everywhere but in washington d.c. who seem to realize americans realize something is profoundly different in the country. it's not the 20th century. this 21st century. the economy is not national. it's international. america's not clearly going to be the dominant economic for the long run. ribeiro competition in china for the first time in history. i want to make three points. one, this is not our fathers and grandfathers economy.

i would say it's even much more profound. our country the rest of the world is evident through one of its third economic revolutions. the first was agriculturally took 3000 years for the second was industrial to 300 years. this revolution and it is a fairly economic resolution is to go from the national to international economy. as we go from manufacture to finance knowledge, environmental and innovation economy is only going to take 30 years and were only halfway through this revolution and everything is changed. and this revolution, countries are team spirit and team u.s.a., the red white and blue team has no plan. we've all said was going on here. you can say it's unconscionable. it's ruinous. it's unsustainable. the team u.s.a. needs an economic land and i think that's what we're here to do. to win this global economic competition and making a plan together. my second point. we had an assumption here when you listen to the people that we

are going to automatically return to the kind of job and wage we had prior to the economic collapse. and if that's true, we have a problem. with a jobless decade in america. the census bureau said before the uneconomic class of american workers hadn't thought of or five years, the longest in economic history and the corporate threat record high in which is a record low. we need to be very thoughtful that we cannot simply in the short run counter way, our way, spend our way, you know, out of this. we need to have job growth and wage growth in the short run it for going to be able to do anything and have to be very thoughtful about changing anything. that might interrupt getting back to the kind of growth we need to begin this conversation. last point. everyone i talk to in washington all apposite to oneness that although this is a critical discussion, you know, they view

it as democrats and republicans, you know, or they look at in terms of left and right. and i think we need to look at what is right or wrong for our country. and i think if we do that, all the assassins of changes i like to call them in washington d.c. who stand around trying to make sure nothing happens will be very disappointing. i've met every single republican member of the commission. while the democrats i've known for a while. and i'll say this. actually a lot of it is not about democrats and republicans. i said dr. coburn earlier and many others here that i think focusing on waste, fraud and abuse is important. as congressman bachus had come to think about all of the tax gaps that we have. i think the whole question about two-year budgeting and the questions about how we have an accountable budget make absolute sense. i happen not to be a great fan of earmarks. i happen to like congressman bares about his taxpayer bill of

rights. i like senator gregg's ideas about how we simplify our tax code or senator conrad kind of indictment of the general unfairness of the current growth. i like congressman wright has said that the income tax rate for corporations are too high and the loopholes are too big and we need to think about effective rates, not just absolutely. i agree with many on the panel who say we need to address retirement security, not just social security. and it's a question both of adequacy as well as solvency. i think there is a question about how people are going to have universal personal accounts as add-ons, you know, to what we have now and look at all the tax expenditures remake for retirement as a more integrated and better way. i like congressman camps idea how we simplify the tax structure. i want to add the same way senator crapo said to me in our meeting is that the goal here is not just about fiscal balance, but we need to make decisions that restore the economic

engines of the greatest country on earth. in the end until we have an economic engine pulling the train, we're not going to get where we ought to go. i see your future is not a matter of chance. it's a matter of choice and it's really time for america to decide. >> i don't need to sum up. >> yes you do. [laughter] >> thank you. first of all, i've got the greatest partner in the world. as i said, with president obama, if this team here can develop the trust that al and i have, there's nothing we can't accomplish. but it's all about trust. a lot of you have talked about the 97 budget agreement. the reason we got that agreement done was because we develop trust on both sides and we ended up getting 75% of the members in both houses of congress on both sides of the aisle to vote for it. we can do it.

i thought representative ryan had a past in saying that this is the most predictable economic crisis in history that we face. and we're on autopilot right now. and if we don't face up to these deficits and the rising debt, we will have a tremendous economic crisis. amnesty said, mr. stern, we do need an economic plan. everybody hear from the president to the fed chair, to every member of this room and every witness said that the pats were on today is not sustainable so we all get it. now, do we have the courage to do something? to me, this debt is like a cancer. it's a cancer that's going to destroy our country from within. it's as plain as day. the arithmetic is compelling, the problem is easy to agree on.

what is really hard is the solution. and there are a lot of ideas out there. look, i want to protect the social safety net. i want to make sure that we invest in those areas that will make america competitive in a knowledge-based global economy. i want to make sure that anytime we discuss revenues that we don't do anything that has a negative impact on economic growth. but we have to be willing to change. we have to be willing to make the tough choices. we're not going to solve this simply by waste, fraud and abuse. we're not going to solve it by just limiting foreign aid. we're going to have to make really tough choices. and that's going to involve the entitlements. it's going to involve the military and it's going to involve discretionary items. and it's going to involve revenue. we have to face up to that.

i think the president was right. he has insisted every time you talked to and me that everything is on the table that he will support the conclusions of the committee if we have the courage to make a recommendation. i have three goals. first i want to make sure that we do educate the american people. we've got a huge education job to do. i'm not the big marketing job as you see it. we've got to make sure they understand that they're going to be no jobs out there if we don't get this debt under control. it's a fact that in the business world, small businesses can grow and create jobs that capital. and they will be crowded out if we don't get this debt under control. i've been in education. i know the importance of making sure we have a highly trained, highly skilled workforce. but there's going to be no money

for education, infrastructure, transportation, innovation if we don't get this debt under control. and you talked about what the chinese start to sell our debt? man, what if they just quit buying it? will be in deep trouble. so we've got to educate the american people that there is a crisis, that paul ryan is right. secondly, we've got to agree on a set of numbers. al and i believe the right numbers are the actuarial numbers from the social security commission and from the medicare commission. we also believe we have to use cbo numbers because they have the most rest to see in this town. so i hope we can agree on a set of numbers. and then we have to explore these options. these two guys became the former head of ceos say there's a lot of options out there. you guys have great ideas. let's explore these great ideas. let's leave everything on the

