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For Immediate Release
Office of the Press Secretary
February 6, 2006

Press Briefing on the President's Fiscal Year 2007 Budget by Office of Management and Budget Director Joshua B. Bolten
Room 450
Dwight D. Eisenhower Executive Office Building

Press Briefing

      Fact Sheet: Highlights of the President's FY2007 Budget
      In Focus: Budget 2007

10:04 A.M. EST

DIRECTOR BOLTEN: Good morning. I have some brief remarks and then I'll take questions.

When President Bush gave me guidance on what the 2007 budget should look like, he directed me to focus on national priorities and tighten our belt elsewhere. He told me to give our troops and those who defend our security what they need to fight and win the global war on terror. And he emphasized that the 2007 budget must support our pro-growth economic agenda.

In particular, he said we should maintain our economic strength by extending the tax relief that has fueled our economic expansion and by aggressively restraining spending. Today, I'm presenting on the President's behalf a budget that keeps the economy strong and restrains spending.

In the past five years, our economy suffered an historic series of shocks -- starting with the recession and terror attacks in 2001, and continuing through the hurricanes last summer. Those events had profound impacts on job creation and on the fiscal outlook. Despite these challenges, our economy is expanding at a healthy pace thanks to the productivity and hard work of the American people.

In 2005, the economy grew by an estimated 3.5 percent, the third consecutive year of healthy growth. And as you can see on this chart, we project ongoing economic strength for the foreseeable future. Economic expansion has produced more than 4.7 million new jobs since May 2003, reduced unemployment to 4.7 percent, and raised home ownership to all-time highs. This economic growth would not have been possible without the tax relief signed by the President.

The tax cuts, which were fully implemented in 2003, have been critical to helping the economy recover from the recession and the terrorist attacks of 2001, and then helping the economy continue expanding despite the hurricanes and high energy prices in 2005. With the tax cuts fully implemented in 2003, the economy responded strongly and tax receipts responded strongly.

As you can see on the chart that's up there now, receipts grew substantially in 2004. What that number there represents is 5.5 percent growth in 2004. In 2005, receipts jumped by a remarkable $274 billion, or 14.5 percent, the largest increase in 24 years. These recent gains in receipts confirm that a strong economy is the most important factor in reducing the deficit.

This chart shows our progress in bringing down the deficit. It's depicted as a percent of GDP, which is the best way to measure the deficits. You'll see that it begins in 2004, with our projected deficit at that time, two years ago, of 4.5 percent of GDP -- that's the time at which the President made his commitment to cut the deficit in half. This dotted line here represents the 40-year historic average of 2.3 percent of GDP, and it also happens to be roughly the cut-in-half point, maybe just slightly below there.

Since the President set that goal of cutting the deficit in half from its projected peak in 2004 of 4.5 percent of GDP, the deficit has come down markedly. The final 2004 deficit was 3.6 percent of GDP. And fueled by the surge in receipts I just described, the 2005 deficit fell further to 2.6 percent of GDP.

Although revenues are projected to continue to rise in 2006, the deficits for the current fiscal year is now projected to come in at 3.2 percent of GDP, or in nominal terms, $423 billion -- which is more than previously expected and is in significant part due to the unanticipated spending associated with relief and recovery efforts from hurricanes Katrina and Rita.

While this increase in the deficit is unwelcome, at 3.2 percent of GDP, the projected deficit would be well within the historical range and smaller than the deficit in 11 of the last 25 years. More importantly, we project that if the policies in the President's budget are adopted, the deficit will return to its downward trajectory.

As you can see on the chart, by 2009 the deficit is projected to be cut by more than half from its originally projected peak, to just 1.4 percent of GDP, which is well below the 40-year historical average. In order to keep the deficit on this declining path, we must continue to do two things: first, keep the economy growing, and, second, restrain spending.

First, the 2007 budget will support continued economic growth by proposing to make permanent the tax relief signed into law by the President in 2001 and 2003. Many of the administration's critics will argue that we should let the tax relief expire. A tax increase is the wrong prescription, not only for the nation's economic health, but also for the government's fiscal health. We are not an under-taxed society. By rejecting tax increases on families and small businesses, this budget will help keep the economy on a continuing course of job creation and strengthen the foundations for long-term growth.

