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 Home > News & Policies > February 2005
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For Immediate Release
Office of the Press Secretary
February 7, 2005

Press Briefing on Fiscal Year 2006 Budget by OMB Director Joshua Bolten

12:04 P.M. EST

DIRECTOR BOLTEN: Good afternoon. I'll start with a short statement, and then be happy to take your questions.

The President's 2006 budget meets the priorities of the nation and builds on the progress of the last four years. We're funding our efforts to defend the homeland from attack; we're transforming our military and supporting our troops as they fight and win the global war on terror; we're helping to spread freedom throughout the world; we are promoting high standards in our schools, so that our children gain the skills they need to succeed; we're promoting the pro-growth policies that have helped to produce millions of new jobs and restore confidence in our economy.

During his first term, the President worked with Congress to meet historic challenges: a collapsing stock market, a recession, revelation of corporate scandals, and, of course, the terrorist attacks of September 11th. To meet the economy's significant challenges, the President proposed and signed into law, in each year of his first term, major tax relief that fueled recovery, business investment and job creation.

The strong economic growth unleashed by tax relief is reflected in the chart that's on the easel now. Since the recession year of 2001, economic growth increased in each of the following three years. A primary goal of this budget is to assure that our economic growth continues.

A strengthening economy produces rising tax revenues, as well, reflected on this chart here. Last year, after declining three years in a row, federal revenue grew by nearly $100 billion -- that's this here. Reflecting strong continued growth, we projected federal revenues will grow by an even larger figure this year.

The President and Congress have also devoted significant resources to rebuild and transform our military and to protect our homeland. In the first term, the defense budget grew by more than a third -- the largest increase since the Reagan administration. To make our homeland safer, the President signed legislation creating the Department of Homeland Security and nearly tripled funding for homeland security government-wide. Both those categories are reflected on this chart.

While committing these necessary resources to protecting America, the President and Congress have focused on spending restraint elsewhere in the budget. We succeeded in bringing down the rate of growth in non-security discretionary spending each year of the President's first term. In the last budget year of the previous administration, non-security discretionary spending grew by 15 percent. In 2005, such spending will rise only about 1 percent.

Because of this increased spending restraint, deficits are below what they otherwise would have been. In order to sustain our economic expansion, we must exercise even greater spending restraint than in the past. When the federal government focuses on its priorities and limits the resources it takes from the private sector, the result is a stronger, more productive economy. The President's budget proposes that enhanced restraint.

As you can see from the chart that Austin is putting on the easel now, the 2006 budget proposes a reduction in the non-security discretionary category of the budget. This is the first proposed cut in this non-security spending since the Reagan administration.

The budget proposes more than 150 reductions, reforms, and eliminations in non-security discretionary programs, saving about $20 billion in 2006 alone. As a result of this enhanced restraint, overall discretionary spending -- even after significant increases in defense and homeland security -- will grow by only 2.1 percent, less than the projected rate of inflation. In other words, under the President's 2006 budget, overall discretionary spending will see a reduction in real terms.

The budget also proposes savings from an additional set of reforms in mandatory programs, saving about $137 billion over the next 10 years. This budget restrains spending in a responsible way by focusing on priorities, principles and performance. We were guided by three major criteria in evaluating programs. First, does the program meet the nation's priorities. The budget increases funding to strengthen our armed forces, improve the security of our homeland, promote economic opportunity, and foster compassion. Second, does the program meet the President's principles for the use of taxpayer resources. If an appropriate federal role could not be identified in a program's mission, the budget generally proposes to reduce or eliminate its funding.

Third, does the program produce the intended results. The Bush administration is comprehensively measuring the effectiveness of the government's programs. And the results are helping us make budgeting decisions. As part of the President's management agenda, the program assessment rating tool, called PART, was developed to measure the performance of all federal programs. Roughly 60 percent of all federal programs have undergone the PART, and those scores figured into the budgeting process.

By holding government spending to these accountability standards, and by focusing on our priorities, and by maintaining pro-growth economic policies, we are making progress in bringing down the size of the deficit in 2006 and beyond.

Last year's budget initially projected a deficit of 4.5 percent of gross domestic product, GDP, in 2004, or $521 billion. The President set out to cut this deficit in half by 2009. Largely because of economic growth generated by stronger revenues than originally estimated, and because the Congress delivered the spending restraint called for by the President, the 2004 deficit came in $109 billion lower than originally estimated. At 3.6 percent of GDP, the actual 2004 deficit, while still too large, was well within historical range and smaller than the deficits in nine of the last 25 years.

We project the 2005 deficit to come in at 3.5 percent of GDP, or $427 billion. If we maintain the policies of economic growth and spending restraint reflected in this budget, the deficit is expected to decline in 2006 and each of the next four years. In 2006, we project the budget deficit to fall to 3 percent of GDP, or $390 billion. In 2007, the deficit is projected to fall further, to 2.3 percent of GDP, or $312 billion. By 2009 -- that's here -- the deficit is projected to be cut by more than half from its originally estimated 2004 peak, to just 1.4 percent of GDP, which is well below the 40-year historical average deficit of 2.3 percent, and lower than the deficit level in all but seven of the last 25 years.

The administration intends to submit shortly a supplemental appropriations request of approximately $81 billion, primarily to support operations in Iraq and Afghanistan for the remainder of the fiscal year. The 2006 budget spending and deficit projections fully reflect the outlay effects of this supplemental request, as well as the prior $25 billion supplemental bill already enacted by the Congress. However, the budget does not reflect the effect of undetermined but anticipated supplemental requests for ongoing operations in Iraq and Afghanistan beyond 2005.