table to the end. and then we have to make the difficult choices. alan i have agreed were going to make those choices. we're going to work together. or not a republican and democrat. but we have a big problem and i'm excited about working with each other. thank you for serving. we've got a couple of chest issues to bring up before we leave. first of all, the next full commission would be on may 26 from 9:00 to 11:30. it will be up on the hill and were announced. in between that, will have working groups that will do with the mandatory spending, discretionary spending and revenue reform. and we'll have each of those on every wednesday going forward. the subsequent meetings after the next may 26th meeting, if i can find my notes here, we'll have a third public meeting on

june dirtiest, the fourth of july 28th. a fifth on september 29th. the sixth on november 10th and and a seventh on december 1st, which is our due date. in between, we'll have meetings to discuss working group meetings on mandatory discretionary and revenue. i'd like to now before my cochairmen closes this meeting, half bruce reintroduce the members of our staff. >> thank you all for the presentations and for the goodwill and good faith you've shown throughout this period the extraordinary amount of help at your stats have given us in hitting the ground running. i like to introduce and think a couple of the people who helped make him this meeting possible and who will be working with you about coming months. next, conor mckay, r. timekeeper there's no time allotted on the amount of power conner puts into this grade. a couple people who are just joined, megan man who is coming

to us from omb and is a long and illustrious career as an expert on mandatory spending. she's worked at gao, cbo as well as omb. and then, marc baldwin was on loan to us from the committee for responsible budget is also mandatory spending expert and a numbers ways. and i should tie you that we are very fortunate members of congress on this commission have some of the most extraordinary, talented people in the field and will be taking full advantage of that going forward. we are determined to build and not partisan, bipartisan staff. there is no minority but were doing and we look forward to working with you to carry out the ideas he put on the table and tackle the problems we heard about from our many experts. >> we have a grand total of three. >> let me tell you, if you think

america is an bare-bones, this commission is in bare bones. this is about it. and that's what makes it confident. we heard some meetings around the united states. voigt, i tell you we don't have to scratch as the old guy said to do it. >> let me tell you, we will have to do it -- [inaudible] so we don't have to physically go from place to place. we can figure that out. >> you're so right. it's about education everywhere you go in the united states. you hear people say something is very wrong here. and they know that. well, i don't think i can add. i thought your remarks are beautifully said. and here we go. do you know, if it doesn't work, all of know that i've given it my best. but i have been on commissions that were.

we did the select commission on imitation refugee policy. and the only reason it failed is because the extreme right in the extreme left side we have a national i.d. card. so watch out when they're using emotions, fear, guilt and racism on you in this game because that's how you pass or kill anything in this joint. the motion, fear, guilt or racism use words, flash words, which like amnesty or taxes or whenever, whenever, those are words. and i just say it in the iraq study group, 10 people, five from each side agreed on every word. i wouldn't issue a report until we agreed on every word. it was very disappointed at the end when i changed a couple of words and sandra day o'connor said your thesis is vented. i said i don't even know what the hell is split and sent it

is. fifty-seven of those suggestions have been except dave after this .. out of 79. so they can work, but the cynicism out there -- he used to be skepticism. and i was just cynicism. and it's heavy with the media. we'll get out of here in the first question, what did you say about entitlements and taxes? so erskine and i go to those and try to laugh them out of their particular complexity. their knickers are twisted as they say in a lan. not here. [laughter] and i'm going to hit some of the working groups and you will. [inaudible conversations] [inaudible conversations]

[inaudible conversations]

solomonic

[inaudible conversations] [inaudible conversations] >> good morning, chancellor. thank you for coming before us this morning. and there's quite a lot to get through. but before i do that, i'd just like to ask you a couple of other questions. the first related decision that the americans have just taken on their own qe plan and i think it would be helpful if you could tell us what coordination there is at the moment but treasury between fiscal policy and monetary policy between the bank and the treasury on this crucial issue. >> well, first of all, thank you very much for letting me appear before you. the first point i make with the committee's forbearance, the monetary policy committee is currently meeting and will make

an announcement today about the conclusions of that meeting. so i'm sure the committee will get drawn into monetary policy. would make this general observation that the economic situation, as i see it, is the u.k. is currently growing quite faster than was forecast to appear the world economy is growing as was forecast. clearly, and it grew with the governor of the bank, it remains one that is choppy and is to be entirely expected what we have had the biggest banking crisis of our lifetime in the deepest recession since the second world war. now in that environment, i have thought it was incredibly important to move out of financial danger of the question over the next couple hours and make sure a fiscal policy and

the government of the banks themselves have served and i really draw between the attention of his word. but the monetary policy. and that is the principle of policymaking that in a way this was the foundation down in the lecture many, many years ago by nigel lawson, that monetary policy is the principal tool for creating demand. my fiscal policy needs to be set for the meeting time. and those of the broad principles i've expressed before. >> my question is partly about proceeds, the level of clearly you don't want to go into great detail of the government, but it would be helpful to have a feel for how dare you whether taking place. what is the level of

coordination taken place as americans? is that harder than usual clerics >> well, socially speaking for the period that i've been enchant for it to make consistent, though not that i think greece are frequently at meetings or decreased better and probably the boat. i can't speak for my previous essay. i meet with the governor regularly. i have a meeting with him at least once a month, quite often more than that. actually, the intentional gathering such answers now go to , g20 finance ministers and essential bank meeting. and so one is the regular meetings are trying to take place. and we've been around as well as those they are also regular encounters an international conferences as well. >> so the foreign meetings or to

drag on. >> they never drag. >> the second thing i like to just refer to is the governments response to our report on the obvious responsibility. while i'm very pleased to see you've accepted the lion share of our recommendation and all recommendations, except one major exception, which are just like to refer to know, which is almost everybody who came before us agreed that this innovation needs to be reviewed thoroughly after a period in most people suggested five years was a good period to take a look at it after. and that included robert goat and professor nichol to three appointees.