The second critical component of deficit reduction is a vigorous policy of spending restraint. The next chart that Austin is about to put up briefly reviews the substantial accomplishments of the past year in restraining spending. The President's 2006 budget set four major goals. First, the President proposed to hold growth in overall discretionary spending below the rate of inflation. Second, he proposed an actual cut in the non-security portion of discretionary spending, the first such proposal since the Reagan administration. Third, he proposed major reductions or eliminations in 154 government programs that were not getting results or not fulfilling essential priorities. And, fourth, he proposed reforms in mandatory programs to produce $54 billion in savings over five years.

The Congress substantially delivered on all four goals, as the middle column in this summary chart shows. This year's budget, the 2007 budget, follows a similar course. It again holds overall discretionary spending growth below the rate of inflation. It again proposes an actual cut in non-security discretionary spending. It calls for major reductions in, or total eliminations of 141 federal programs, saving nearly $15 billion. And it continues our efforts to slow the growth in spending on mandatory programs by proposing $65 billion in savings over five years.

These efforts to restrain the growth in mandatory spending are vital, not just for our near-term deficit reduction efforts, but especially for the long-term. The chart that's up now displays our long-term situation. It's presented as a percent of GDP and it shows both our receipts as a percent of GDP and our total spending as a percent of GDP. The receipts are the black line, our spending components are the bars -- green is entitlement mandatory spending, blue is interest expense, orange is discretionary spending.

What this chart shows is that toward the end of the next decade, deficits stemming largely from unsustainable growth and entitlement programs, such as Social Security and Medicare, will begin to rise indefinitely. No plausible amount of spending cuts in discretionary accounts or tax increases could possibly solve this problem.

The President has shown a willingness to take on these future unfunded obligations and to propose long-term reforms. This year's budget proposes $36 billion in savings for Medicare, and includes proposals that pave the way for additional reforms in the future. As with Social Security and Medicaid, we do not need to cut Medicare, but we do need to slow its growth and this budget begins to do just that.

In addition, the 2007 budget contains proposals to significantly improve the budgetary process. The budget proposes discretionary spending caps, as well as restraints on new mandatory spending. The administration is pleased that the congressional leadership is focused on the need for reform of earmarks in the budget process. One way we can address the abuse of earmarks together is by Congress giving the President the line item veto.

The 2007 budget also continues our efforts to improve performance and make sure the taxpayers get the most for their money. Using the President's management agenda, OMB measures success not by good intentions or by dollars spent, but, rather, by results achieved. As part of these efforts, I'm proud to introduce a new website called This website goes live today. allows taxpayers to review the OMB assessments of nearly 800 federal programs. Each program is categorized, you can search by rating -- effective, adequate or ineffective -- as well as by topic or by using a simple keyword search. Robert will navigate us to one category which -- Robert, we've chosen the category programs marked "effective." There we are. And as an example, within programs that have been rated "effective," we'll take a look at health centers. Here you can learn a little bit about the program, find out if it's working and learn what the program is doing to improve. Each summary, like this one on health centers, also links to the program's website and the search results for similar federal programs. Here you can see the exhaustive work that goes into each one of these assessments. I expect that this website will be a useful tool for everyone who cares about how tax dollars are spent.

Clay Johnson, the mastermind behind this website, and the Deputy Director of the Office of Management and Budget, is here to answer your questions about the President's management agenda and, and we both would be pleased to take some of your questions now.

Q Mr. Bolten, the nominal figure you mentioned of the deficit in 2006 would represent a record in nominal terms. And you say it's partly attributable to Katrina, but isn't it also partly attributable to the supplemental spending or wars in Iraq and Afghanistan?

DIRECTOR BOLTEN: First of all, the right way to look at a deficit is not as a nominal number, which doesn't really reflect what kind of burden the deficit may be putting on the economy. The right way to look at it is as a percent of GDP.

The reason we're headed for that higher number in 2006 is, indeed, a product of a lot of different factors, one of them being the ongoing war expense. And when the President gave me the instructions on putting this budget together, he did direct me to give our fighting men and women who are in harm's way now everything they need to perform their job properly. So the ongoing war expense is substantial. We project it to be substantial in 2006. It is part of the reason why we have a higher deficit.

The biggest factor, though, and certainly the biggest surprise factor is the costs of responding to the disaster in the Gulf from Hurricane Katrina. When I presented numbers here in July, we did project a slight up-tick in nominal terms in the deficit from 2005 to 2006. What was not incorporated in July, obviously, was the hurricane which came in August, which has added very substantially to our costs in 2006. The good news is that those costs aren't permanently baked into the budget, those are ones that should dissipate substantially over time, and I believe put us very safely back on a very strong path.