The 2006 budget also does not reflect the effect of transition financing associated with the President's proposal to create personal retirement accounts, as part of a comprehensive plan to permanently fix Social Security. As the administration announced last week, the type of personal accounts the President is proposing will require approximately $664 billion in transition financing over the next 10 years, with an additional $90 billion in related debt service.

This transition financing would result in a deficit in 2009 and 2010 of 1.7 percent of GDP, which is still consistent with the President's goal to cut the deficit in half by 2009, and still well below the 40-year historical average.

It's important to remember that this transition financing does not have the same effect on national savings, and thus on the economy, as does traditional borrowing. Every dollar the government borrows to fund the transition to personal accounts is fully offset by an increase in savings, represented by the accounts themselves. In addition, the transition financing does not represent new debt. These are obligations that the government already owes, in the form of future benefits.

Perhaps most important, comprehensive Social Security reform that includes personal accounts will eliminate the system's current $10.4 trillion in unfunded obligations. Those $10.4 trillion in obligations represent the real fiscal danger, and it is vital to our long-term fiscal health to enact comprehensive Social Security reform.

Confronting these long-term obligations, combined with our near-term deficit reduction efforts, will ensure a strong economy both now and in the future.

I'll be happy to take your questions.

Q You said that the projections on the deficit do not include anticipated outlays for activities in Iraq and Afghanistan. Why not? I mean, that's a big -- that's a pretty big chunk of change, and you know it's coming, so isn't that going to affect your projections on the deficit?

DIRECTOR BOLTEN: It will affect our projections. What we have included in the budget is what we know. In fact, we leaned a little bit forward, because we put this budget to bed a couple of weeks ago. We leaned a little bit forward in anticipating what the supplemental request that is still forthcoming is likely to include. We were on target. About $81 billion in supplemental requests is what we'll -- the administration will be bringing forward in the next few days. And we included those costs in the deficit numbers you see here. So as you look at the '05 and '06 and beyond deficit numbers, the outlay effects of our supplemental request that we are still -- we have yet to send to Congress is included there.

What's not included there is what we don't know, which is how much is this effort going to require going forward. We do know that there will be additional costs beyond what we've said here. So I think folks need to look at this chart and understand that there are additional war costs that need to be included. But it wouldn't be responsible for us to take a guess at what those costs are.

When you see the supplemental, one thing you will see is that we're putting a lot of effort and funding into training and equipping Iraqi police and military. And as that process proceeds, our hope and expectation is that the demands on the U.S. military will decline and the amount of our commitment will decline over time.

Yes, sir.

Q Where does the $137 billion in mandatory spending reductions come from?

DIRECTOR BOLTEN: Can everybody hear the questions? Or do I need to repeat them?

Q No, repeat that --

DIRECTOR BOLTEN: The question was, where does the $137 billion in mandatory savings come from.

It's a variety of mandatory programs. I think your budget documents will show all of them. Some of the more prominent ones are from agriculture spending; power marketing authorities; the student loan program, where we have significant savings to capture from the money that the government is now paying out to middlemen, not reducing the amount that students get. In fact, this creates an opportunity for us to get more money out to students. And, finally, Medicaid which is -- which will be the largest portion of it. Again, the net savings in Medicaid that we're projecting is, I believe, $45 billion. The gross savings is about $60 billion, but we're projecting -- we have proposals also to spend about $15 billion more. So the net savings we're seeking in Medicaid will be about $45 billion over 10 years. This is on a rapidly growing base in Medicaid spending. Right now we're projecting Medicaid spending to grow at about 7.4 percent per year. Our savings would reduce that growth rate to about 7.2 percent per year. So in the grand scheme of Medicaid -- projected Medicaid spending, the savings are relatively modest. And, once again, we're not going after the benefits that poor people get under Medicaid; we're trying to squeeze the anomalies out of the system, prevent measures that states and private parties have been using to circumvent the system and get federal money to which we believe they're not entitled. This is not in any respect a cut in the benefits that we expect Medicaid recipients to receive.

Along with that, there will be a comprehensive Medicaid reform proposal coming forward. Governor Leavitt, I thought, spoke very eloquently about it last week; I commend that speech to you. And those reform efforts, I believe, will take us a long way toward not only delivering Medicaid services more efficiently, but getting help to more people who are truly in need.

Q There are some substantial cuts to vocational education's budget. I wonder if you could explain --

DIRECTOR BOLTEN: I'm sorry, cuts to?

Q Vocational education. And I wonder if you could explain the rationale for that? And, more broadly, respond to the answer from the Hill, which is: these are the old chestnuts they try every year, they've never getting it and they're not getting it this year.

DIRECTOR BOLTEN: On the vocational education portion, I'll refer you over to Secretary Spellings, who is going to be doing her own briefing. But we do have a program to consolidate a lot of existing programs. A lot of the savings you'll see in this budget come from consolidating a variety of funding streams, not all of which are performing as well as they should; putting them in the place where we think they're going to perform the best. And the vocational programs are no exception to that. You will see increased funding, for example, for community colleges, but de-funding of programs that, on our performance ratings, have not shown up well. But I'll refer you to Secretary Spellings for more detail on that.

More broadly, the question was, the reaction from the Hill is -- they've seen some of this before and we don't get it. It is true that some of the proposals contained in this budget for reductions or eliminations have been proposed before and not adopted by the Congress. We think those are good proposals and I'm optimistic about them because I think we have a stronger interest now on both sides of the aisle in pursuing fiscal responsibility. And you'll see the administration putting some more emphasis on it.