i'd be very grateful if you could reconsider your rejection of the proposal that we have a statutory review after five years in the legislation. >> well, i'm very happy to look again at that purge legislation going forward in committee will want to take part in the discussions on that legislation. and for me, i'm trying to establish the institution that is going to survive long after i'd left this job that would operate in physical persuasions. it's incredibly important that a command the confidence of the whole house economies. as i say, take very careful consideration over your request about having a statutory requirement for review after five years. i wouldn't say yesterday, but i've just confirmed it is

possible beyond the legislation that certainly we believe there should be review. the question of whether should be in primary statute or not ever look at it and get back to you. >> thank you very much on that, too. it's very good news that i'm usually the government has pretty much accepted the payrolls we've made that we've had a significant body. there's just one of those recommendations that you've made. can i turn to the issue -- the vexing issue of the internet sessions already about the carriage. there's only one question i want to explore, which is what you and the government did, which you realize that you had this

astonishing contract which given the decisions you're going to take come with aircraft carriers for 10 years with no aircraft to put it in. how carefully was renegotiation of that contract would be considered? >> well, can i make a broader point and then joe very specifically with your question. this was clearly, of all the problems we face, probably the greatest. it was an incredibly difficult contract for a government that committed whoever had won the general election to an extraordinary amount of expenditure on tudor aircraft carriers which have increased significantly from 3.9 billion pounds to 5.2 billion pounds. this was confirmed by the previous chief secretary to the previous government in january of 2010, which is in these contracts have been further

confirmed after the intermediary station in 2008 in 2009. in other words, it was confirmed was very clear that the country was going to be short of financial resources going forward. and what i propose to do with your permission, mr. chairman, is give to you, the committee, the confidential letter that was sent by the chief executive of bea systems to the prime minister on the five out over 2010, the 80 systems are happy to provide this letter to you. it goes through some detail -- [inaudible] >> i pointed out to be a system that this committee had over the last few days taking considerable and cost that i thought it was appropriate that members of the situation we inherited the contract had been negotiated by the previous government in the complete line that the average taxpayers. and as you will see it will show

to that the cost of canceling the carrier, the second carrier, would have been more expensive than building and not proposing to have it operational in order to save resources. what i propose to do, mr. chairman, is give you a copy of this letter and we been up to you and your committee to decide when i need to put into the public command, but that will be yours. >> more transparency that can be brought to this once if they can extraordinary decision and part of the public find it quite incomprehensible as i'm sure you know. but let's leave it there since others may want to come and a bit late to see that that letter has to say. and he loves. >> it is a 2000 night conference when the prime minister said,

sometimes the competitive using we'll have to stop because in the end it leads to inflation. you don't really like quantitative. >> if you allow me to repeat myself, the monetary policy committee meeting is actually meeting as we speak. and i don't think it would be appropriate for the chancellor to see whether meeting with their public position as a couple hours away for me to comment on the merits of the different forms of monetary policy. >> let me ask you and answers on the house of commons, you have two get this you would follow the same policy is your predecessor. in effect, given the greenlight to the monetary policy committee and relation to quantity of easing. why did you do that? >> well, with the original arrangements were created for the independence of the bank of

england on monetary policy, it was very clear that the nbc had complete independent in the setting of interest rates again to an inflation target set by the chancellor. and i became clear some time ago arrangements around the granting of permission for quantity were not so clearly set out in the original statue. so my predecessor came forward with arrangement that would to concept using. and i thought it was appropriate to continue with that arrangement. i think one poses a counterfactual, which is up by a torn up those arrangements is that of a whole new set of arrangements people might have regarded that as quite an extraordinary decision. >> will understand your elation of that to the situation in the

united kingdom which some of us have united states. but the situations are very, very different. in fact, situations here but suggest that is persistently higher than i think expected with long-term interest rates already reasonably low. i'm wondering why in the context the overall economic situation and come with you suggesting we would have a fiscal policies while you needed to educate and leave the freehand to be saved upon. the situation was this. i was asked a question by a journalist. but i continue with the arrangements of my predecessor put in place for quantity of easing. and i said yes. i found guilty of answering the question. and that is what i think is

appropriate. the counterfactual, which is a fight that actually about considering the arrangements between the treasury and the bank in this regard, what would've been the reaction to that? so i've actually made this clear as it happened when i was in opposition and was asked this question but i became a chant or, what i continue to arrangements? i said yes i would. i didn't regarded as particularly newsworthy. a more newsworthy event would have been the specter is. >> there's been quite a lot of speculation in the news media. with resection to the rest of the economy, in the sub quarter was greater than expected although there is still signs the economy is slowing. with those great uncertainties quest quantities easy in should

things go wrong, how do you respond to them? >> well, as i said in my opening remarks, in my opening answer to the chairman, you know, what i believe you've got to do in this situation the united kingdom has found itself in is provide credible fiscal policy. that was obviously the overriding need to continue to take my job anna mae. i've done that that. the governor of the bank of england has himself drawn attention to the fact in a speech at the mansion house that a credible fiscal policy was eight, essential, but beat, provides flexibility for monetary policy. and i think that is a good way to govern the country. >> you indicated earlier on in the year to your preference was to have 80% of deficit reduction from public expenditure cuts

with 30% for tax tax tax entries. you subsequently changed that to roughly 70, 30. why if you do not when you play such great emphasis on the need for the predominate stevens to come from public expenditure? >> well, first of all, the parliament develop. and that's partly because the tax lover is an easy one to polls in the public expenditure and other. in other words, you can increase tax if you have to, the poet expenditure savings can take longer to come into affect. so we moved to a the 20 during the parliament. i said at the time and i said repeatedly covered either regarded in absolute number have to be 8020. i said that was a good rule of thumb. that was a good guideline for a credible fiscal consolidation package. and i would not simply be my own

personal view. that was the view of most international studies into fiscal consolidation packages around the world. the ones that tackled the root cause of the problem, which was a fairly dramatic increase in the structural deficit brought by an increase in study of the best way of doing that was to tackle the increase in spending. >> wasn't not related in any way to the resistant to it. dane, the treasury was experiencing in trying to implement such high levels of government departments? is that not taken into account in trying to readjust it? >> as i say, seeking to readjust the figures, i mean, on the tax front i've made my announcement in the budget. obviously when i reserved benningfield was the public expenditure decisions. and i have not met resistance as it's been a collegiate process.