Q Can you specify exactly how you would achieve the $65 billion in entitlement savings and the $36 billion in Medicare savings?

DIRECTOR BOLTEN: I'm going to ask -- we're going to try an innovation here, and have some charts show up spontaneously on the screen behind us. And I think we have a chart of what the content of the mandatory savings is. I'll audible this one. (Laughter.)

The largest portion of the $65 billion is $36 billion in Medicare savings. And that's a product of several items, but the most important element of that is a reduction in the built-in increases in something called the market basket, which is the way that the built-in increases in Medicare provider costs are plugged into the system. So there's a very small reduction in the market basket that will produce substantial savings out over the five-year or 10-year period, whatever period you want to look at. But that's a substantial portion of the $36 billion we expect to save in Medicare over five years.

In addition, the next largest element is reforms in the federal pension guarantee program, the Pension Benefit Guaranty Corporation. The Congress stepped up in the last set of -- in this most recent round of reconciliation legislation and did enact some reforms in the Pension Benefit Guaranty Corporation. There's more to be done. I think the Congress recognizes that there's more work to be done. We need to put that system on a more sound actuarial basis. And then I hope you can see what some of the other elements are. There are savings in agriculture programs which are similar to savings that we proposed last year but have not, at this point, been adopted.

Q Your budget proposes three new line of business programs in IT infrastructure, geospatial and budget formulation. Can you go into some detail about that, and what you expect?

DIRECTOR BOLTEN: Clay, is that something you want to take?

Q The question is, the three new lines of business -- IT infrastructure, geospatial and budget formulation, how they'll bring benefits or what they'll require.

MR. JOHNSON: All three of those programs are -- deal with matters that are common across many agencies. And so we looked to come up with government-wide solutions to government-wide opportunities or problems. Geospatial -- there are a number of agencies that use geospatial information. And rather than each of them have been trying to come up with separate mechanisms for collecting this information and having accurate resources to turn to, we're coming up with a resource that all agencies can tap into.

The other two were?

Q IT infrastructure and budget formulation.

MR. JOHNSON: Well, by budget formulation, they're looking for common -- developing common expenditure codes that all agencies can use that will allow us to pull up data by expense type much more -- with a much more productive fashion, so we can have better information, better diagnostic information about our expenditures.

Q And then IT infrastructure?

MR. JOHNSON: IT infrastructure is there are a number of common infrastructure expenditures that every agency faces -- IT security, IT training, a help desk and so forth. And we're looking for coming up with government-wide solutions to those common needs that every agency has.

Q On Hurricane Katrina, since you're saying it will be something that dissipates over time, for 2007 and that fiscal year, it is expected to be dealt with. How are you handling that as far as beyond housing and working with the levees? Have you made specific items for Katrina, a specific category? Or are you just building it into Housing, Commerce, Labor and other departments?

DIRECTOR BOLTEN: So far the Congress has already enacted legislation appropriating about $88 billion in spending. And there's about $8 billion in tax incentives on top of that. What we're carrying in addition in the 2007 budget is an estimate of what our additional supplemental request will be, which we're likely to be presenting soon. We've put a number in there of $18 billion, but that figure is still under review. They're still working -- Chairman Powell, who is the coordinator for Katrina relief, is still working on that number with the folks in the Gulf Coast, and with the members of Congress. So we've displayed this $18 billion number in our budget figures.

By the way, that's not an '07 number, that's an '06 supplemental number. But we are displaying it as part of our '07 budget presentation. We're displaying those numbers in there as our estimate, but the numbers could be different. And the content we're not describing here because that's really something that Chairman Powell needs to work out with the folks who are down there.

Q So you're not trying to carve out any '07 money specifically for Katrina?

DIRECTOR BOLTEN: Oh, I see. No, we have not carved out '07 money. But the money that's already been enacted is money that will have ongoing expenditures into '07. We've captured what we think the deficit effect will be in '06 and '07 from the $88 billion that's already been enacted, and the $18 billion that we're likely to propose -- or somewhere around $18 billion that we're likely to propose in the next few days.

Q On Iraq and Afghanistan, could you run through with us briefly what you think the anticipated costs are, '06, '07? And also, specifically on reconstruction, which we were told before this would probably be pretty close to zeroed out.

