The White House, President George W. Bush Click to print this document

For Immediate Release
July 13, 2005

Mid-Session Review Budget Briefing
Dwight D. Eisenhower Executive Office Building
Room 450

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President's Remarks
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11:43 A.M. EDT

DIRECTOR BOLTEN: Good morning. It's a pleasure to be with you, especially when I have good news to report on the budget. Since last February, when we released the 2006 budget, the nation's fiscal outlook has improved dramatically. The U.S. budget deficit is falling, and it's falling fast. The 2005 shortfall will be $94 billion less than we projected just five months ago.

We're seeing what happens when you have a strong economy: more businesses investing, more people working with more income, so that Americans can spend and invest as they see fit. And with all those economic gains, we're also seeing more revenues coming into the federal treasury.

We got to this point largely because of the President's pro-growth policies, especially tax relief. Those policies have strengthened the economy, which is now producing better than expected tax revenues. Of the $94 billion decline in the deficit from last February, $87 billion comes from stronger receipts, $7 billion comes from lower than expected outlays.

Even as the nation devotes the substantial resources needed to fight and win the war on terror, the deficit is now forecast to fall from $412 billion, or 3.6 percent of GDP, in 2004 to $333 billion, or 2.7 percent of GDP, in 2005. At its currently forecast level, the U.S. budget deficit for 2005 would be smaller than the deficits in 15 of the last 25 years. As the chart shows, under the President's fiscal policies, the budget deficit is forecast to continue to fall, to $162 billion in 2009, or 1.1 percent of GDP, less than half the size of the average deficit over the last 40 years. This dotted line here reflects the average deficit over the last 40 years.

That would significantly surpass the President's goal of cutting the deficit in half from its projected 2004 peak of $521 billion, or 4.5 percent of GDP, which is represented by the top line of the bar on the far left of the chart. This rapid improvement in the budget picture demonstrates the significance of policies that have contributed to sustained economic growth.

The implementation of the administration's pro-growth agenda, especially tax relief, restored growth and investment to the economy after multiple shocks, including a stock market collapse, corporate scandals, and the attacks of September 11th. Tax relief proposed by the President and enacted by Congress in each year from 2001 through 2004 reduced income tax rates, raised incentives for small businesses to invest in new equipment, dramatically reduced the tax rate on dividends and capital gains, and phased out the death tax.

Once fully in place, tax relief has produced the desired results. The economy has grown by 12.4 percent since the recession ended at the end of 2001. Since enactment of the 2003 tax relief, the economy has expanded by at least 3 percent in every quarter. Employment is up by more than 3.7 million, and the unemployment rate has fallen to 5 percent, lower than the average unemployment in each of the past three decades. Both inflation and interest rates have remained low, and business investment is strong.

Our improved budget outlook is largely a product of collections of tax revenue which have grown significantly faster than projected five months ago. After three straight years of declines due to economic weakness, tax receipts will have risen two consecutive years. This mid-session review projects that tax receipts will rise 14 percent from last year. That's reflected by this light blue -- medium blue line right here, and that's the largest year-over-year increase since 1981.

Federal receipts as a share of the economy are projected to continue rising in future years, as well. We can't yet identify with certainty the composition of income that yielded this greater than expected surge in tax receipts. Detailed data that would permit that analysis will not be available for many months. The data so far do show, however, that all major categories of receipts -- corporate income taxes, payroll taxes, and individual income taxes -- are outpacing forecasts. This experience of the Federal Treasury generally has been matched at the state level, as nearly all states are reporting income tax collections above forecasts, as well.

As the chart shows, our improved deficit picture in the budgetary window does not rely on assumptions that receipts will continue to grow at this year's remarkable rate. Rather, these forecasts reflected in the light blue lines are well within the range of experience in times of solid economic growth. With these future gains, federal receipts are expected to rise to 17.4 percent of GDP in 2005. By 2010, the ratio is projected at 18.1 percent, just about the historical average, even assuming full extension of the President's tax relief program.

Tax relief has had a significant positive impact on the economy, and that stronger economy is the source of the improved tax receipts that are reported today. To sustain economic growth, it is critical that Congress make tax relief permanent. Allowing this tax relief to expire would endanger the economy's prospects, placing into doubt gains in job creation and business investment that are critical to increases in tax revenues and further reductions in the size of the deficit.