There are also a lot of new proposals in here that the Congress has not seen before that I believe will attract some interest both for and against. It's never unanimously popular to propose any savings. The spending is in the budget for a reason, because somebody wanted it there. But in an era of limited resources, we need to set some priorities, and I'm optimistic that we'll get some good cooperation from the Congress.

Let me make one other comment about the Congress, because I imagine that you all have already gotten some "dead on arrival" comments from folks on the Hill. The same thing was said last year. The President sent up a budget last year that asked for discretionary spending growth to be no more than 4 percent overall, and in the non-security accounts, that it be no more than 1 percent. That was declared dead on arrival. In the end, the Congress delivered exactly that; they delivered the totals that the President sought.

Now, a lot of the details are different, and that is Congress' responsibility to make the -- make appropriations decisions, subject to the President's signature. So we're expecting that we're headed into an extensive and serious negotiation with a lot of members on the Hill. But we've had terrific cooperation from the leadership in both Houses, from the budget chairs, from the appropriations chairs, in trying to see to it that we live within the restraints that the President is seeking.

We have three out of four new chairs this year, but I've been in touch with each of them; they're all great leaders and great chairmen, and I think we will have excellent cooperation from them in making sure that in the broad outlines, at a minimum, and in many of the details, that the President's budget is actually adopted.

Q Is there somewhere we can look to find a list of the 150 programs that are being scaled back or eliminated?

DIRECTOR BOLTEN: A lot of it is inter-lineated throughout the budget. We will have some material for you. But the point of the presentation today is to step back and take a look at the whole budget. If you have particular interests, you can go through and find where your interests are. What we're doing today is presenting the overall picture of the whole budget. There will be more detail coming out about specific cuts and so on as they arise.

Q It is about $1.3 trillion in tax cuts, tax breaks over the next 10 years. I did not -- and maybe I missed it -- see anything about the alternative minimum tax. I'm wondering if the President has actually come to terms with the AMT or if he has -- does want something done about it?

DIRECTOR BOLTEN: You've read the documents correctly. The budget assumes the permanence of the President's tax cuts. So as you look at these numbers, that includes extending permanently the President's tax cuts. The alternative minimum tax was patched for one year in 2005, to prevent additional people from being thrown on to the AMT. The administration does believe that the AMT is a problem. It is a complex and unfair tax system that is built in to capture more and more American taxpayers. It does need to be reformed. The administration's approach on this is that it should be reformed in the context of overall tax reform. Secretary Snow has that underway. There is an advisory panel on fundamental tax reform that's to report to the President by the end of July. And we expect the AMT to be addressed in the context of fundamental tax reform.

Q On these forecasts, you're projecting that you'll halve the deficit on the 3.6 percent base by 2009. Will you henceforth talk about halving relative to the actual outcome. And, if not, why is it helpful to refer to the dotted line you've got on the chart?

DIRECTOR BOLTEN: The question is why are we referring to the original projection in halving the deficit.

Q And also given that you're now projecting halving relative to 3.6 percent, is that now going to become the number you focus on?

DIRECTOR BOLTEN: No. The President's commitment was made based on the original projection of 4.5 percent of GDP, so that's what -- that's what we will continue to consider as the goal that the President was setting. That we've done better than that and moved ahead faster than we expected is good news, but it doesn't change the overall goal.

Regardless, you'll see that even with the Social Security transition financing elements included in 2009, we are well -- we're well on-track to still meet that goal of cutting the deficit in half.

Q Josh, how are you? What is it this administration wants to happen with Amtrak?


Q What does this administration want to happen with Amtrak, in light of the proposed cuts in here?

DIRECTOR BOLTEN: The question is, what does the administration want to have happen with Amtrak, in light of the proposed cuts. What the administration would like to see, and has sought for several years, is fundamental reform in the Amtrak system. It was originally set up 30-some years ago to be a for-profit, self-sustaining corporate entity, not intended to run on federal government subsidies. Over the course of that 30-some years, it's now collected close to $30 billion in federal subsidies. Last year it was subsidized to the tune -- or in this year, in the '05 cycle, it's subsidized to the tune of $1.2 billion.

What the administration is proposing is that we fund those efforts -- the commuter rails, and so on, that are actually commercially viable -- and insist that Amtrak focus its operations on those portions that are commercially viable. Those that are likely to permanently require government subsidies -- that was never the plan, that isn't the plan -- and so we're asking that Amtrak be put on a sustainable basis over the long run.

Q Does the other line disappear -- that free market?

DIRECTOR BOLTEN: The market needs to apply in railroads, as everywhere else.

Q You project receipts as a percentage of GDP going up from 16.3 percent in '04, to 17.7 percent in '10. How does that compare with the ramp-up under the Clinton administration in the '90s? Is that pace of growth comparable, faster than, not so fast as?

DIRECTOR BOLTEN: I don't know exactly, but it's a -- the question is about the pace of growth in revenues as a percent of GDP. I don't know how it compares with the Clinton administration, where there were some periodic revenue surges, a lot of it based on a stock market bubble that had burst shortly before this administration entered into office. A lot of the surging revenues came in through unexpected capital gains. And as that was unwound with the bursting of the stock market bubble, we had the reverse effect on revenues. We had -- in the first three years of this administration, we had three consecutive years of declining federal revenues. That's the first time that's happened since the 1920s.