DIRECTOR BOLTEN: The request in 2006 for the war in Iraq and Afghanistan, for those purposes, the Congress has already adopted $50 billion in supplemental spending. That was done as part of the legislation that was enacted before the end of this past calendar year --

Q On top of what? I realize it's difficult to separate out ordinary military action from --

DIRECTOR BOLTEN: Oh, I see. But we do separate it out. We do separate out the regular base defense spending from the incremental costs of conducting the war. And the Congress in 2006 adopted base spending of about $410 billion -- I think I have that right -- is the defense base. And then on top of that, the Congress adopted already $50 billion in supplemental spending for the war in Iraq. And what we're displaying in this budget is an anticipated -- just as with Katrina, an anticipated supplemental that we're likely to be presenting soon in the range of $70 billion. So that $70 billion that we expect is reflected in all of the figures that you'll see in the budget documents as they come out.

There's one additional element, and that is that in this year's budget, we are adopting the approach that the Congress took in 2006 of including in the regular appropriations process a $50 billion allowance for the ongoing war on terror in Iraq and Afghanistan. And so we have included in our numbers a $50 billion allowance, again, for 2007. And so that will also appear in the numbers.

Now, whether that ends up being the most accurate estimate of costs in 2007, nobody knows. You need to keep in mind that the 2007 fiscal year is still 18 months away, but we thought that particularly because the Congress has adopted this measure of transparency so far that we would adopt it, as well, in our 2007 budget.

Q On reconstruction?

DIRECTOR BOLTEN: Oh, I'm sorry, on reconstruction, the Congress adopted -- roughly a little over two years ago, the Congress adopted over $18 billion in reconstruction money for -- principally for Iraq, some for Afghanistan. And that money is still being spent out.

There is money in the 2007 budget for some ongoing reconstruction activities. We have tried to put as much of that as possible into the regular base of State Department spending. The supplemental request that we'll be putting forward, that $70 billion that I just mentioned, that request that we'll be putting forward will include some elements that relate to State Department activities in Iraq and Afghanistan. But the bulk of the reconstruction effort, we are planning to rely on the monies that have already been appropriated, and then what's going to come forward in the base.

Yes, ma'am.

Q Last year we asked you for a list of the 154 programs that you were going cut, and you didn't have that. Do you have the list this year of the 141 --

CHAIRMAN BOLTEN: Yes, I believe we do.

Q And the 71 that didn't get cut last year, are those a part of these new --

CHAIRMAN BOLTEN: Let me see -- it would have been 65, that -- we proposed 154, and the Congress adopted 89 of them. So that would leave 65 still on the table.

Q You're chart is saying --

DIRECTOR BOLTEN: I don't think so. If it did, it was in error. The Congress adopted 89.

Q But, at any rate, that remaining number?

DIRECTOR BOLTEN: Yes, that remaining number are things that were eligible to be on the table again. I expect we are repeating most of those.

Q When you distinguish Medicare from Medicaid and Social Security, did you mean to suggest there will be proposals forthcoming for cuts in Medicaid or Social Security?

DIRECTOR BOLTEN: Well, last year we did propose a reduction in the rate of growth in Medicaid, and the Congress adopted a good portion of what we proposed. I'm using the phrase "reduction in the rate of growth" intentionally, because these are not cuts either this year in Medicare or last year in Medicaid; these are reductions in the rate of growth. With the adoption of the proposals that we put on the table last year, at least the portion that the Congress adopted in the reconciliation bill that just passed a few weeks ago, the growth rate in Medicaid will decline from about 7.4 percent to about 7.2 percent, out over the next decade.

On Medicare, the savings that we have proposed in this budget will reduce the rate of growth over the next 10 years in Medicare spending from about 7.8 percent per year to about 7.5 percent per year. So these are modest reductions in the rate of growth, and we believe that they can be done without undermining the support that those programs were intended to provide.

Q And Medicaid --

DIRECTOR BOLTEN: There are some very minor -- not minor, but there are some additional Medicaid savings that are proposed in this budget -- I think you might have seen it on the chart there -- that amount to relatively, in this context, relatively low dollar figures. Part of the agenda that was left over from this past year. So there are some ongoing Medicaid savings in there.

And on Social Security, the President put on the table last year a fundamental reform proposal that would do exactly what I was talking about, and that is, reduce the rate of growth in the cost of that program over time in a progressive way that doesn't fundamentally undermine the benefit, but makes it a sustainable program over all.

So the President has addressed, in some fashion, all three legs of the entitlement stool. There's a great deal more to be done on all three fronts, and that's why the President called for bipartisan support for entitlement reform in his State of the Union message.

