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For Immediate Release
Office of the Press Secretary
January 12, 2006

Press Briefing on Effects of Gulf Coast Recovery Costs on the Federal Budget by Joel Kaplan, OMB Deputy Director
Via Teleconference

4:03 P.M. EST

MR. KAPLAN: Thanks, everybody. As you all know, the President was down in the Gulf Coast region today talking about ongoing efforts and the commitment that the federal government has made to date to helping the region recover. We wanted to provide some context of what the deficit impact we expect of the ongoing efforts -- rather, the efforts to date, will be. So I'll give a brief outline and then be happy to take any questions.

In February of 2005, when Director Bolten released the President's 2005 -- excuse me, 2006 budget, the administration projected that the '05 budget deficit would come in at 3.5 percent of GDP, or $427 billion. Because the strong economy we've been experiencing generated far greater revenues than we expected at that time, the '05 deficit actually came in at $108 billion lower than we projected, or 2.6 percent of GDP, $319 billion.

In July, when we published our annual Midsession Review, OMB predicted that the fiscal year 2006 budget deficit -- the fiscal year we're in now -- would increase to $341 billion. Our new projections for 2006 will be released formally when the budget is released in the first week in February, but our preliminary calculations indicate that we'll project a deficit that increases from the 2005 level and exceeds $400 billion, or 3.1 percent of GDP.

Those July Midsession Review projections were made, obviously, before Hurricane Katrina and Hurricane Rita struck. We don't have final numbers yet -- and I want to make sure to underscore that caution -- but as the President indicated today, we have made substantial investments in the region and our new deficit projections will include the costs to date of Katrina relief and recovery, and those costs are expected to cause the deficit to increase.

We believe that those increased outlays associated with the Katrina recovery efforts are a temporary event and that with continued commitment to the pro-growth economic policies that generate the strong receipts numbers and with continued spending restraint, we will return to our downward trajectory and remain on path to cut the deficit in half by 2009.

The President, as he made quite clear today, is committed to helping families in the Gulf rebuild their lives and their communities, but this does reinforce the need to continue those policies that I mentioned of spending restraint and pro-growth economic policies. What we saw in 2005 is that the greatest tool we have for reducing the deficit is a growing economy because of the revenue that results. Continuing those policies, again, is the best thing we can do to deal with the unexpected increased costs that we're experiencing as a result of Katrina and the pressure that those costs put on our deficit.

As for the other side of the ledger, spending restraint, last year, as you may know, the President proposed, for the first time since President Reagan was in office, to reduce non-security discretionary spending below the previous year's level, and, working with Congress, he succeeded in achieving that level of restraint. He also proposed to keep total discretionary spending below the rate of inflation, and that happened, as well. The Congress achieved those goals by adopting about 89 of the 154 terminations and reductions the President had proposed, for a savings of $6.5 billion.

And when Congress returns, it's poised to give its final approval when the House votes to the $40 billion Deficit Reduction Act, which will be the first time the reconciliation procedures have been used since 1997 to achieve savings on the mandatory side of the budget. The administration looks forward to -- the President looks forward to signing that bill, and urges the House to act quickly when it returns to send it to him for his signature.

All that for '05 is encouraging progress and the budget that the President releases in February will build on that progress. We intend to continue the spending restraint proposals, and my boss, Director Bolten, will have details when he sends the budget to Congress in the first week of February.

And with that, I'll wrap it up and invite any questions.

Q Yes, Joel, when you find it necessary to request more Katrina relief, will you also send along spending cut proposals, like some of the conservatives on the Hill would like?

MR. KAPLAN: Well, Andrew, I'm not actually talking about anything that we're going to be proposing going forward today; this is just an effort to tell you where we are as a result of the things that we've already proposed and have been enacted. I will point out that the President, early on after Katrina, directed those of us who work at OMB and those in his administration to make sure that the resources that the Gulf Coast region needed were provided and, at the same time, to look elsewhere in the federal budget to make sure that we could find savings. And we did that.

