TESTIMONY OF THE HONORABLE LEON E. PANETTA …

                       TESTIMONY OF THE HONORABLE LEON E. PANETTA
                                        BEFORE THE
                      UNITED STATES SENATE COMMITTEE ON THE BUDGET
                                      OCTOBER 31, 2007



Mr. Chairman and Members of the Committee:


     Thank you for the invitation to testify before your Committee on S. 2063, the bill that will create a

Bipartisan Task Force on Responsible Fiscal Action.



     I am honored to have this opportunity to again appear before my former colleagues and friends. I have

been here before in different capacities to fight for budget priorities and discipline. Although there were

political differences on approach, there was a fundamental commitment by both parties to the goal of

deficit reduction and a balanced budget.



     Today, I am afraid that you are facing an even greater challenge because while there are concerns

about a growing debt, there appears to be little will or commitment to making the tough decisions necessary

to achieve deficit reduction.



      I commend you, Mr. Chairman and Senator Gregg, for your leadership in trying to encourage the kind

of bipartisan cooperation that can build on the lessons of the past. I am here to strongly support your

efforts.



     I appear today in my capacity as one of the Co-Chairmen of the Committee for a Responsible Federal

Budget. As you know, our focus over the years has been the federal budget and the need for fiscal

discipline. Our Board is composed of past Directors of the Office of Management and Budget, the

Congressional Budget Office, the Government Accountability Office, and Chairs of the Federal Reserve

Board and the Budget committees.



     I am here to share with you the principles that I learned over the past 30 years of my career in public
life in fighting deficits. As Chairman of the House Budget Committee, Director of the Office of

Management and Budget and Chief of Staff to the President, I participated in the key budget summits and

negotiations aimed at achieving deficit reduction. My hope was that if this nation could ever achieve a

balanced federal budget, that it would never again permit runaway deficits to undermine its economic

strength. Unfortunately, events, partisanship, and a failure of leadership on all sides have conspired to

produce the kind of irresponsible fiscal behavior that again threatens our future.



     We govern in our democracy by leadership or crisis. If the elected leadership of this country is willing

to make tough choices and work together, it can avoid, or, in the least, control crisis. If not, crisis drives

policy.



     Today, policy is largely driven by crisis whether it is the War in Iraq, global warming, energy, health

care, immigration, Social Security, Medicare or runaway deficits. Every one of these issues in one way or

another relates to resources. The failure to have adequate resources to confront each of these issues

guarantees that for the first time in our history, our children are facing a reduced standard of living. We

cannot invest in their future by borrowing from their future.



     Action on the deficit is not just a moral imperative. It is not just a fiscal or economic imperative. In a

very real sense, it is about protecting our national security. The prospect of uncontrolled deficits and a

"borrow and spend" addiction erodes the nation's ability to confront every other crisis we face in the 21st

century.



     This failure of leadership combined with exploding entitlement programs, changing demographics, the

rapid growth of health care costs, the slowing of the labor force, and growing interest costs places us on an

unsustainable path to fiscal chaos. What is even more discouraging is that it ignores virtually everything

we have learned the hard way in the past.



     The challenge of large deficits is not new to this nation. In his book, The Price of Liberty, Robert D.
Hormats traces the concern for fiscal responsibility to the very roots of the United States. George

Washington and Alexander Hamilton believed the credibility of a new nation depended on its ability to

assume and pay down the debt from the Revolutionary War. It was Washington who said that we should

not throw "upon posterity the burdens we ourselves ought to bear." Lincoln pushed through three Revenue

Acts to pay for the Civil War. Roosevelt pledged that future generations would not have to bear the burden

for the cost of World War II. Even Lyndon Johnson finally passed a surtax to pay for the Vietnam War.

This nation historically has never operated on the assumption that deficits will take care of themselves.

That was the purpose of the 1974 Budget Act.



     In the 1980s and 90s, with the prospect of deficits reaching records of anywhere from $250 billion to

$500 billion by the turn of the century, Democrats and Republicans were locked in the same kind of

political gridlock we see today. Democrats resisted cutting domestic spending and entitlements and

Republicans opposed cuts in defense and any new taxes.



     With the failure of leadership to achieve any significant deficit reduction, crisis became the inevitable

engine that forced change. The 1987 Stock Market Crash raised serious concerns that unless the federal

government exercised greater fiscal discipline, the markets would continue to weaken. President Reagan

convened the first budget summit of key administration and congressional leaders to develop a bipartisan

deficit reduction plan.