and i think the world productive process what would've been able to deliver what i believe is a credible package from what chevron international you looked at this and the british business regards as a package. >> let me say the former secretary are laying up last week that the four year time scale of cut in successive years is unprecedented double the incredibly difficult to deliver. i say that in the context of the report from the national office on the efficiency savings of the previous government. i know you say it was overflowed the previous government, but the reality of that report is to show how difficult it is to get the level of efficiency savings being requested. but the weight of the problem of being able to deliver on the public expenditure cut is a

gargantuan spin on views somewhat chastened by the experience so far? >> well, of course it's a big task. it's not a big task for the government, but for this parliament to face up to the largest deficit we have had to confront the second world war. and i believe we all have to take collective responsibility for trying to solve it. now, i would make two observations. first of all, i seem very long-term with the cabinet secretary under the previous government >> and former members were the chairman of the secretaries are in the security. >> but i read both evidence. it is very clear to this committee that this was an absolutely necessary consolidation, but beat, the pace is appropriate. and he makes interesting observation which permits

officials can make, which is weber won the election will pretty much be doing the same thing because of the facts on the ground. so you know, i think that's an interesting observation from him. i would make another observation about the pac report which i've been reading this morning. i mean, i think it points to the dangers to announcing just enormously efficient targets. for this reason, some great efficiency justice and government departments can deliver. it says when this was done in 2007, there is no robust evidence about what can be achieved. and there is a lack of financial performance data. now we are trying to resolve that. we have had a more specific approaches some of the efficiency savings, for example, administrative savings in production and quangos in the light. we've also tried and are currently trying to improve the quality of financial data and what i thought was pretty, you know, shockingly weak at the

moment you were trying to improve that appeared were also using other tools like for example transparent these so that public expenditure is available for people to see that we can create a nation where the taxpayers money is going. so i mean, were used in a number of different tools. but as they say, we all face the same challenge. every single person in this room. it's a very large structural budget deficit. we have to do with it. i think the most appropriate way to deal with it is since the international evidence support is by touching the root cause, which is very rapid increase in public expenditure and the fact scene up resumes have it way above its long-term average. and the measures i've set forth, which were of course in the individual measure. what i've tried to do is put together a package that is credible, deliverable, does not

rely on efficiencies which are being delivered as for seaman 2007, but instead more specific and gives more control to developments about how to deliver it. >> on both those fronts, we now know that your predecessor wanted to increase. the last government was planning. did you find any evidence when he started work in the treasury? >> well, i want to say it was not made privy to me as the papers of the previous government. what was clear, frankly, was all the work had been done on the back rise and i confirm recently she would go ahead with the vat rise and also work had been done on the housing and a fat cat. that was a policy that was worked out. and of course, if you read now the labour manifesto. so there had been with some work done on some specific policies,

which are not the policies are now mostly attacked for introducing, but in terms of a broader plan there was none. there was just an addition to cut 44 billion pounds from department to expenditure set out in the march budget with no plan behind that to deliver that 44 billion. >> and i press you on these efficiency savings? the pac report this morning really does make clear that at least a dozen would never achieve at all the last of the efficiency were serving in your document. how can you reassure us that your efficiencies really will be different to these claims we've had in the last four or five reviews? >> well, first of all, we have agreed with individual departments in very explicit reductions in their administrative budgets. that is a fact on the ground. they're having the administrative budgets reduced.

as part of its process, i required to reduce their administrative budgets. second, we are actually eliminating and they are disappearing as a fact. third, we are putting in place, i believe, reports that will improve the efficiency of government through, for example, the place budget and which will extend more broadly through the use of personal budgets and the more extended areas of public policy in the light. and i am actually the budget to these departments. so the challenge to them will be yet, to deliver that through greater efficiency, greater productivity gains in the treasury, the center of government will remain absolutely on the case to deliver those product improvements. because of course one of the great challenges in this department is the productivity of the other, declined to the last decade. at the same time it was

increasing in the private sector. >> if you're remiss to turn, how will we know whether you've been successful for the benchmarks? how we know whether these services are more efficient? >> well, i think there will be a couple of tools at people's disposal. the first of the complete transparency, not where money is being spent. this committee and other members of parliament and the public will be able to see what is being spent on the administrative budget in a way that has been not so transparent as before. second, we will be publishing much more data on the outcomes. people appeal to judge themselves whether outcomes are improving or not. >> can i ask you about the spending process over the summer? i think you are the first chancellor to send and of the process. looking back, did that help? >> yes, i think it did. i think setting the date in october, so early on, focused on everyone's mind, i think image

you could come and, not knowing when the spending review was going to take place, whether it be october, november, december. people on this committee who remember from the last parliament will know it was will doubtless indicate to what the spending review, when the pvr, with the budget? i think it's perfectly sensible to put into place some structure and process but there's no reason why you can't make a forward announcement of the date to get the whole machinery of government working for that day. >> what have you learned? looking back over, what would you have done differently? what would you do for next time? >> well, i personally think the process of your sitting in judgment on this. i think the process went pretty well and was a collegiate as possible. what i learned -- to say i have learned that i think setting clear date that go months in advance for the quarter is a