Also important to our efforts to restore and sustain economic growth is a continued commitment to spending discipline. In each year of President Bush's administration, he and Congress have brought down the rate of growth in discretionary spending unrelated to defense and homeland security. This year, the President proposed an actual reduction in non-security-related spending, compared to prior year levels, the first such proposed cut in that category of funding since the Reagan administration. The President's budget would hold overall discretionary spending below the 2.4 percent projected rate of inflation. His budget also proposed reforms to slow the growth in mandatory spending programs.

The Congress has made good progress on the budget. Earlier this year, it adopted a budget resolution that holds discretionary spending to the President's overall request, assumes a reduction in non-security discretionary spending from last year's levels, and calls for $35 billion in savings and mandatory programs. While the House of Representatives has passed 2006 appropriations bills that remain within the President's overall level and also achieve a reduction in non-security-related spending, much work remains to be done to ensure that the final spending bills reflect this appropriate level of restraint.

I want to direct your attention again to the chart that shows our deficit projections. In this review, we have added some items to the projections made in February. This review assumes enactment of an additional $50 billion in funding in 2006 for the continuing costs of operations in Iraq and Afghanistan. This funding was assumed by the Congress in its recently adopted budget resolution.

The full cost of these operations in 2006 is uncertain, but they are expected to require additional funding beyond the $50 billion included in the resolution. The administration expects to request additional 2006 funding from the Congress when requirements for these operations can be estimated more reliably. This review also does not reflect the effect of undetermined, but anticipated supplemental requests for ongoing operations beyond 2006.

This review includes the estimated budget impact from the creation of personal accounts under the President's Social Security reform proposal. Transition financing for those accounts would not begin to take effect until 2009, and is easily accommodated within the President's deficit reduction goal.

Although transition financing is incorporated into our deficit projections, it would not have the same effect on capital markets as traditional federal borrowing. First, such financing would essentially bring forward obligations already owed in the form of promised future benefits, and as a result, would reduce existing future obligations by a roughly equal amount. Second, unlike debt issued to fund government spending, there would be no impact on net national savings, because every dollar of transition financing would be saved in a personal account and invested in the capital markets.

As the nation's near-term fiscal outlook improves, we have the opportunity and responsibility to address the real fiscal threat: a long-term budgetary picture of steadily rising deficits from mandatory spending programs. President Bush has proposed to address Social Security's long-term insolvency while offering a better deal for today's younger workers.

Critical to success in both the short- and long-term is a strong economy. This review offers clear evidence that a growing economy, combined with spending restraint, will make the fiscal outlook substantially brighter. As we continue to address the nation's long-term fiscal challenges, spending discipline and pro-growth policies, especially sustained tax relief, will prove essential to our success.

I'd be happy to take some of your questions.

Q Last week, Doug Holtz-Eakin, the Director of CBO, identified three factors that he thought were contributing to the increase -- there was a corporate tax holiday, the end of bonus depreciation, and last year's very good stock market. And he suggested that we couldn't bank on those continuing on further. You guys seem to have basically ratcheted up your receipts expectations by about $80 billion a year for the next five years, and I'm wondering why you did that and whether you think you might be diverging now from CBO's expectations in the out-years?

DIRECTOR BOLTEN: I don't expect that we will be diverging substantially from CBO's expectations. This year, 2005, is a remarkable year of spending* growth. Austin, let's put that chart back up on here. We are -- what we are seeing is, in fact, a 14 percent increase in revenues. And economists, I think, will spend the next couple of years figuring out exactly what all the components of the income were that contributed to that.

What we do know about the individual elements is that we saw increases in our receipts in all the major categories -- individual income tax, payroll tax, and corporate taxes. So we saw it across-the-board reflect some underlying strength in the economy. But we do have to recognize that this is -- this is an extraordinarily large increase in receipts.

Going forward, we are not projecting that that level of increase will continue into the future. What we're projecting here is in the range of 6 percent growth and receipts year-on-year after this extraordinary year, which is very much within the historical range of receipt growth for an economy that's growing as we project in the 3 percent to 4 percent, more like the low 3 percent range during these out-years. I don't expect that these projections, these revenue projections going forward will diverge substantially from what CBO is projecting.