With economic growth back in the economy, we're now projecting restored growth in our revenues, as you mentioned, going back up to nearly 18 percent of GDP at the end of the budget window. And that 18 percent of GDP is about the historic average in modern times of total -- of the total amount that revenues take from the economy, about 18 percent --

Q In some areas, you project out five years. In other areas, as in the savings for Medicaid, you go out 10 years. Can you describe why that is? What has to do with the statute, and what just makes you feel uncomfortable?

DIRECTOR BOLTEN: None of this makes us feel uncomfortable. The reason is that we do our policy budgeting, our discretionary proposals on a five-year basis. And we project our deficits on a five-year basis.

For our mandatory programs -- for our spending programs and our revenue programs, those are much more predictable. And so we -- we have traditionally taken those out on 10 years. The selection of the periods that we're reporting in this budget is consistent with recent years. There was a brief period when budgeting was done -- all of the budgeting was done on a 10-year basis. It turned out to be not just off, but wildly off as a projection. So we've narrowed it to five years, which is the way that OMB has done it most consistently over its history.

Q But over the following five years, after the 2010, going out 10 years, you do know some of the effects of making the tax cuts permanent. Could you describe those?

DIRECTOR BOLTEN: I could. They're in your tables. I think if you look at the path, the cost of making the tax cuts permanent does grow over time. So does the economy. One of the things you need to keep in mind with -- in looking at our evaluation of tax cuts is that we tend to use static models; that is, they do not -- our growth forecasts and our revenue forecasts often do not adequately take account of the effect of those tax cuts on the economy.

And one of the things we -- I think most economists will agree on at this point, is that the reason we have growth back in the economy, or the kind of growth that we've seen in the last couple of years and project in the months going forward, is because the tax cuts are in place. They have contributed substantially to that restored growth.

Q I'm a little confused, more. You just said that you expect revenues to go back up to its historic share of 18 percent of GDP. Then what did the President's tax cuts do? If you've eliminated the estate tax, which I see is a very big number, and you've reduced the top marginal rate, which is where most of the growth in tax revenues came in the late '90s, where is the tax stream -- what are the specific streams of revenue that are going to boost that share back up to 18 percent?

DIRECTOR BOLTEN: Well, I think Terry is getting to the most important point, and that is that the most important thing for our fiscal picture isn't necessarily either the spending or the taxing of the government, it's how fast is the economy growing. And when we've got a good, strong, growing economy, you get a better stream of revenues from that economy. In other words, when the economic growth fell off rapidly in 2000 and 2001, the stock market bubble burst, we saw -- the tax rate was even, but we saw rapidly declining revenues because the economy was performing badly. The reason that we see revenues recovering back up to 18 percent of GDP, principally, is that we project a steady and stable growing economy over that period. That's what brings the revenues back most strongly, even with the President's tax cuts in place -- I would argue because the President's tax cuts are in place.

Q Even though most of the revenue in the late '90s came from people whose taxes you've cut.

DIRECTOR BOLTEN: Well, a lot of the revenue did come from the upper-income people. The result of the President's tax cuts, by the way, even though there were tax cuts allocated at the top end of the spectrum -- there were cuts all across the spectrum. And if you look at the President's tax cuts as a totality, the income tax, those at the upper end of the spectrum are now paying a larger share of the income tax than they were before.

An example: The top 5 percent in income in this country -- That's people making I think above about $140,000 a year -- without the President's tax cuts, that top 5 percent would be paying about -- less than 52 percent of our total income tax revenue. After the President's tax cut, that group is paying more than 54 percent of our total tax revenue. So the notion that the President's tax cuts have somehow made the code less progressive is wrong. The President's tax cuts have made the tax code more progressive.

Q Can I follow up on that? You talked about the importance on the spending side of holding programs to rigorous standards and effectiveness and accountability. What about on the tax cut side? Is there any effort being made to look at whether you really get the economic bang for the buck, particularly given the huge numbers that are attached to some of these things? For example, the estate tax, which Terry mentioned -- are you really going to get the kind of economic feedback from that? And the scale of the numbers on the tax cut side, particularly in the second five years of this budget window, dwarf anything that you're doing with the non-homeland security, non-defense budget cuts you're talking about here.

DIRECTOR BOLTEN: Well, don't underestimate what's going on in restraining the discretionary spending, because that's money that is restrained in the base. If we let the base grow, it's in there permanently, it grows indefinitely. So don't just look at one year for discretionary tax cuts; those are big numbers, as you grow them out over the course of any number of years.

But your question is a good one, with respect to tax cuts. Do we evaluate what effect they are likely to have on economic growth, which as I was saying in response to Terry's question, is the most important thing for our budget picture. The answer is, yes. And proposals do various -- proposals do vary in what our economists think the effect is on the economy.

One of the things that's politically difficult in the whole tax area is that economists will tell you that the tax cuts that are most likely to have the biggest bang for the buck in terms of economic growth are the marginal tax cuts, those at the top end. They will also say that the tax cuts that may have had the best effect on our economy over the last several years were the cuts in dividends and capital gains. Now, those benefits are actually spread much more broadly through the economy than most people think, but they are characterized typically as cuts for the upper income. But what economists will tell you is that those are the most effective.

And the President, in putting together a package, put together a package of tax cuts that was designed to be -- to promote both fairness in the tax code -- and I think the estate tax falls well into that category -- and promoting economic growth, and dividends and capital gains and the marginal rates fall into that one.

Q Your budget anticipates zero growth in non-security, non-defense discretionary spending for the next four years, five years?

