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
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
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
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
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
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
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
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.
Q Where does the $137 billion in mandatory spending reductions
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
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?
DIRECTOR BOLTEN: I'm sorry?
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
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
Q Does the other line disappear -- that free market?
DIRECTOR BOLTEN: The market needs to apply in railroads, as
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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