     That was followed in 1990 by the second budget summit called by President George H. Bush. Again,

key administration and congressional leaders negotiated at Andrews Air Force Base and later at the Capitol

to develop a record deficit reduction package of close to $500 billion plus landmark budget enforcement

reforms.



     Three years later, President Clinton built on the success of these summits by enacting an economic

plan that further reduced the deficit by $500 billion over 5 years, evenly divided between spending restraint

and taxes.
     These efforts combined with the Balanced Budget Agreement of 1997 which extended many of the

key budget proposals and disciplines, helped produce a balanced federal budget and a projected $5.7 trillion

surplus.



     As a participant in most of these historic efforts, the key lessons are clear and, to your credit, many

have been incorporated in S. 2063:


1)     Bipartisan Congressional and Administration Leadership. The key leaders of both parties need to be
at the table along with the Administration's economic team. It is important that the committees of
jurisdiction on enforcement ­ Finance, Ways and Means, Appropriations and Budget ­ be represented. No
agreement that provides for serious deficit reduction can be effectively enforced without the support of both
Republicans and Democrats. Each party provides political cover on the difficult choices: Democrats
provide cover to Republicans on spending and entitlement restraints and Republicans provide cover on
revenue increases.
2)     Everything Must Be On the Table. In order to attack the enormity of this fiscal crisis, any final
agreement is likely to require some combination of spending reductions, revenue increases, structural
reforms and enforcement disciplines. Any preconditions or exceptions to consideration are likely to doom
chances for an agreement.
3)     Nothing Is Agreed To Until Everything Is Agreed To. In order to allow for a full consideration of all
options, the parties must be given the freedom to consider all possible areas without committing to their
inclusion. It is only after a discussion of all possible savings and revenues in the budget that the elements
of a final agreement can be negotiated.
4)     Enforcement. No agreement is worth much if it cannot be enforced. It is vital that any final set of
policy recommendations should include important enforcement tools such as spending caps and "pay go"
and be considered on an expedited basis. Although S. 2063 includes the requirement for a supermajority
vote, I am concerned that no major deficit reduction plan in recent history has passed by a supermajority of
both Houses. I believe that like past agreements, it is sufficient if it follows the key budget and
reconciliation rules in the Budget Act. Those are sufficient to avoid the biggest barrier to passage ­ the
filibuster in the Senate.
5)     No Press. If negotiations are going to consider the most sensitive areas of the budget, it is essential
that all sides protect the confidentiality of those discussions. The toughest challenge is to establish some
degree of trust between the participants. There can be no trust without honest and frank deliberations and
that will not happen if negotiations are played out in public. Any press statements must be cleared by the
participants and the key spokesmen should represent both parties.
6)     Deficit Reduction Over 5 Years. The focus should be to achieve a set number for deficit reduction
over a 5 year timeframe. To go beyond that may look good but is generally unrealistic. Within a 5 year
window, clear and enforceable annual targets can bet set for all discretionary savings, entitlement savings
and revenue increases. Both CBO and OMB can confirm whether the targets are being met and what
adjustments, if any, are necessary to achieve the required deficit reduction.


     S. 2063 provides an important and necessary framework for implementing many of the principles I

have outlined. These are the important lessons of the past. We know what works and what does not. Your

legislation follows a clear precedent for effective deficit reduction. Both you, Mr. Chairman and Senator

Gregg should be complimented for your willingness to break the present gridlock and establish the
necessary forum essential to confronting this serious problem.



     Politically, while all of us would love to see this legislation adopted in this Congress, the likelihood is

that it will not happen. But it can set the framework for action for a new President and Congress. Taking

the tough steps required can best happen in the first year of a new administration. For that reason, I would

strongly recommend that the leading candidates in both parties for the presidency should be approached by

the key budget leaders in the Congress to gain their support for the principles included in S. 2063.



     We know that a new President and Congress will confront an unprecedented set of crises facing the

nation at a time of deep political divisiveness and distrust. The greatest challenge facing our political

leaders will be to begin the process of working together and restoring some degree of trust. It must begin

with the budget because every other crisis depends on restoring fiscal discipline.



     We govern by leadership or crisis. We have crisis. It is time for leadership.