DIRECTOR BOLTEN: Yes, out through the end of the budget window, through 2010. Q Do we have any precedent in history for that duration of no-growth? And what do you think, in practical terms, the impact of that will be by 2009? In other words, what are we left with in this side of the government's budget after we've been through all that, if we ever --

DIRECTOR BOLTEN: Well, we're left with quite a bit. It shouldn't be forgotten that the federal budget is still $2.5 trillion. This is not a trivial figure. We are projecting out, over the balance of the budget window, a flat growth in the non-security portions of the discretionary budget. We're also projecting growth between 4 percent and 5 percent in the defense budget and in the homeland budget, so we're seeing continued investment there.

You asked for precedent. I don't have the figures off the top of my head, but there were some years in the mid-'90s, during the Clinton administration and when Republicans gained control of the House of Representatives where non-defense spending was kept to very low levels. Last year is a precedent. The President asked that non-defense spending be kept -- discretionary spending be kept below 1 percent growth; the Congress delivered it.

This year we're asking for an actual cut -- almost minus 1 percent, I think it's minus .7 percent is the actual number. We're asking for an actual cut. I'm optimistic we'll get it. So what we're projecting out for the next four or five years is no -- is no stricter really than what we've asked for, and so far gotten, in the preceding two years.

Q Why weren't the transition financing costs put into the text of the budget?

DIRECTOR BOLTEN: The question is why weren't the transition costs in the text of the budget. The budget went to bed a couple of weeks -- two or three weeks ago, and so before the President's proposals were announced. And the President's Social Security proposals are still in formulation, in a process of consultation with the Congress. We're just reflecting now for you what we do know about the immediate deficit effects of the personal account formulation that the President advertised. There's a lot more, though, to go, to know what the real numbers are going out into the future.

Q I noticed that the effect gets much -- or gets larger, anyway, in 2010, than 2009. Does it continue to ramp up in the years after that --

DIRECTOR BOLTEN: I expect it would ramp up. I don't have numbers for that, but I expect it would become larger as a nominal figure beyond 2010. As a percent of GDP, my guess is it's likely to remain relatively stable, because these -- we should have a substantially growing economy, and a substantially growing economy is able to bear a larger nominal debt burden than one that isn't growing.

Q Can you give us the nominal figure for the 1.7, and the 1.7 for '09 and '10, including transition?

DIRECTOR BOLTEN: I can, but not off the top of my head. Can I ask that somebody give that to you immediately after the briefing.

Q What is the administration's targets for surface transportation spending -- subways, highways, bridges -- over the six year?

DIRECTOR BOLTEN: The question is about the highway bill, what our target is for the highway bill. The amount we are carrying in the budget for a six-year highway bill is $283.9 billion, which reflects an understanding between the administration and the leadership on what a reasonable bill that meets our infrastructure needs, but also ensures that the trust fund, the highway trust fund is able to carry out its obligations into the future, without requiring money being brought over from the general fund.

Q With the President talking about the war on terror being a generational struggle, I just wonder what is the rationale behind using supplementals to finance big chunks of the war on terror, given that it looks like it's going to be part of the picture for the foreseeable future?

DIRECTOR BOLTEN: Did you all hear that? The question was about with the President talking about the war on terror being a generational struggle, what is the rationale behind putting the funding into supplemental funding to fight the war on terror.

Well, first of all, there are substantial increases in base funding to fight the war on terror. The President has increased defense funding over the course of his first term by 35 percent. If we get our request in '06, he will have increased defense funding by over 40 percent in just five years. So a substantial reinvestment in our military might.

Then -- but to fight the actual wars, we use supplemental spending. And from a budgeteer's perspective, that's exactly the right thing to do, because even though we know that we're going to need to build up our strength, our base, we're going to need to transform our military to fight the war on terror for many years to come, we don't know where there's going to be any actual fighting, if any. We hope not, of course.

So from a budgeteer's perspective, you don't want those costs in the base, you want those taken as a one-off shot. That's how we've handled Iraq and Afghanistan. I think we've done a pretty good job of separating out what's base, what's permanently going to be part of the growing defense budget, and what is genuinely related to the unusual demands that the military now has in Iraq and Afghanistan.

Q Is the President pleased that the taxes are becoming more progressive, as you described? Or does he think it might be unfair to shift a greater percentage of the burden to the higher-income Americans?

DIRECTOR BOLTEN: The President thinks that the tax cuts that have been put in place have made the code fairer. There's more work to be done, and that's why he's asked for fundamental tax reform. The principle objective in the first term was to put those cuts in place, restore growth to the economy. The tax cuts succeeded in doing that. Now, there's still a lot of work to be done to make the tax code simpler -- it's a horrendous mess -- fairer to all the taxpayers, and more pro-growth. There's a lot that can be done with the tax code to make it more competitive.

I think that's a very interesting and complicated debate that we're going to have. My guess is it's going to come after Social Security is well launched or even resolved, but I think it's going to be a substantial theme even in the course of this first session of the Congress.

Q Just to play devil's advocate, how is it -- from the perspective of higher income Americans, how is it fairer for them to be shouldering a greater percentage of the tax load?

DIRECTOR BOLTEN: Well, the higher -- interesting, I don't get many representatives of higher income Americans at these sessions.

Q I'm not speaking for myself, believe me. (Laughter.) I guess I'm playing the devil's advocate.

DIRECTOR BOLTEN: Yes, you are. You are really playing the devil's advocate here. I'm seeing a lot of grumpy faces around the room as you're raising this.

But for those higher income taxpayers, they got a tax cut, too. What I was doing in response to Terry's question is, is pointing out that the result of the tax cuts overall was to make the code more progressive, rather than less. I don't think anybody was disappointed with their tax cut. But the notion that somehow the tax code has been made less progressive is the one I was responding to.