good idea. >> we've long recommended to have the pvr data in the budget should be adequate notice giving. first proper notice of these things. what the budget going to do? >> i'm going to tell you, the answer is the 23rd of march, 2010 -- 2011. and that is over four months notice you're getting. i think the treasury committee in the previous parliament of two months -- recommended to none giving the chancellor should get two months notice. so the 23rd of march will be the date of the budget. put it in your diaries and no doubt i will put it in my diary of the appearance before this committee. [inaudible] >> i'm already looking forward to it. >> just going back to the spending review. would you build to tell us of the most difficult minister was? >> i don't think i can,

unfortunately. >> i was about to say, wait for my memoirs. but they're so boring, i'm not sure i'm going to write them. >> might be a long way. >> chancellor, i'd like to press you a little bit more about the process because having das involved that they change management programs, anyone will tell you it's hard to come up with the plan, but it's not impossible to implement it. just to press you a little bit more in terms of how you know to the plan into the reality. for example, would you have a finance director in every department, ensuring the budget, who will be the people on the ground that ensure this gets rolled out? >> ultimately, secretaries of state are accountable and indeed the prime minister and myself are accountable to parliament on the public for the delivery of the spending review. now it's an departments we are trying to increase the capacity

in terms of financial management to make sure there are proper finance director roles, but the quality of data is improved. and of course, permanent secretaries are also accountable cometh not to this committee, the public finance committee. in a number of ways we are trying to improve the quality of the data, which as i say is a shocking report. in fact it, the accountability to the delivery of the spending review. but i've made this observation, what are not trained to do is start out for every encounter of what every director needs to do with the group found of its budget. there are many different public-sector employers at hospitals, schools, local councils, government councils and so forth. and in the end, i want them to take responsibility for the

delivery of their budget. now, i take responsibility for the budget i've given them. they take responsibility for the delivery of that budget. >> is that the revolution and accountability than? >> i think were trying to increase accountability. i think frankly there's a much greater public focus now on that money that has been the case. and it has been brought about by the real-world situation. and partly i would say because it's of the focus of this government that we have made this the focus of people's attention. >> so specifically than on the forecast, our senior officials telling you that the inevitable reduction in headcount for example could cause having the political stand there with the accounts? >> know, we have not received that message. i mean, i think it's also the case that this consolidation is

coming and after a period of very rapid increases in public expenditure. so they're certainly a capacity the government to make these savings. and i think it is not that different from previous administrations and had to come on the backhaul leaners already. if you look at the late 1970's, there really from the arrival of the imf, since the beginning of the new decade they have been attempted to control public expenditure and attempt to control and the new government has to come in to make further efforts. and of course it's very difficult. i'm not underestimating the difficulties, but police were dealing with the situation where there's been no attempt to control public expenditure. >> absolutely. just turning the to manage it in the church, do you worry that with the reforms combined with

the cuts and budget, that you might undershoot. do you ever worry it might be extremely difficult to achieve the level of savings and expenditure? >> know, i think that's one of the big challenges facing the treasury, the expenditure bill because there is no incentive on government departments to control those budgets. and we are looking at whether actually this whole framework of doubt come in amy is to be revisited, particularly to any part because this is a very large budget. i think actually have with the government spending, it's not really managed. and so, we are looking at a new framework. i'll say more about that in the budget on the 23rd of march. >> thank you.

and another question, is there a part of me that worries if there is a reduced sail to deliver the cuts, that it may be necessary to give them a further round of cuts of some of our european colleagues have had to do? >> is certainly not my attention. when it sought to do is set out a credible plan that delivers on our fiscal mandate. and the fiscal mandate is to bring the physically adjusted structural budget into demand. and i aim to achieve that because i built in some caution into the plan. actually, this relates to another question about the ob are. it's a misunderstood point that the government forecast now are built around the essential as image, so the previous government in previous government would announce the

forecast ramped up in the treasury of say we don't some portion and see what the portion was. but we've moved to as a system where we have an independent body that produces estimate what they forecast with a central forecast and where were building the caution now is into the delivery of the fiscal mandate. >> thank you. >> thank you very much, mr. chairman. chancellor, i want to get back to the question of the aircraft. every member of this committee has a sense of absolute bewilderment. how is it possible that a government facing an 80 to 100 billion pounds deficit can be signing that kind of deal of? how is it possible between more expensive, not to build and does this point to mod being captured by the industry? india and do you think the prime

minister itself will be including those over the interest margin spectrum? [inaudible] [laughter] >> i'll leave this committee and the public to draw their own conclusions about the last point, although we very much welcome the return of the body to the house of commons to bring up the subject. but the broader point i think is a good one, which is i think they're going to be an enormous amount of lessons to be learned and stemmed from this contract. i think it will be one of those things that hopefully at a meandering school for years to come they will point out as a very, very bad example of the absurd taxpayer money. we ended up with a situation where it would actually cost this country more money not to

build a second aircraft carrier than to build one. that is a world that is unfortunate situation we found ourselves in. what we also discovered and this is the reason we found out is the decisions delay, for example, in this last year cost 600 billion pounds. it's that simple decision to delay the taxpayers 600 billion pounds. and of course, we also face a situation where the carriers were going to be equipped to take a particular version of the joint strike version of the original take-up version that was the most of the three barriers.