Congress enacted, you know, more than $85 billion in spending and about $8 billion in tax relief for the region. And in the closing months of their session they came through with an actual cut in non-security spending as I mentioned, discretionary spending. They went further than that and actually applied an across-the-board cut to discretionary programs to help pay for the recovery efforts. They had pending, when Katrina hit, a $35 billion budget resolution for mandatory savings; they went further and enacted $40 billion.

So we've tried to do what the President asked for. I think we've succeeded in both responding and exercising restraint and I expect we'll continue to see that with the budget that Director Bolten presents in early February.

Q The President today spoke of an $85 billion that's been committed, and I gather $25 billion of it spent and another $60 billion in the pipeline. Does the projection -- does the new projection for the budget deficit include only that money, or some additional expectation that more money will be needed for recovery efforts?

MR. KAPLAN: Again, I don't want to talk too much about the specifics of what will be included in the budget that Director Bolten releases in February. I do expect that we will present -- try to present as accurate a picture as we're able at that time of whatever spending obligations in the region we anticipate.

Q And to follow up, when you say over $400 billion, are you talking just marginally over $400 billion or well over? What are we talking about?

MR. KAPLAN: Well, we actually don't have final numbers yet. We wanted to try to give context today because the President was in the region and was talking about it. We've got numbers settling down; we'll know the final numbers sometime in the next couple weeks and they'll be released in early February. But for now, we thought it was important to make sure folks understood that the impact was going to exceed $400 billion.

Q I just wanted to ask about how long you're projecting this $85 billion is going to carry you -- meaning, how long will it be before you'll need to ask for more funds?

MR. KAPLAN: It's a good question. At the time, if you'll recall, Congress, at the end of the session, reallocated some of the money that had previously been appropriated to FEMA's disaster relief fund. They reallocated it for things like the CDBG money the President mentioned today, the levee reconstruction money. And we indicated at the time that we would need to replenish FEMA's disaster relief fund to make up for some of those reallocations. I expect that we will need to do that sometime this spring, but, again, we're not in a position today to say when that will be or how much.

Q Just one other question about the new projection on the deficit at a little bit over $400 billion, or whatever the number comes out to be. Do you attribute that increase all to the hurricane relief, or do you attribute any of it to the war in Iraq and the emergency spending?

MR. KAPLAN: As I mentioned at the outset, when we did our Midsession Review in February, we indicated that we did expect the deficit to increase -- I think at the time we said the deficit would be -- the number that we showed was $341 billion, but Director Bolten was very explicit that that $341 billion, while it did include the $50 billion bridge fund for Iraq that Congress had indicated it was going to provide in the fall, it did not include the remaining Iraq supplemental funding that will be needed in 2006. So our budget -- our deficit estimates in February will reflect the additional funding beyond the $50 billion that Director Bolten spoke about at the time, as well as the effects of Katrina.

Q Okay, thank you.

Q In the same vein, will the deficit -- the deficit projections that will be in the new budget include, A, the extension of whatever tax cuts expire in those years; and, B, the AMT relief?

MR. KAPLAN: Well, on the first part, the President has pushed for and will continue to push for making the tax cuts permanent. We have carried that in our budget projections really every year, I think, since he proposed them, and I expect we'll do that this year, as well.

As for the AMT, as you may recall, the President's position -- and Director Bolten discussed this when we released the budget last year -- our position is that the AMT ought to be considered in the context of a broader, revenue-neutral tax reform. For 2006, however, Congress has indicated both the House and the Senate have voted to do a one-year patch for the AMT, and I expect that we will reflect the impact of that extension in our deficit projections when we release the budget in February.

Q That's only for '06, isn't it?

MR. KAPLAN: That's correct. That's what -- the House and the Senate have each passed, in their respective Houses, a one-year extension that hasn't been conferenced yet, but I think in -- you know, to be prudent, we expect that they will pass it. And so we will carry that in our 2006 projections. So it will be incorporated in that number that exceeds $400 billion.

Q Okay. But it won't be part of the '07 deficit projection?

MR. KAPLAN: I don't want to get into too much detail about the budget, what we'll be proposing. What I will do is refer you to Director Bolten's previous statements that we expect AMT to be dealt with in the context of broad, revenue-neutral, fundamental tax reform.

Q All right. Okay.

MR. KAPLAN: Thanks, everybody.

END 4:19 P.M. EST