Q Mr. Bolten, you're projecting the economy growing at a rate of 3 percent to 3.5 percent over the next five years. Is that a bit optimistic? And what would interfere with that kind of projection?

DIRECTOR BOLTEN: I think the projections that we've assumed in our budget for economic growth are on the conservative side. We've always tried to remain on the conservative side. I think you will -- if you compare our numbers with blue chip, you will see that they run very closely together. In some years we may up a tenth of a point; we might be down a tenth of a point. But our economic growth assumptions going forward are very much mainstream economic growth assumptions. They're consistent with what we've seen so far in the economy.

Now, what can throw us off track? Who knows? Anything could do that. But nothing that we can now anticipate will suggest that we are likely to go off track. Significantly, we've experienced a very large rise over the last year in oil and gas costs. And yet that has only taken, I think, a minor shave off of growth in the economy. I think it's a real reflection of the resilience of the economy that we've been able to absorb those higher oil prices and not had a significant detrimental effect on growth in the economy, which we're now projecting for -- we and blue chip are now projecting for 2005 around 3.6 percent. I think our projections going forward are in the conservative range, and I think we can have confidence in that range of projection.

Q If I could just follow up -- oil, as you mentioned -- can the economy continue to absorb that kind of shock over that long a range?

DIRECTOR BOLTEN: We don't want the economy to continue absorbing oil prices as high as they are, but every indication so far is that the economy has absorbed those prices and is moving forward on a good sustainable basis. The futures markets are taking into account substantially higher oil prices and, so far, that's only had a modest effect in suppressing economic growth.

Q How has the spike in real estate values affected revenues, if at all? And does the mortgage deduction mean less revenues, but then you see more on the capital gains side?

DIRECTOR BOLTEN: An interesting question, to which I don't know the full answer. My guess is that there is substantially more individual wealth contained in homes. People have taken some of that wealth out; it's been used to help spur economic growth. But one of the good news stories of the last several years is how strong the housing market has been and, more importantly, how many Americans now own their own homes. Home ownership is at an all-time high. My guess is that economists will differ on exactly how much that's contributed to our revenues, but we don't foresee any threat to our forecasts going forward. In fact, I think we see -- we benefit to our forecasts going forward from the strong housing market we've had so far.

Q You've noted that it may be a couple of years before there's sufficient data to really analyze the composition of these revenues, but is it your sense, at this point, that the simulative effect of tax cuts has been the biggest single factor driving this improvement?

DIRECTOR BOLTEN: I think there's no doubt that the effect of the tax cuts, especially in the mid-years of the first term, in '02, '03, into '04, have been an enormous factor in producing the additional income that has found its way now into the federal treasury in the form of tax revenues. What is going to take a couple of years for the economists and number crunchers to sort out is what are the components of that income that yielded that higher than expected revenue source. But I don't think there's any doubt that the tax relief played a very substantial role in that.

Q At what point now do you expect us to bump up against the federal debt limit?

DIRECTOR BOLTEN: I don't know. I know Treasury keeps a running tab on that. I think they are expecting that we are likely to bump up against the debt limit again -- Austin, is it later this year? Let me refer you to the Treasury Department. They actually keep sort of a week-by-week tab on how we're doing. But what today's good news does reflect is that with the additional revenues coming into the treasury, that date will -- I think will effectively be pushed out for at least some period.

Q Now, you said you assume that private accounts have been adopted when you do these projections --

DIRECTOR BOLTEN: In 2009 and 2010.

Q What happens to the projections, assuming that Social Security remains as it is now?

DIRECTOR BOLTEN: If there's no change in the Social Security program -- i.e. that there are not personal accounts adopted, and we very much hope that they will be -- but should personal accounts not be adopted, then you would find a lower -- and even lower deficit projection for 2009 and 2010 than we now see. I think it would lower the deficit by about $23 billion in 2009, about $56 billion in 2010.