>> it does seem like an unfortunate thing that hospitals and schools need while other schools and hospitals maybe very badly affected by the squeezing and public spending. >> that's not the easier thing to do. by definition. what the protect sector has done. private sector companies have gone back to the supplies and thought to reopen. we are doing that at the moment.

in the ministry of defense, there's certainly an expectation from myself and i know from the prime minister they are going to get absolutely stuck into the contracts to see if they can be renegotiated and see if we can get money from some of them. and i know that the commercial job at the mod is currently vacant. i think we need to get someone of real quality to lead the work. >> thank you. you've talked about the poor quality of data available. and at the moment. it does seem to me that part -- one the conclusions that comes from the arguments about regressivity and progressivity and some of the things made there, i wonder if that's something that concerns you. and if they do exist, simply improve. >> i don't think there are --

churchill maybe guilty of many things. i'm not sure there's a weakness in terms of that kind of analytical ability and the tables that we produced and in a bunch of documents on the impact. as i said, i think the last time i was that here, i would say again today, this is not the perfect science. we didn't claim it. we are trying to do something that has not been done before by any british government. we are trying to mobile the impact both of changes to benefits and tax levels. but also changes to public expenditure. now this has been done in other countries. but it's not been attempted in the uk. we are drawing on the best international evidence to do this, you know, what we hope to do is stimulate a proper debate in the international circle of matters work. obviously, we also very much welcome the input of this committee into this. and as i say, this is not a --

this is work that i want to see developed. and so that there's an agreed, instead of there being an argument about the methodology, there's an argument about the actual policy measures. and we get to a point where everyone agreed about the methodology, then i think we will have achieved something. we will have a proper debate about whether this is the right measure or not. >> do you think the debates over the technicals is included the wider debate about the rules of the pleasures? >> you know, i think there's been a robust debate about all of these things. what i can tell you is that in all honesty, this area of the treasury has sought to produce the data in the best possible way that it can. it's not supposed to include things for particular political reasons or exlewd things for particular political reasons. it's done with the evidence.

i think speaks for the officials in that part of the treasury, they would welcome input on that work. i think we need to come to an agreed form of methodology, this committee, or with the help of the public account committee as well, they agree as the methodology that we are going to use in the future of -- the future budget under whoever is the chancellor. as i say, you can have a debate about the substance. i don't know who i should bring in the permits. >> at the same time? >> they actually, i think, the party of the analysis around the distribution is pretty impressive. this is cutting edge stuff. now, you know, ineligibly, things like public goods, how to sort that out between individuals. the analysis is clear, very transparent, and i think it represents an improvement

length. it's a credit to the analyst and the treasury. >> this is -- it certainly isn't cutting edge stuff. they have been doing it for at least a decade. how can you call it cutting edge stuff? >> to be fair to the treasurer, the distributional analysis is certainly something they have been doing for many, many years. and we're attempting to assign in the treasury. the -- i'm sorry the publishers work has always been done in the treasuries. this -- my predecessor had all of the information available on the distribution impact of tax and benefit changes. they just chose not to public it. but what has not been attempted, and i think they mentioned to this in the appearance, is the impact on the public expenditure changes and the benefit in kind that come from those. that is genuinely new work, cutting-edge work from the

undersecretary. which it is in his world. and, you know, -- [laughter] [laughter] >> and we really welcome -- again, we welcome not just in this committee, the broader academic community. i don't want to speak for members of other political parties. if we can get to the point where they aren't arguing about the methodology, but the public policy measures, we'd all be in a good place. >> to be fair to those who have taken issue with you, chancellor, you said in your budget, this is a progressive budget. and it wasn't a progressive budget. was it? measures in the budget for progressive. subsequently, as the many measures were progressive. look at the csr and say this is fair or not fair, according to criteria. but it was over rating it a bit, wasn't it, to call it a

progressive budget? >> i don't agree with that. i think the disturb -- returning to the budget, i think the total fiscal consolidation, which includes the budget, which includes the measures announced by the previous government, many of which i have to take it to the house of commons, some of which i've had to completely change, like the taxation of pensions and enough to completely redo that. of course, the house of commons will pass the judgment on that. and the measures, we take them together, i believe they are progressive. and the richest pay more than the poorest, not just in cash tones, but as a proportion of their income. >> some of the other remarks that you've made. the statement that we're on the brink of bankruptcy. isn't that a bit over the top? >> no, i believe the situation that i found myself in in may this year was incredibly serious

for this country. let us remember. >> that's not the same says we are on the brink of bankruptcy. we all agree there was a fiscal crisis. >> let's be fair. i came to the office in a middle of a european sovereign debt crisis. we had the highest debt in world and the investor was saying the uk guild was a no go area and sitting on a bed of nitroglycerin. this is the situation that i took on. i have done everything that i can to move britain out of the danger zone and the market interests rates. it shows that. there was an acronym at the time, as one remembers, p.i.g.s., then there was another acronym, s.t.u.p.i.d.. the u was the united kingdom. i believe i have taken the steps

in the financial danger zone. we are not on negative watch with the credit rating agencies anymore. it's pretty clear the credit rating agencies say that is due to the measures that we have taken and the question mark they will always have is can we see the measures through? i believe we can. but, no, i think we have taken those decisions as a government and parliament, we have been proud that we have done that. >> maybe the top measures and also the effort to make the budget fair would have come across more clearly if they hadn't been obscured in the debates. there's something to look at when making the remarks that do look to me nor like the language of opposition and government. just tell it as it is. >> i'm supposed to tell it as it is. but inevitably, they are going to be controversial decisions. they go to the heart of what we affect, which is public expenditure, taxation, and the

soundness of the public finances. as i say, when you got the largest bond investor in the world telling people that the uk -- that sterling is sitting on a bed of nitroglycerin, when you have the credit rating agencies putting us on negative watch, when you are thrown into a european sovereign debt crisis with the largest budget deficit in europe, i believe this is an incredibly serious situation. >> i take your point, chancellor. i accept and welcome the fact there's a high level of transparency in the forecasting crisis and the decisions that you have taken, and you have made unprecedently bold step to look at the impact of the measures that you have taken. i hope you'll at least reflect on the point that i've made about trying to make sure that claims can be readily stood up. chuck umunna.

