ADMINISTRATION PROPOSAL TO INCREASE PUBLIC

DEBT CEILING

THURSDAY, OCTOBER 18, 1973

HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C.

The committee met at 10 a.m., pursuant to notice, in the committee hearing room, Longworth House Office Building, Hon. Al Ullman presiding.

Mr. ULLMAN. The committee will please be in order.

Mr. Secretary and Mr. Director, we are glad to have you aboard this morning.

The purpose of the meeting today is to receive testimony from officials and others who have requested an opportunity to testify with respect to the administration's request to increase the public debt ceiling to $480 million through June 30, 1974.

Without objection a copy of the Committee on Ways and Means press release, dated October 11, relative to the hearing will be included in the record at this point.

[The press release follows:]

[Press Release No. 10, October 11, 1973]

ANNOUNCEMENT OF ONE-DAY PUBLIC HEARING ON THURSDAY, OCTOBER 18, 1973 ON PUBLIC DEBT CEILING

The Honorable Al Ullman (D., Ore.), Acting Chairman of the Committee on Ways and Means, today announced that the Committee on Ways and Means would conduct a one-day public hearing on Thursday, October 18, 1973, on President Nixon's anticipated request to increase the public debt ceiling. This public hearing must be concluded by the Committee within this day.

The Administration has not yet advised the Committee as to the precise increase which will be requested. This information will be made public as soon as the Committee is advised.

The permanent debt ceiling under present law is $400 billion. Present law also provides for a temporary additional limitation of $65 billion, effective through November 30, 1973. The overall limitation is pursuant to Public Law 93-53, approved by the President on July 1, 1973. It will be recalled that the Administration in June 1973 had asked the Congress to increase the temporary debt ceiling to $485 billion.

The Administration witnesses will be the Honorable George P. Shultz, Secretary of the Treasury, and the Honorable Roy L. Ash, Director of Management and Budget, to be followed by the receipt of testimony from public witnesses. The limited time available to the Committee for this hearing requires that all interested persons and organizations designate one spokesman to represent them where they have the same general interest. Any interested person or organization desiring to do so many file a written statement for inclusion in the printed record of the hearing in lieu of a personal appearance.

The cutoff date for requests to be heard is the close of business Tuesday, October 16, 1973. The requests should be addressed to John M. Martin, Jr., Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, Room (1)

1102 Longworth House Office Building, Washington, D.C. 20515, telephone: (202) 225-3625. Notification as to whether or not an individual or organization has been scheduled to appear will be made at the first opportunity of the Committee.

In this instance, it is requested that persons scheduled to appear and testify submit 75 copies of their prepared statements to the Committee office, Room 1102 Longworth House Office Building, by the close of business Wednesday, October 17. Persons submitting a written statement in lieu of a personal appearance should submit at least three (3) copies of their statements by the close of business Thursday, October 18. If such persons desire copies of their statements distributed to the press and the interested public during the course of the hearing, it is suggested that they submit an additional 50 copies for this purpose.

Mr. ULLMAN. Our first witness this morning is the Honorable George P. Shultz, Secretary of the Treasury.

Mr. Shultz will be followed by the Honorable Roy L. Ash, Director of the Office of Manpower and Budget, after which testimony will be received from certain Members of Congress who have requested to be heard and from the general public.

For the benefit of the committee I will say that because of meetings with the President, Mr. Shultz and Mr. Ash will not be available this afternoon.

We will attempt to run straight through and get all of the questioning completed.

If you would make yourselves available we can run through the lunch hour if need be to get your testimony completed.

Mr. Shultz, we welcome you back to the committee this morning. We want you to proceed as you wish with the understanding that, if there is no objection, the committee will not ask questions of you until your complete statement has been presented to us.

I think it would also be advisable if we could hear from Mr. Ash at the conclusion of our testimony before we begin interrogation of either one of you.

If there is no objection, let us proceed in that manner.

Mr. Secretary, we are glad to have you. You may proceed, sir.

STATEMENT OF HON. GEORGE P. SHULTZ, SECRETARY OF THE TREASURY, ACCOMPANIED BY HON. PAUL A. VOLCKER, UNDER SECRETARY FOR MONETARY AFFAIRS

Secretary SHULTZ. Thank you, Mr. Chairman.

I appreciate your outline of the schedule. We will be glad to stay through lunch. In fact, probably one of the most constructive things to happen to us all would be to miss lunch.

I have with me Mr. Paul Volcker, Under Secretary of the Treasury for Monetary Affairs.

As you well know, the administration of our debt management is basically his responsibility. So, he is here to help in a discussion of these questions.

The temporary debt limit of $465 billion will expire on November 30 of this year. Without congressional action, therefore, the debt limit reverts to its permanent level of $400 billion on December 1.