The important thing to remember about that additional deficit effect of funding personal accounts is that it's not like new spending. It's actually -- it's not really adding essentially to the overall debt burden that the United States has to bear. What the personal accounts do is simply bring forward an obligation that the government already owes to a retiree later, let's them keep more of their money sooner, and therefore, we have to recognize that deficit effect within that relatively narrow budget window within which we operate. But in a comprehensive reform plan, with personal accounts, the long-term effect we would see is a substantial improvement in the fiscal position of the United States because we'd be dealing with one of the components of our huge unfunded long-term liabilities and our entitlement programs.

Q What about the alternative minimum tax? You talk a lot about tax cuts increasing the receipts. Did you look at the AMT and what that did in terms of the receipts?

DIRECTOR BOLTEN: There is, now existing in the code, a patch on the AMT that you're probably aware of that expires in 2005 that is keeping more people off the AMT. We have not in our projections and in the numbers we show -- let's go back to the percent of deficit chart, percent of GDP chart -- we have not in our numbers going out beyond 2005 projected any additional patching of the AMT, and that is because our policy is that the AMT does need to be reformed. It's a confusing, complicated and unfair additional imposition on taxpayers to have to figure out which tax code they're actually paying under. And so the administration supports reform of the AMT, but we support that reform in the context of overall fundamental tax reform, which we think can be done on a revenue-neutral basis.

Q You've talked about the good news on the budget this year, and revenues coming in better than expected, and then the report warns about some of the longer-term problems. Is the administration not tempted to raise its sights and to try and do more than targeting your deficits in 2009, which will be, I guess, eight years after the end of the recession? You're not tempted to have a more ambitious target?

DIRECTOR BOLTEN: I think we've got an ambitious target out there in terms of cutting the deficit in half from its peak in just a five-year period. What today's report shows is that we are well ahead of pace to do that. And I don't know whether the President will be interested in setting a new goal. I don't think that's particularly necessary. I think what we will try to do is ensure that this very positive deficit path that we're looking at now actually comes true. And it will require two things. One, it will require a continued solid growth in the economy, which means maintaining the tax relief that the President and the Congress have adopted.

And second, it means maintaining a responsible level of spending restraint like that reflected in the budget that the President presented last year and basically got adopted by the Congress, like the budget that the President presented this year for 2006, and in which we're making good progress for the Congress in having adopted.

Q I have two questions. The first one is, I know you don't have a breakdown yet of the incomes that led to the revenue surprise --

DIRECTOR BOLTEN: Right. And I'm told by the economists we probably won't have that for many months, maybe even years.

Q But we do already know, don't we, that a lot of it is non-withheld income tax? And isn't that things like bonuses and capital gains? Can we assume that it's those types of things, and if it is, a lot of those things tend to be one-time types of income?

DIRECTOR BOLTEN: Some of them may be. I think you could probably spend a couple of hours with the economists going through what they speculate may be happening. And I think some of the elements of that 14 percent increase in our receipts in 2005 are likely to turn out to be one-time elements. But many others are not. We're seeing growth in individual income tax across-the-board. We're seeing a substantial growth in payroll tax paid. So I think it will be a while before the economists can really tell you exactly what the different elements are.

The point I want to emphasize, which I addressed earlier, is that we are not assuming going forward that we're going to continue seeing 14 percent growth in receipts year-over-year. We are reverting to a much more normal, roughly 6 percent, growth which would be consistent with the, I think, relatively conservative economic forecasts we've done going forward.

Q On a separate note, I also want to ask you about the aftermath of the London bombings and whether there's been some review of homeland security spending, where we're spending the money and whether the places that money is being spent need to be reassessed, and whether you communicated this thinking to Congress?

DIRECTOR BOLTEN: Secretary Chertoff has our mix of homeland security constantly under review. We have very substantially increased over the last several years, since 9/11, naturally, homeland security spending in this country. We're now well above triple, I think, what that spending was before 9/11 took place. But it's a difficult subject because there are so many places that you could address. And what Secretary Chertoff is trying to do is make sure that we are focusing our resources on those areas that are most at threat, to try to do a risk-based assessment and spend money in areas where we think we're likely to do the most good.

In the aftermath of the London bombings, as you suggested, there is a fair amount of reconsideration about are we doing enough to protect our mass transit capabilities, especially subways and trains. That's an ongoing conversation with Congress, and it may be that we can, with Congress, come to agreement on a better mix even than we proposed in the budget. Our budget did propose substantial funding for mass transit security in our proposal, but we may be able to arrive at Congress with a better mix.