>> thank you. can i ask mr. love about easing. i think andrew quoted the prime minister previously on whether he was pro. and granted the mpc's meeting as we speak. but kind of portray your position in neutral is rather absurd, isn't it chancellor? in march 2009, the conservative party unusually with the easing is a leap in the dark. you are quoted as telling the bbc, i don't think anyone should be pleased we have reached this point. it's an admission of failure. can we take it from that. if there's an announcement, maybe today, maybe not, but sometime in the future, that to you would be an admission of failure. admission would be a move with the way you described the risk in last year. >> as i say, i know you were disappointed.

i don't think it was appropriate for me to comment on the merits of the physical and monetary policies of sorts. it just would not be a very responsible way to conduct my job. >> okay. in some senses, i suppose the business secretary hasn't made a secret of his views on quantitative easing. he did an interview last week on "the today" program. there's been a lot of debate about whether you should have plan b or not. it was very clear there's an opportunity to use money in the policy as a way of introducing some kind of flexibility in your approach. >> well, i -- this obsession with plan b, you know, i think we've got a pretty robust plan a. but plan a is all about providing fiscal creditability. and fiscal credibility allows

the monetary policy committee to do what it needs to. which by the way, could mean either increasing interest rates or decreasing interest rates, or using any other monetary policy that has it. it gives them greater flexibility. they are not having to take into account that the government doesn't have a credible fiscal policy. that's where we were last year. what i have done, is i believe, allowed them to operate as they see best and others are not in any way prejudging what they may or may not do. that's an entirely independent decision for them. what i've done is enable, i hope, enabled to provide the rock of fiscal stability on top of which they can operate. >> okay. it's their decision. have you asked the -- i guess have you asked the governor for an assessment of the likely affects of the further round of qa? it has an impact. >> okay. >> which should concern you. >> i beg the committees

forbearance. i'm not going to go into the private conversation in chancellor and governor which shouldn't say i have or haven't asked for the information that you have mentioned. >> okay. is it fair to say that since you took the government, the prime minister has been quite keen to introduce proper cabinet government where, you know, the previous government was criticized for having the certain style of business. for example, your style changed. >> no, i think -- probably shouldn't. my private view is this. which i will now make public. i think that the the -- i think prime ministers always in opposition talking about the merits of cabinet government. then they suddenly lose interest when they become prime minister. however, the fact of the coalition, which, of course, we

weren't planning for, more was our partners, liberal democrat policy, has actually forced a degree of capital government that no one would have expected a few months ago, on labour or liberal democrat. it is forces in two ways. one is that our coalition partners need to be constantly involved. so, for example, decisions around taxation would be the chancellor and prime minister discussing it today and announcing it to the cabinet on the day of the budget. here in every step, we involve the prime minister, chief secretary is much more involved than the previous chief secretaries would have been in the decisions. we establish a "lateral process. second, there's an interesting process. by consulting the liberal

democrat partners, member of the conservative, and members of the cabinet also expect to be consulted and have a right to be. so it has introduced a much greater degree of process capital government that i think i would have predicted, frankly in the hearing before you nine months ago and giving you my candid views. >> on that point, you announced to fanfare the change in child benefit in the fourth of october. this, of course, was a change which is going to affect over a million families. was this something that was discussed in full cabinet before you announced it to the conservative party conflict? >> no, it wasn't. i think that's well known. it was discussed extensively and for a long period of time. a couple of months, in the process. it has been discussed intensively with the relevant secretary of state. now, technically, on a technical reason.

technically, it's a tax measure that involves the use of the tax system. requirement to take it to the cabinet. but also practically, this was in the run up to the policy conferences this was the best and most practical we couldn't bring the cabinet together when you have one part of the coalition having a party conference, another part of the coalition having a party conference. and so on. but, you know, not every single decision that is made in government is taken -- this government or any other government. but the relative -- the most -- the people with the direct responsibility and the deputy prime minister were involved for many, many weeks beforehand. >> okay. >> this was not sprung on them. >> i heard what you said. you've been fond of saying we're all in this together. you've asserted that this emergency budget that we heard off in the summer, let's look at the child benefit change. if you say, take, a cabinet

minister like yourself with two children, a great salary of i think 134,565 pounds. claiming child benefit, you'd be entitled to 1752 in child benefit. which is 1.3% of your gross salary. then if you take, for example, many of the newspapers have referred to households as one owner, where they fall just above the high income. i take sarah who's referred to the guardian a few weeks ago, who's husband, his salary justs takes them above the threshold. they, as a result, lose all of the child benefit, which is 4% of their gross income. and so they fall in that kind of middle that's being talked about. they get hit hard like this. people like yourself, not really going to have a dramatic affect. but people like them, it's going to have a very heavy affect. net income less than 35,000

pounds. how is that fair? >> well, i mean -- squeeze middle is a phrase used by the leader of the opposition. i should congratulate you on the bbs. i thought to make the distribution. i think it would have -- the truth is that the -- many measures are means tested when maybe the discussion later in this area, for example, housing benefit. but there are many wealth measures that affect working families across the income distribution. and i wanted to make sure that people who i completely accept are not the super rich. but they are all better off and high rate taxpayers are better off. that they too made a contribution to the fiscal consolidation. now, if this kind of thing that i'd like to do in completely benign economic times with a balanced budget. of course not.