As we pointed out in our last appearance before this committee, and as table I attached indicates, the actual debt is expected to exceed the present temporary limit late in November, assuming a normal cash. balance.

Consequently, action to provide a new debt ceiling is required before the final week of November if we are to avoid temporary retirement of debt and abnormal pressures on our cash balance at that time. A new temporary ceiling will, in any event, be necessary by November 30 if we are to maintain our expenditure and financing operations.

In June, when looking forward to fiscal 1974 as a whole, we proposed that the debt limit be raised to $485 billion. That request was based on projections of a unified budget deficit in fiscal year 1973 of $17.8 billion and a unified deficit of $2.7 billion for fiscal year 1974. We now know that the actual deficit for fiscal year 1973 was $14.3 billion. We also know that, with our revenues increasing both as a result of real growth and inflation, we have a reasonable chance for a balanced unified budget for fiscal year 1974 at a level of expenditure of about $270 billion. (Tables II and III describe the changes in receipts and outlays since our January and June estimates.)

Based on this later data, and the assumption of a balanced budget, a debt limit of $480 billion should be adequate for fiscal 1974.

In requesting that ceiling, I want to emphasize that a balanced budget is by no means assured. To achieve that goal, we will need to maintain both strong economic growth and the tightest kind of control on expenditures.

At this point, 8 months before the end of a fiscal year, any expenditure and revenue forecasts must imply a range of possibilities about the projection. I am particularly concerned that, without vigilant effort, expenditures could exceed the projection.

Already, as the Director of the Office of Management and Budget will explain in greater detail, and as shown on table IV, certain congressional appropriations in excess of the President's budget and higher interest costs for the debt have forced us to estimate expenditures for fiscal 1974 more than $1 billion larger than our June projections.

Of course, we do not know what possible budget outlays may become connected with the Middle East war.

I believe it is as evident to you as it is to me that strong pressures are evident for still greater spending. They should be resisted--but they can successfully be resisted only by the strongest cooperative efforts of the Congress and the administration.

My sense of the Congress is that that objective is widely shared. In requesting a debt limit of $480 billion. I am counting on that effort and that cooperation in holding expenditures to the projected level and making the possibility of a balanced budget an operative reality. As you know, changes in the public debt are related more directly to the Federal funds than the unified budget. Table V shows the relationship between these budgetary concepts.

As indicated, the Federal funds budget-which includes receipts and expenditures handled by the Government as "owner"-is projected to be in deficit by some $15.1 billion, despite the fact that tax and other receipts from the public are projected to exceed payments to the public by about $6 billion.

The Federal funds budget is in deficit because some $21 billion will be paid from the Federal funds budget in interest and other payments to the trust funds. As a result of these intragovernmental payments, the trust funds will, in turn, have a large surplus, offsetting the Federal funds deficit.

Since this trust funds surplus is invested in Government securities, the public debt will rise, despite the balance in the unified budget.

Table I translates this outlook into projected levels of the debt month by month, assuming a $6 billion cash balance and a $3 billion margin for contingencies.

The peak monthend figure is $478 billion. I would note that the monthend indebtedness is sometimes exceeded within a month, making the $480 billion request appropriate.

Such a debt limit will, in fact, provide a tight ceiling. Obviously, the dollar flows in a $270 billion budget are considerably larger than ever before-double the total only 9 years ago.

An error of only 1 percent in estimates on either revenues or expenditures would amount to $2.7 billion. As indicated in table VII, the assumption of a constant $6 billion cash balance and the traditional $3 billion margin for contingencies provides a margin for flexibility, in relative terms, little more than half of that provided in the early

1960's.

I would remind you, too, our forecasts depend to a large measure on what the Congress actually votes to spend, as well as on the performance of the economy. The Congress has not yet completed final action on several appropriation bills, including the two largestDefense and HEW.

There are a number of other bills which must yet be considered and could have a major impact on 1974 spending.

Finally, in managing the debt, we are inevitably subject to uncertainties arising from potentially sharp fluctuations in our cash needs stemming from sudden changes or disturbances in domestic or international markets.

Fortunately, such contingencies seldom arise. But in looking many months ahead, we do need a reasonable margin for operating flexibility for handling such unexpected needs if they do arise-even though the needs may be temporary and are not related to changes in the basic flow of receipts or expenditures.

While considering the debt limit, I also strongly urge the committee to initiate the legislative action necessary to permit us to pay a fair competitive rate on U.S. savings bonds.

Currently, the rate, under interpretation of the present statute, is limited to 52 percent. Events of the past 4 months indicate the rate should now be raised.

I believe experience also shows the potential value of permitting the Treasury scope for more flexible administration of the rate in the future.

As you know, savings bonds have been a cornerstone of our debt management policy. Some $60 billion are outstanding, 24 percent of the total debt in the hands of the general public.