Democrats get mixed budget office views on TARP

As Senate Democrats gear up to move jobs legislation, Congressional Budget Office Director Douglas Elmendorf said Thursday that using funds from the $700 billion Troubled Asset Relief Program to offset the bill would add to the deficit.

"There is just one pool of government money, and everything else is accounting treatments to keep track of various purposes," Elmendorf told the Senate Budget Committee at a hearing on the CBO's economic outlook. "If more is spent through the TARP, that is just more that's spent, and more that is borrowed and more that goes on the federal debt."

Elmendorf made the statement in response to a question by Budget Committee ranking member Judd Gregg, R-N.H., who has argued that repaid TARP money should be used to bring down the deficit, not fund the jobs bill.

But Democrats argued that with unemployment hovering at 10 percent, a jobs bill must be a priority.

Budget Committee Chairman Kent Conrad, D-N.D., noted that while there has been some modest improvement, "the jobs situation across the country is very much in the front of everyone's mind."

His comments came after President Obama called on Congress to pass a jobs bill in his State of the Union address Wednesday night. The House passed a $150 billion package last month, and the Senate is expected to act soon.

Sen. Debbie Stabenow, D-Mich., said a jobs package that includes an extension of unemployment insurance benefits, a jobs tax credit, and "other investments" would boost jobs creation and ultimately reduce the deficit, which CBO expects to be $1.35 trillion in fiscal 2010.

Elmendorf agreed with Stabenow that such a package would boost economic growth and, in turn, lower the deficit.

"About a dollar of extra GDP ... raises government income by about 25 cents," Elmendorf said. "So there is a substantial feedback effect. We show in our outlook if economic growth is stronger than we project ... that would lead to smaller deficits. If it's weaker than we expect, that would lead to larger deficits."

On the tax front, Republicans raised concerns about the future of cuts enacted in 2001 and 2003, which are set to expire at the end of the year. Democrats are expected to extend them for taxpayers making under $250,000 a year. Republicans argue that letting the cuts expire for higher-income Americans would hurt small businesses, whose owners tend to file their taxes as individuals and sometimes breach the $250,000 threshold.

Elmendorf countered that while CBO's analysis of extending all the cuts for a short period of time would provide a temporary economic boon, a permanent extension could be a drag on economic growth later in the decade and double the size of the 10-year deficit.

Meanwhile, Gregg reiterated his appreciation of Obama's plan to freeze non-security spending for three years beginning in fiscal 2011 but stressed more needs to be done to bring down the deficit. "It's a step in the right direction, but ... it has a marginal impact on the deficit," he said.

Speaker Nancy Pelosi, D-Calif., said Thursday the freeze should include some defense spending to gain more savings.

"I don't think that we should protect healthcare contractors," Pelosi said. "I don't think the entire defense budget should be exempted." But she added, "we all have to support our men and women in uniform. ... I don't think they should be subjected to the freeze."

Anna Edney contributed to this report.