that's not the situation that i fail. -- i face. i face an 11% budget. i had to make sure it was progressive. that people in the richer deciles. yes. >> kind of where you have somebody falling off of the cliff there. you are in a couple, you have one earner in the higher income bracket. do you think it's right if the parent is going to work overtime or go for promotion if it means they are going to lose the child benefit? >> i was going to say what i thought to do is introduce this in the simplest possible way. to use the existing systems that we've got which involve, you know, we know who higher rate taxpayers are. and the alternative, if i wanted to remove child benefit, or tax it in some way would have been to create some means tested system. i don't think that was sensible. because what i've done,

preserves the way child benefit is claimed by the vast majority of people in the country. i have not had to introduce the brand new means test system. i've not for the first time had to go and try to set the joint household income on people of 60 or 70,000 pounds of year. i've tried to do it in a simple way. it's an interesting point. the treasury has looked at this before in 1998. gordon brown looked at taking part of child benefit away from high rate taxpayers. this has been looked up before in the treasury. so the work is long established in the treasury. and the simple way to do it is the way that i want to do it. >> i want to ask you a question, in june, the prime minister, on the 7th of june in a speech said that taxing the deficit was going to affect our whole way of life. it was going to affect every single person in the country. and actually i went on to the famous internet forum so see what they were saying about the

change, in the child benefit. meg buffett said this is going to cost me a 1500 a month. very similar comments. there's a lot of furry on that side. >> can we have a brief question? >> how has the csr affected your way of life and people in the kind of income bracket? today to prove the salary for the 3 million pound pay package. how is it going to affect your way of life? pm says it's going to affect their way of life. how will it affect your way of life? >> i lose my child benefit. my wife does. >> you are claiming. >> yes, i have two children. like everyone else who is a higher rate taxpayer from 2013 onwards, you don't -- >> it's not going to change your way of life, is it chancellor? >> greatest in these encounters, you often play the man. not the ball. i would make the broader point.

>> well. >> i would make the broader point. there's an enormous budget deficit. i've read your questions. you seem to be under a misapprehension and delaying it will avoid them. it doesn't go away. if we don't do the child benefit measure. which you are perfectly entitled to agree. that's 2.5 billion pounds that you have to find somewhere else. be my guest. come up with alternative proposals. but frankly. >> as i've said before, i'm not giving you. >> very well you are not giving me benefits. because you've been asking. >> thank you, chuka. the council in the last year has been looking into what you like

to preempt and working very hard on trying to make the savings. they work on the basis of 15% cuts over a three-year period. a three-year period, what happens is it's 28% over four years. which is quite a lot higher than a lot of people were expecting. could you comment on why that particular area of government has been hit quite so hard? >> well, local government is responsible for about a quarter of all government spending. it's an incredibly -- major delivery mechanism of public services. and the presence of the state in our communities. and so it would not be immune from the changes that we make. now obviously there are individual decisions, there are individual budgets within the local government world like, for example, the school settlement, like, for example, the police settlement, which are less than that -- the number that you gave. the 28% number.

but i have to make a decision about where to place our priorities. and what i've done with local government is a), important budgets like schools give them increase. but also give them maximum flexibility with the rest, by, for example, stripping away the grants and the like. which i think will give them much greater freedom to manage the budget and not for a second says this is going to be easy. the local government. but, you know, most people will have seen for some time that whoever won the general election was going to have to take some difficult measures. >> sure. i mean one the things that the compensation is raised in it's written evidence is that these cuts are front loaded. you've got the 20.5 billion this year in 2011. 22 billion, next to 24, 24, 22. you see they are coming down.

they are consequential terms. they want to hear what it was. reducing the cuts. a lot of their contracts are long-term contracts with private businesses and service budget on the collection disposal, and i do appreciate a lot of councils are looking to get the savings by sharing some of these services. but what is worrying a number of them is that actually where you got the greatest affects in the short term is when you have things like grants and organizations and that type of stuff. i think what i'm getting coming back from the government is that it's going to be those types of areas that are going to get hit first, rather than -- not necessarily giving them enough time to actually start looking through the pfi contracts and other contracts as my colleague was referring to earlier. >> well, look, as i say, of course, like all there is in government, it's not particularly easy. i'm not claiming it is.

what i think local government can do with the freedom that we've given them is, you know, make some of the -- some of the more ready to reach savings early on. which are there. and there's a lot of good councils has been preparing. and then as the settlement -- as we get further into the spending review period, some the groups of contracts and so on will come to them. the big -- the challenge with the consolidation is this. that if you make the whole thing back loaded, if you said we aren't going to sort out our budget deficit, the largest in the g20. we are going to do it in three or four years time. this is not credible. no one from the imf, british business, the credit rating agencies, anyone who observed the market, no one would look and say it's credible. what i thought to do was a consolidation that falls the

same amount each year. that's required different parts of government to make a contribution. as i say, local government, in a way they are a mini version of the central government in their own areas. there are some savings they already able to make in the short term and long term. as they do both, they can live with themselves. >> this is sort of highly -- this is a question on the 2.5% rebate that you are going to give to keep the tax increases at a minimum. that's fine. if you take the taxpayers that pay 100 pounds, and that's times 50, you will give them back two pounds 50 on 100. there will be no tax rises. you will do that, i think, for two years. one the concerns that has been raised to me by the council of authority is that what will

happen when that comes to an end in three years time? which would have been inflation, so that is why i think it is good public policy. >> actually it is a check,

because ultimately what it is trying to do is-- simply to make >> i think you know, all of us had this focus on the hard decisions and as i save parliament had to focus on the local councils and the need to look to their end budgets and as i say, i think our government out there has been preparing for this. it is a lot of work. there is enormous amount, less well-prepared councils. the lords aren't going to look at what the councils are doing and shared services, shared chief executives. for example there were many innovations taking place in local government under councils of all different political persua

why it was at the highest bread prices in our history? >> well, because both--. >> the the gdp is the highest in our history. >> is not the highest in our history. >> the debt repayments we have at the moment, are they the highest with gdp? >> the total debt repayment is here is the highest percentage of gdp. >> for example we faced a fairly extraordinaire situation and they were particularly high event but the deficit is the highest outsi