The important thing we need to do, though, is make sure that we focus our resources where there is an actual risk. Everybody would love to get some of the homeland security dollars, but we need to make sure we're spending that money wisely, that we're putting it in places where we believe there's most likely a genuine threat, and we're putting it in -- we're spending it in ways that are likely to do something to actually reduce that threat.

Q I got here a little late, so forgive me if you've already touched on this. How confident are you that spending on Iraq and Afghanistan won't negatively affect reducing the deficit?

DIRECTOR BOLTEN: I'm sorry, there were too many negatives in that for me.

Q How confident are you that spending on Iraq and Afghanistan won't effect reducing -- it won't slow down reducing deficit reduction.

DIRECTOR BOLTEN: I see. Well, I mentioned in my prepared remarks that we -- that we are including in our 2005 numbers the 2.7 percent of GDP figure here -- we are including all the spending that we expect from all sources, including the war in Iraq and Afghanistan. We're also including in 2006 and beyond a $50 billion reserve that the Congress included in its budget resolution -- they called it a bridge, or war reserve. Whatever you want to call it, we have taken account of that additional $50 billion in 2006 and beyond. But it's very likely that we will need funding beyond that $50 billion, even in 2006. That's not reflected in our numbers because we don't -- we can't say now with any confidence what size we think that's going to be. So, depending on how our expenditures go in Iraq and Afghanistan, I think as people look at this very positive declining deficit path, you do need to add back in an increment for effectively prosecuting the war on terror.

I think the essence of your question, though, is, does it threaten the basic picture that's shown here. I think the answer is very clearly, no. Even with all of the war costs factored in for 2005, we see our deficit has come down to 2.7 percent of GDP, which is, as I said, very near the 40-year historical average, and we see it continuing on a progressively downward path from there.

Q Given the strength of the economy and the strength of revenues, is it fair to look at this $333 billion as a structural deficit the U.S. is faced with right now?

DIRECTOR BOLTEN: I don't think so. I think that the path that's plotted out here, which by 2009 has the deficit in the mid-$100-billion range, is entirely plausible. I mean, for sure, it won't be exactly the number that we project, but I think that path is completely plausible. So I don't think we are stuck at the $333 billion, 2.7 of GDP level we're at now. I think we can do very much better. I'm confident we will do very much better, as our numbers show, going out over the next five-year period, maybe the next 10-year period.

Where we have a serious structural problem is in the longer period -- to look out 15, 20 years. That's where we face an enormous challenge from huge unfunded liabilities in our entitlement programs. And nothing we do on the taxing or spending side can really alter the trajectory of that. We need to fundamentally reform our entitlement programs to make sure they're sustainable in the future. And the President is leading the way on that with his proposal on a very big part of our entitlement problem, on Social Security reform.

Q Is there any evidence at all that increased IRS tax enforcement efforts have led to the increased revenues?

DIRECTOR BOLTEN: I'm sure increased IRS enforcement efforts have indeed improved collections. I think Commissioner Everson is the best person to talk to about exactly what that element is. There is substantially more we can do. There's a substantial amount in unpaid taxes that can be collected from enhanced enforcement efforts. A number of members of Congress are interested in that; the administration is very interested in that. We proposed a substantial increased increment in our 2006 budget -- I don't remember the exact number, but I think it's about a half-billion dollars in additional spending at the IRS for enhanced enforcement, which we believe will yield many times that amount back in collections of legitimate spending.

There's something else we can do also to increase our collections, and decrease the amount of money that we're not collecting because people are cheating, and that is to reduce the complexity of the code. One of the important goals of fundamental tax reform is to make a simpler and fairer system, which makes it much harder to cheat and also makes it much less likely that people will be inclined to cheat on a system that's been reformed in that way. That's one of, I think, the important initiatives that will be coming forward out of the Treasury Department in the months ahead.

Q The $500 million is right.

DIRECTOR BOLTEN: I was right -- about half-a-billion dollars in additional IRS money.