Q Josh, can you review -- since the Medicare prescription drug changes go into effect in 2006, can you just review what the budget projects in terms of the growth of Medicare spending, and whether the President believes that there is going to be a need for more legislation to address that as a budgetary concern.

DIRECTOR BOLTEN: The question is about the budgetary effects of the Medicare legislation, and whether -- Alex, whether more legislation is likely to be needed?

Q Right, more --

DIRECTOR BOLTEN: I don't have off the top of my head the figures on the budgetary effects. But you can see that Medicare expenses will be growing, and growing substantially in 2006, as we implement for the first time the availability of prescription drug coverage under Medicare -- a very important development, sought for decades by politicians on both sides of the aisle, delivered last year by this President and the previous Congress. So the advent of prescription drug coverage under Medicare is a huge and important development in its own right. It also has effects on the budget. You will see increased Medicare costs. Those are all baked into the deficit projections you see out here, the increased costs in Medicare.

In terms of additional legislation, I think the President's view would be, he just signed a bill a year ago and he would want -- he wants that to take effect properly. There are a lot of potential efficiencies that are likely to grow out of that Medicare bill that may not be captured in the actuarial assessments, especially the advent of private plans competing in the Medicare market to deliver better care at a lower cost, which is what competition traditionally has done in this country.

So the advent of that, the advent of health savings accounts is a big change. I think there are a lot of savings to be captured in the course of implementing this bill. Whether we ultimately need to go back to it, or whether we will need to go back to it at some point, the answer is, probably yes, that there are always adjustments that are going to need to be made. But the most important thing we need to focus on is health care costs overall.

Right now, one of the reasons why we have a long-term fiscal problem is that health care costs, themselves, are projected to grow way above the rate of inflation. We're projecting Medicare costs will grow out over the course of the budget window about 9 percent per year. And there's a lot that can be done outside of Medicare legislation to bring those health care costs down. We're making some substantial investments in this budget in health information technology, which should bring costs down; medical liability reform should bring medical costs down. There are a whole variety of measures -- the further implementations of health savings accounts -- a whole variety of measures can be taken that should improve health care costs over the long run. Those we should work on, and not just focus on the formulas that are contained in the Medicare legislation.

Q Can I follow up real quickly? Nine percent sounds very conservative. Is that sustainable? I mean, because there are a lot of projections that it's actually going to be much higher than 9 percent.

DIRECTOR BOLTEN: The projections we use are based on what the Medicare actuaries do. They have a track record that's -- these are very hard things to project, especially when new programs like prescription drugs are coming into place. But over the long run, the actuaries' track record is probably as good or better than anybody else's. It's our best estimate. Regardless, it's a big number and is one that the entire government needs to focus on getting under control.

Q On tax reform, when you said a lot more needs to be done to make taxes more competitive, are you talking more in terms of international tax reform? And also -- well, actually, if you'd just answer --

DIRECTOR BOLTEN: In tax reform, are we talking in terms of international tax reform -- is that the question? I would imagine so, although there's a lot to be done domestically. But I think international tax has to be part of the equation when you look at fundamental tax reform. I know there's a lot of interest on the Hill. Speaker Hastert has spoken often about the disadvantage faced by U.S. manufacturers from the non-border adjustability of the taxes that we pay here, compared to the taxes that are paid in Europe. So I would imagine that the international will be on the table along with domestic. I don't necessarily think that one or the other predominates; I think the whole tax code has to be looked at as a whole.

Q And when you said breakdown the AMT relief, that it should be addressed in the context of tax reform -- since tax reform is supposed to be revenue-neutral, are you suggesting there should be offsets to this so it does not have any impact on the deficit? And given the size of the problem, the loss of revenues from correcting that, will there be room for any other reform in the tax system if you just adjust that in a revenue-neutral way?

DIRECTOR BOLTEN: Sure. I mean, you need to look at the tax code as a whole, but what the President has asked for is that the Secretary of the Treasury come forward with a proposal that, over all, looking at the whole tax code, is, indeed, revenue-neutral. Yes, ma'am.

Q Could you elaborate on the administration's plans to extend DOD- and DHS-like personnel flexibilities to the rest of the government?

DIRECTOR BOLTEN: I'm going to kick you over to my deputy, Clay Johnson, who is expert on that, and I think has done some briefing. He'll be available to you afterwards, if you like. But there are some important flexibilities that we've managed to put in place in both the Defense Department and now the Homeland Department. And we're hoping to spread those to the rest of the civil service. There are a lot of efficiencies that can be captured. And I think actually it's something that a lot of the federal work force should welcome because it is a shift much more toward rewarding performance, rather than longevity.

Q You've said the transition financing shouldn't be viewed as new debt. But given that the accounts aren't expected by themselves to restore solvency to the system, how can you be certain that credit markets will view that as an offset, given -- if they take issue whether or not the benefit cuts or other things needed to put it into solvency -- would materialize?

DIRECTOR BOLTEN: Well, let me emphasize, the personal accounts on their own are not new debt to the system. All that's happening is, in creating a personal account is that you are taking an obligation that the government owes to a beneficiary some time down the line -- maybe 30, 40 years, when you retire; maybe sooner -- and bringing it forward and allowing you to set that money aside for yourself, keep it in a personal account that you can invest and that can grow at rates better than the system can now provide. So while that increases the deficit in the short run, in the long run, the net cost to the government is zero because this is a debt that the government already owes. The government already owes this obligation to you, to pay you this benefit. It's just letting you keep that money earlier on and invest it for yourself. So that's entirely apart from everything else that might be happening in the system.

