WASHINGTON (Reuters) -U.S. Treasury Secretary Scott Bessent on Tuesday said the Trump administration has cut $2 billion from the IRS information technology budget without operational disruptions and intends to save hundreds of millions more by automating processing of paper forms.

"Last year, the IRS spent approximately $450 million on paper processing with nearly 6,500 full-time staff dedicated to the task," Bessent said in testimony before a U.S. House of Representatives Appropriations subcommittee hearing. "Through policy changes and automation, Treasury aims to reduce this expense to under $20 million by the end of President (Donald) Trump's second term."

Savings so far have come from eliminating, renegotiating and refocusing "wasteful" information technology (IT) and professional services contracts, including unused software licenses that had been auto-renewed for years, Bessent said, adding that this effort would reduce future Internal Revenue Service outlays by hundreds of millions of dollars per year.

Bessent defended the Trump administration's proposed fiscal 2026 cut of almost $2.5 billion from the tax collection agency's budget in the White House's fiscal 2026 budget proposal. The proposal also aims to slash spending on education, housing, and medical research for $163 billion in discretionary savings.

He said most of the IRS cuts would come from cutting its IT budget, which he said was "bloated" by former President Joe Biden's clean-energy Inflation Reduction Act. That 2022 legislation added $80 billion in new investments in IT and revenue collection at IRS, but subsequent Republican budget bills have reduced this supplemental funding by nearly half. 

"I am confident that we will make substantial progress in the IT and right-size the payments system, the collection system," Bessent said. "As I've repeatedly said, my priorities are collections, privacy and customer service."

He disagreed with assertions by Democrats that the cuts would impair tax collections, saying it takes years to train enforcement personnel for high-end audits.

"So I believe, through smarter IT, through this AI boom, that we can use that to enhance collections," Bessent added. "And I would expect that collections would continue to be very robust, as they were this year."

DEBT CEILING 'WARNING TRACK'

Bessent declined to provide a forecast on when the Treasury would exhaust its borrowing capacity under extraordinary debt ceiling measures but said it was "not far away." He vowed that the U.S. government would not risk a payments default or use any "gimmicks" to try to circumvent the limit, which will ultimately be increased or suspended.

"I will tell you, just as an outfielder running for a fly ball, we are on the warning track," Bessent said, using a baseball term indicating that a player was close to crashing into the stadium wall. "And when you're on the warning track, it means the wall is not far away."

Some private forecasters have said the Treasury could avoid a payments default into the late summer without a debt ceiling increase or suspension.

Bessent said he agreed with his Biden administration predecessor Janet Yellen's view that the overall U.S. debt level should be viewed as a percentage of U.S. economic output. 

"Secretary Yellen and I both agree that it is the debt to GDP that is the important number. So we are trying to both control the absolute level of debt - pay it down - but also grow the GDP," said Bessent, who has criticized the Biden administration for excessive spending. 

Bessent also said the Treasury was looking to make material changes in how nickel coins are manufactured to bring production cost back below five cents, adding: "I believe the dime is profitable."