Q You said the 14 percent is somewhat anomalous and due to mysterious factors you can't actually outline. But as you know, there are some analysts who are going to interpret this as a vindication of supply-side economics, the fact that you can actually cut taxes and increase revenues. Is that the way you read the data? Is that a proper reading of the data?

DIRECTOR BOLTEN: Well, I certainly read the data as demonstrating that the President's tax cuts had the desired effect. They restored growth to the economy. That growth to the economy has restored revenues. Now, in 2005, we're getting even more revenues than we would have otherwise projected based on that path, and I can't say whether that will be ongoing, whether that's a direct product of the President's tax relief. It may or may not be. I'm guessing that economists will argue about that for some time to come.

But what I can say is that the good revenues we are seeing I believe are a direct product of the economic growth that's been ignited by the President's tax relief and that we need to keep that tax relief going into the future in order to be sure that we get the kinds of revenue increases -- although we're not projecting these remarkable increases, we are projecting increases in revenues and I think we need to keep economic growth going in order to realize that.

Q A quick question about the 2005 projection, and that is that if Treasury projects $251 billion cumulative deficit later today, with their June figures, their final June report, and last year's last three months were like an $85 billion addition, and this year's were much better than last year, does that mean that the $333 billion is a very conservative estimate, or that you're projecting some sort of drop in revenues or hike in spending for the last three months?

DIRECTOR BOLTEN: We rely on Treasury's numbers for our calculations on what to expect in the way of revenues. So I think what's baked into their numbers will be baked into ours, and you may want to talk to them for a deeper analysis of it. But my understanding is that the changes that the Treasury now expects to occur and will be reporting today are already factored into the numbers that we are putting out today. So I think if you ask the Treasury folks, do they agree with the trajectory and the path, the answer will be, yes, that that factors in all of the information that they have to date.

Q You touched on this briefly in your opening remarks, but can you address what is happening with the Senate in terms of discretionary spending? They're already shifting billions away from defense to domestic programs. And just yesterday they added billions more through a series of accounting maneuvers to domestic programs. What does this mean for your goals in terms of keeping discretionary spending cut from last year's level -- non-security discretionary spending -- and also staying at the caps --

DIRECTOR BOLTEN: It's an important question. First, let me talk about the House, which I think needs to be complimented for having done a terrific job with the budget and with appropriations on time and largely within the parameters that the President requested. They've reported a full set of appropriations bills, and they've managed to do it within the ranges that the President requested, including an overall discretionary spending level that looks like it will come in below the rate of inflation, which is 2.4 percent growth. And they seem actually to have been able to produce a real cut in the non-security elements of the budget all considered together. So I think we have to recognize that the House has done very good work in very good time. I think Chairman Lewis and the leadership deserve a lot of credit for that.

Over in the Senate, as is commonly the case, the situation is more difficult. I know Chairman Cochran is doing his best to live within the budget limits set out by the budget resolution. There have been efforts to try to go above the caps that are set out in the resolution. There have been a couple of gimmicks that look like they're on the table in some of the sub-committee considerations and in the bills they bring to the floor. That's just the way of the Congress. That's the way of the Senate. It's often a more difficult process over there.

I remain confident that as we go into conference -- and by the way, we're way at the front end of the process. The Senate has really only just begun to consider its appropriations bills. And while there may be some modest erosion going on there, I know Chairman Cochran is working hard to stay within the limits. I expect that we will go into the conference negotiations on appropriations bills this season in good shape and with an opportunity to get either at or very close to the budget limits the President has requested. Nothing that's being discussed right now substantially endangers, I think, the good budget track we're forecasting now. It may change the numbers very slightly, but I think as of right now, I think we're in pretty good shape.

Q Just one quick question. On a static score, I think the President has approved something like $1.7 trillion in tax cuts, and I'm wondering with what you know now, if you could give us a dynamic score, how much would the tax cuts go into cost, and are they going to pay for themselves?

DIRECTOR BOLTEN: I wish I could. I've asked that question of economists many times, because when we account for things, and when CBO accounts for things, unfortunately, we have to do it on a static basis, which doesn't take into account the dynamic events that the tax cuts do on the economy. It's certainly true that when you give a tax cut of $100, that does, in the initial instance, reduce federal revenues by $100. But when we account for that, we're not able to account for the additional economic activity that that generates, that brings additional revenue into the Treasury that offsets that $100.