But as people express concern about the short-term deficit effects of these accounts, I think the financial markets will understand pretty clearly that this is not an increase overall in the debt of the United States. It may require some borrowing at the short end as a transitional measure. In fact, it will; I mean, we've showed some of it here on these charts. But, overall, the net cost to the government is zero from doing this. I think the financial markets will understand that, and I think if there's concern about how the financial markets will react, I'd urge you talk to folks on Wall Street. The ones that I've talked to have said that if this is part of a comprehensive reform plan, it won't be a matter of concern to the financial markets; it will be a matter of great comfort and satisfaction to the financial markets.

Q How much of this budget was put together with an eye on the international markets, and the valuation of the dollar as opposed to the euro? How big a factor is that?

DIRECTOR BOLTEN: We put together all the budgets with an eye to the credibility and confidence that the United States government has. I think this budget should continue to attract a lot of confidence in both domestic and international markets.

The main thing is that it is a responsible, restrained budget on the spending side, and that over the long term, we're able to show that the situation that we've described right here is something that is -- if not exactly these numbers, is the trajectory that we're on.

Q Are you also arguing, in addition to the relation to GDP that you are cutting the deficit in half in dollars? Because according to the numbers, it doesn't seem like you are --

DIRECTOR BOLTEN: The question is about deficit in half as a nominal matter, as well as GDP. The right way to look at this, at the budget deficit, economists will tell you, and even people on Wall Street will tell you, is as a percent of GDP. Reporters like to report nominal numbers, because those are easier to deal with. As we know show it, by 2009, the deficit will still be cut in half as a nominal matter. So if you insist on using nominal numbers, we make it that way, as well. But the right way to look at this is as a percent of GDP, because a deficit figure is basically meaningless -- $100 billion in deficit today would be a very low deficit. Twenty years ago, 30 years ago, it would have been a very large, possibly dangerous deficit. And if it were in a country with a much smaller GDP, it would be a dangerous deficit.

So it's not really meaningful to look at a nominal number. You need to look at the deficit as a percent of GDP. That's the way you do it. If you insist on looking at nominal numbers, we cut it in half that way, as well.

Q From the projected nominal --

DIRECTOR BOLTEN: Well, when the President made the -- set the goal, he was setting the goal from the original projected deficit of $521 billion, which, by the way, was consistent with most Wall Street analyses at the time. I think my alma mater, Goldman Sachs, was projecting a slightly higher deficit at that time, CBO had one slightly lower. But the number that the President was cutting from was a number that was actually, I think, right in the middle of most projections.

Q With the Medicaid -- for the Medicaid cuts and cuts in block grants, aren't you just shifting some of the tax burden to state and local governments from the federal tax burden?

DIRECTOR BOLTEN: The Medicaid proposals do involve asking states to shoulder a more appropriate share of the burden. What we are trying to do in this proposal is ensure that states are not able to game the system, so that they receive more in federal match than the system was intended to provide them.

But over the long run, what we really want to do is provide the flexibility to the governors to use the money in a way that's most likely to benefit those most in need. The Medicaid system is, today, overly complex, overly rigid in how governors can spend the money. We're hoping to provide a reform that gives them a lot more flexibility. And although some of them will be disappointed that we're hoping to shut down some of the measures that they've used to get more money out of the federal government, I think they should all welcome the opportunity to use more flexibility.

Q Does the budget anticipate revenues from new oil leasing in the Arctic Refuge, and if so, is this the right place to change national energy policy?

DIRECTOR BOLTEN: Well, the budget is the right place to present the entirety of the President's policies, so all of his proposals are reflected in there. Let me ask Austin -- does it reflect revenues from that? Yes, it does reflect the increased proposed revenues that we would get from that, although that would be pretty far out in the budget window, I expect, because of how long it would take to come on-line.

Q Insofar as you've acknowledged that some on the other end of the avenue have already declared this thing DOA, does the administration start by sort of matching the ante and saying, okay, we'll veto it? Or, in absence of that, doesn't that send the signal that by October all this shifts and the lawmakers are going to get their pets and popular programs anyway?

DIRECTOR BOLTEN: The attitude here right now is actually kind of optimistic. It's part of political theater to declare DOA at this moment, if you're on the other side. But the reality is that the same thing happened last year and the President actually got the overall budget he was asking for. And we got it because we got really good cooperation from the leadership in both Houses and the chair of the committees. I'm very optimistic that we will have the same level of cooperation, and maybe even better, going forward. So I don't think it's necessary now to throw down the gauntlet and so on.

Are we going to get everything we ask for? No. Are we going to get all the program cuts we wanted? No. Are we going to get all the spending increases we asked for? No, I don't expect that. But I think we will get a lot of them; I think it will be a cooperative process with the leadership in the Congress. So I'm -- I actually enter into this with a happy spirit.

Q What, then, is better about the relationship and your optimism this year than last? What's changed?

DIRECTOR BOLTEN: Last year was good. And we got great cooperation from the two budget chairs and the two appropriations chairs, as well as the leaders. Three of the four committee chairs have changed, and I think those chairmen also will be good leaders.

The only thing that I've sensed that's changed is the mood in the Republican Caucus, which I was able to gauge at their retreat a week ago, was of being supportive of the President's message of the necessity of setting priorities and exercising fiscal restraint. I think, even though individual members will be disappointed about -- every individual member will be disappointed about something in this budget, I am sure; overall, I think they understand in the aggregate the need to restrain the federal government spending appetite, and I'm hopeful we're going to get some good support.

Q Can you talk about the airline ticket tax increase in here? What impact do you think that will have on tourism and on the financially troubled airline industry?