I know economists have spent years, they will probably spend more time -- I hope it's a matter of months -- before they arrive at some consensus on how to recognize dynamic scoring. So I can't tell you exactly what the mix is. I do know that there is a substantial feedback effect from tax cuts that substantially help economic growth, and in particular, in the kind of situation that the President encountered as he came into office -- a situation of an economy slipping into recession, and then the attacks of 9/11 very badly suppressing -- potentially suppressing consumer demand -- that the stimulus that a tax cut can provide in that kind of situation, I think, is disproportionately positive in regenerating growth in the economy and making sure that our tax revenues actually rise.

Q It's been very difficult on veterans' health care spending to pin down exactly how much additional money you need. Given VA's inability to give Congress good answers, can you fault them if they add more money than you're requesting today -- or are supposed to be requesting today?

And secondly, on mass transit security, is the administration open to making some of that emergency money above the caps?

DIRECTOR BOLTEN: Let me take the second first. On the mass transit money, that's an issue that's in discussion now with Congress. I believe that we can accommodate whatever additional mass transit security spending that we and the Congress might think is appropriate within our existing budgetary levels, especially if we focus our resources in a risk-based way within the homeland accounts. But that's an issue that's now under discussion up on the Hill.

I'm sorry, refresh me on the first one.

Q Could you fault Congress for going with --

DIRECTOR BOLTEN: Oh, veterans.

Q -- more veterans' money that you asked for given VA's inability to give them quality information so far?

DIRECTOR BOLTEN: We have already sent up to the Hill -- just before the July 4th break, the administration sent to the Hill a request for almost a billion dollars in supplemental funding for 2005 for the veterans' accounts. We expect to be coming forward shortly with a budget amendment for 2006 to cover any shortfall. And the source of the -- and the reason why we've come forward with those requests is that there was a substantial error made in the actuarial forecasts on which the Veterans Administration and the rest of this administration were relying in putting together the 2005 and 2006 budgets. The principal factor was that we simply under-projected how many veterans would be coming into -- how many more veterans would be coming into the system. It turns out there are many more veterans coming into the system now and projected to be in 2006 than we -- when we originally put together the 2005 and 2006 budgets. When those facts became clear to Secretary Nicholson, he moved promptly and the administration moved promptly to correct the errors, because Secretary Nicholson, the administration up to and including the President are committed to ensuring that our veterans get the highest-quality health care and that we meet all of the commitments that have been made to our veterans in our health care system.

So we have stepped forward with a billion-dollar proposal for '05 to correct the error in the actuarial projections. We will be coming forward with an '06 budget amendment that I think will take care of the full amount. I can appreciate the frustration on Capitol Hill with the numbers because, especially in a sensitive area like veterans health care, which I think everybody agrees we must fund fully, I can appreciate the frustration with not getting the numbers right. I think Secretary Nicholson is getting his hands around it. I think he is generating substantially enhanced confidence on Capitol Hill that we will be getting our projections right. And I do expect that we'll have substantial support in the Congress for the additional spending.

Q In that review, you've no money set aside for physician payment increases under Medicare. Obviously, that's a big ticket item. That's likely to come to attention soon. Are you all going to hold a line on that. Or is that another one of these things that you'll negotiate later?

DIRECTOR BOLTEN: That's an issue that's going to come up later in the process. But again, I believe that there are ways if the Congress should determine that an increase in physician payments from currently projected levels in Medicare is necessary, I believe that's something we ought to be able to accommodate within existing budget levels.

Q And just -- can you give us some indication about how insistent you're going to be? You're going to fight like heck on Medicaid and pensions and whatnot to save $40 billion --

DIRECTOR BOLTEN: I don't think the number -- I'm looking at my Associate Director, Dean Clancy -- I don't think the numbers are that -- quite of that magnitude in -- over a 10-year period. But we'll see how the negotiations and the consultations play out. This is a problem that is one that's recognized on both ends of Pennsylvania Avenue. We recognize we do need to deal with it in some fashion. So I imagine we'll be doing this cooperatively with the Congress, rather than in some sort of tension.

Q Why were the projections in February so far off the mark?

DIRECTOR BOLTEN: Light blue. I think the principal factor is that we just got a whole lot more revenue that we expected. That 14 percent increase in revenue is something that is not within historical experience and was -- and I don't think it should be a surprise that the actuaries in putting together our own projections missed that coming in. A lot of that revenue did come in the last few months, coming in way ahead of projections. But we're now factoring all of that into our projections. And that's why you see that the big light blue area on 2005 -- in the subsequent years you won't -- you don't see that light blue area growing because we're assuming that revenue -- conservatively, I believe, assuming that revenue growth will revert to more normal range of revenue growth for a good solid economy, which is a good thing. Even absent this very large increase in revenues that we have been fortunate to experience in 2005, our deficit path looks pretty good.

Q You mention that you expect more than the $50 billion war reserve that Congress had put in being needed for '06. Why is it so difficult to project costs for war? There are all kinds of inferences and projections ranging out several years, and all kinds of policy. Why is it so difficult to -- of war costs year to year?

DIRECTOR BOLTEN: Well, if we knew exactly what we would be doing in Iraq, how many men we would need and so on, we actually would be able to forecast it fairly accurately. But as Secretary Rumsfeld reported at the Cabinet meeting this morning, the U.S. government is actively engaged in strengthening the Iraqi government's ability on its own to take over its own self-defense. The big question mark is how rapidly are they going to be able to do that. If they're able to do that rapidly, the needs for a U.S. presence and U.S. spending there will decline correspondingly rapidly. But we need to wait and see exactly how that plays out.

So we can do pretty accurate estimates if we know what we're going to be doing a year from now in Iraq and Afghanistan in terms of our own level of commitment of troops, but that's a matter very much in discussion and being reviewed week-by-week. So it's not something we're comfortable sticking into the budget.

From the Budget Director's standpoint, there's another factor here, and that is that safest thing to do would be to plug in a big number and just assume it's going to be spent. As a Budget Director, I hate to do that because numbers we plug in, if it turns out we don't need it, we don't get the money back and we haven't been a careful with the taxpayers' dollars as we should have been.

On the other hand, if we plug in a number that's too low, for example, as we had with this error in the Veterans Administration, we have huge problems of having to scramble around after the fact and try to fill in the budget. So, in an uncertain situation, especially a national security situation like this, our best course from the Budget Director's standpoint, is make those calls as late as you possibly can so that they can be reflected in the budgets as accurately as possible.

Q You said that the principal factor behind the reduction in this year's deficit forecast is that surprising surge in revenue. What factors would you point to as lying behind the improvement in the budget picture over the remaining --

DIRECTOR BOLTEN: Over the remaining years of the forecast window -- that's a relatively simple process of first, keeping a lid overall on spending so that we get the increases we need, for example, in our security spending, but we -- and we basically keep a lid on most other categories of spending. I'm not talking about austerity, here, I'm talking about restraining growth in spending -- and while we're doing that, allow the economy -- which is growing at a very solid pace and shows every sign of continuing to do that -- allow the economy to continue to bring stronger revenues back into the Treasury.

So while we hold our spending at, hopefully, at a relatively flat level in relation to GDP, or maybe even nose it down in relation to GDP, what we see happening is revenues coming up because of increased economic growth. And eventually, those lines will come -- either meet or come very close to meeting.

Q I mean, relative to the February forecast --

DIRECTOR BOLTEN: Oh, relative to the February forecast. Take me back on your question, then. Relative to the forecast, what?

Q -- not only has this year's budget deficit forecast improved, but the forecast for the out-years in the forecast window have also improved.


Q What are the factors behind that change in the forecast?

DIRECTOR BOLTEN: I see. What that reflects is the -- and a move up basically in our baseline of the revenues that we can expect. So we've had this 14 percent bump in our revenues. We can now -- I don't think we can expect next year that we'll necessarily get another 14 percent bump, but from that base, the economists tell me, we can expect another at least 6 percent rise in revenues in each of the succeeding years after that, which will show an ever-rising level of revenues coming into the Treasury from basically the same tax rate, as long as we keep the growth going in the economy.

Thank you, very much.

END 12:28 P.M. EDT

*Correction: “This year, 2005, is a remarkable year of [receipts] growth.”

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