DIRECTOR BOLTEN: We are proposing raising the fees on ticket taxes to reflect the cost of the screening of passengers and baggage. I don't know what the effects on the industry might be, but we really have two choices -- is that we can ask those who are flying to bear those costs, or we can ask everybody, including those who are not flying, to bear those costs. We do have the costs; we want to make that system work as effectively as possible. But given the choice, I think the better policy is to ask those who are actually flying to bear the cost of the enhanced security system.

Q How do you respond to the criticism the brunt of the pain is going to fall on the poor for these budget cuts?

DIRECTOR BOLTEN: I don't think the criticism is accurate. There are cuts spread throughout this budget. We have tried to ensure that where we are providing a safety net for the poor, that that safety net remains in place. There are several areas of the budget where we are increasing, that are generally regarded in the safety net category. Our assistance to public housing is going up substantially. Our assistance to community health centers is -- I think I have a figure here somewhere -- community health centers are going up $300 million this year. That's about a 17 percent increase on an already big base that the President has built up. The WIC program will see increased spending.

So there are increased spending on a lot of the safety net programs that are most important to protecting --

Q Health credits --

DIRECTOR BOLTEN: Health credits is, in the President's proposal, will be available -- a health credit for the uninsured that is very substantial.

So there are a lot of ways in which this budget is ensuring that the safety net remains. There are other ways where we've taken programs that we think aren't performing adequately or don't meet the same priority, where we've sought savings. And a lot of them have really nice names -- there's the -- there's some education programs that are being reduced or de-funded that have great names and have laudable goals, but that we don't think are performing as well. We're taking that money and shifting it over to programs where we think we are going to get better performance.

Let me just take one or two more.

Q Are you saying that you're expecting enthusiasm in Congress for the big cuts in the farm program? (Laughter.) Including from those members who are looking ahead to the Iowa caucuses, for example? DIRECTOR BOLTEN: The question is, am I expecting enthusiasm from members of Congress for cuts in farm programs. Probably not, from members who are in, or will be visiting farm states. But I think a lot of the members will recognize, even those from farm states, that there are savings to be captured. And I do expect that we will have support from large portions of the caucus on the proposals we're pursuing, because there are measures we can take, even within our agriculture programs, for example, in limiting the amount that any individual farmer might receive in subsidies. These are measures that we can take, I think, responsibly, without undermining our farmers, either the big ones or the family farmers, and still dealing with the restrained fiscal situation that we find ourselves in.

Q Mr. Bolten, I just want to go over how -- one thing, one of the more topical questions on Iraq and the $390 billion deficit. Did you say that the $81 billion supplemental is reflected in the $390 billion?

DIRECTOR BOLTEN: It is. It's a little bit complicated, but the $81 billion supplemental is an '05 supplemental request. We're going to be presenting it in the next few days. Its enactment will probably come about halfway through the fiscal year. So that $81 billion will not spend out all, or even mostly, in 2005. So the 2005 deficit number you see up -- figure you see up there reflects what we expect will be spent in 2005, and then a good portion of the $81 billion will also be spent in 2006. And that is reflected in the 3 percent deficit figure, or the $390 billion nominal figure.

Q What's not reflected in the $390 billion deficit figure for '06 would be any further supplementals on Iraq --

DIRECTOR BOLTEN: That's correct. So there's no outlay effect from any additional supplemental. Where we probably have the same kind of situation where if -- to the extent that there is another supplemental a year from now, part of it would be spent in '06, part in '07.

Q And there likely would be --

DIRECTOR BOLTEN: It would be very surprising if there was not.

Q The President is proposing a budget with a deficit of between $300 billion and $400 billion, and he's also proposing substantial tax cuts. The President has been out on the road saying that 20, 30 years from now Social Security will be running deficits of $200 billion to $300 billion. He's very concerned about that. What is the philosophical difference between the tax cuts, which he believes and is pressing for now, in light of these deficits, but Social Security 20, 30 years from now which will have similar deficits in nominal terms?

DIRECTOR BOLTEN: I'm not sure I'm following the question exactly. But there --

Q Why are the tax cuts affordable in light of the deficits we have now, but Social Security's deficits are such a problem?

DIRECTOR BOLTEN: Well, first, to deal with Social Security side of that equation. Social Security needs to be sustainable on its own. And the deficit that it's building up over time, the present value of those is over $10 trillion. So that's a problem that we need to address on its own. No amount of tinkering with tax increases or discretionary spending cuts can address the fundamental problems of unfunded liabilities in our entitlement programs.

On the tax side, those taxes are important for sustaining good, strong economic growth. The reason why we have a recovering revenue picture going forward is because we have growth back in the economy. And the President views those tax cuts as -- keeping them in place as essential to sustaining the growth of the economy. Our best fiscal tool is a growing economy. And in order to sustain that, we need to keep the tax cuts in place.

Let me take just one more. Yes, sir.

Q I'm wondering, since you projected the deficit will actually go down $37 billion into '06, whether it's possible -- given that we're going to have another supplemental -- once we factor that in, the deficit actually won't go down at all in '06, in terms of nominal or real dollars?

DIRECTOR BOLTEN: Our expectation is that we're still on a good path. Certainly as a percent of GDP, we are on that declining path. We don't know yet what additional spending is likely to be outlaid in '06 and adding to the deficit number. But I think -- I think we will see, if we're all fortunate enough to be here a year from now at this time, I think we will see that declining path coming true and looking very solid out through the course of the budget window.

Anyway, thank you all very much.

END 1:06 P.M. EST

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