Q Isn't it a bit of a cop-out to say let's reduce the number of earmarks, but you've got to give me the line-item veto? I mean, why doesn't the President commit to vetoing some of these spending bills that he thinks have too many earmarks on them?

DIRECTOR BOLTEN: I think the -- for those who couldn't hear the question, the question is, earmarks, line-item veto, why not veto some bills.

I think, first of all, I think the two approaches go very much hand-in-hand. The Congress is stepping now to try to -- I expect will be, and their leadership has certainly indicated the support for, promoting more disclosure, transparency and accountability in earmarks, and hopefully reducing the number of earmarks. That's on the congressional side, and those are good developments.

On our side, the President has asked for a line-item veto, which would make it possible for him to step into an appropriations bill once it's been enacted, and take out the elements that at least the executive branch considers are ill advised, not well supported by policy. The question is, why then not -- without that authority, why not veto bills? And the difficulty is, that these are massive bills, typically, many of them in the tens of billions of dollars. And the individual earmark problems are a minuscule portion.

Earmarks are a serious problem, but they are not a major portion of the budget in most cases -- at most, 1 to 2 percent of overall spending. And to then step in and veto a bill over half of 1 percent of the spending in that bill creates more disruption, and probably in the aggregate isn't wise. That's why the President needs a line-item veto, or some other process like an enhanced rescission process, to be able to step in and line out the items in these big bills that should not be included in them in the first place.

Q The $50 billion allowance that you have for '07 for Iraq war spending is substantially below this year's spending. How confident are you that that number is realistic? And if it's not realistic, wouldn't it drive up the deficit substantially?

DIRECTOR BOLTEN: It's very hard to say what we're going to be spending 18 months from now in Iraq. It will depend entirely on the situation on the ground, how rapidly Iraqis are able to pick up responsibility for their own security and make it possible for the United States to bring our troops home more rapidly. So we've included that $50 billion not as what we think is an accurate estimate of what the war costs might be, but simply because we are adopting the wisdom that the Congress used in this past budget cycle of simply including a plug amount of $50 billion that gets adopted along with the regular appropriations, so that we're taking at least some account of the spending there. Whether that number will be higher or lower when we finally get there 18 months from now, I'm not really able to say and I don't think anybody else is really able to say.

Yes, sir, way in the back.

Q Several years ago, General Shinseki was chastised for suggesting that the war in Iraq might cost upwards of $200 million. Larry Lindsey got in some hot water, too. Now with the cost of the war up around $300 billion or so, is it time to apologize to these guys for being, if anything, conservative in their estimates?

DIRECTOR BOLTEN: I'll leave that to others. I don't think so. The costs of the war are what they are. It's been a very expensive undertaking and essential undertaking in the fight in the global war on terror. The President has committed to provide our fighting men and women what they need to prosecute this war correctly and as safely as they possibly can. That's what our budgets provide.

Q On the -- back to the earmarks and the line-item veto, these are two questions, related. How is the bill going to be drafted, the line-item veto going to be drafted so that it pass constitutional muster, in view of the fact that of the court overruled some years ago? And, second, are you putting out a rescissions bill, a rescissions proposal today?

DIRECTOR BOLTEN: Let me take the second part first. Do you mean a proposal of actual rescissions today?

Q Yes.

DIRECTOR BOLTEN: No, we're not. The 141 programs that we're proposing for termination or major reductions are part of the '07 budget process. On the line-item question, we will have a proposal that we've shared previously with the members that our lawyers believe would pass constitutional muster. You can't be absolutely certain what would happen if and when a provision like this got to the Supreme Court, but our lawyers have a high degree of confidence that a line-item veto can be constructed in a way that would pass the constitutional test.

The second part is where -- the second part of your question is, is some sort of rescission process. And the administration will be receptive, as well, to an enhanced rescission process because neither this President, nor any previous President has found the existing rescission processes to be effective. It basically is too easy to bottle up on the Hill, to be amended, and so on. And if that process of rescission is going to be effective, then the rules need to be changed. And we'll be actively supporting members of Congress who want to do that, as well.

Q In regard to non-security discretionary spending, you're again proposing an absolute real cut. How long do you think you can keep that up, and at what point do you think you begin to cut into the real services that are provided to real people?

DIRECTOR BOLTEN: When we're in the midst of major national priorities -- disaster, war, and so on -- it's only prudent that the government tighten its belt elsewhere. And that's why we've pursued the restrained spending proposals that we have on the non-security part of discretionary spending. There's still a lot of spending going on in those programs, somewhere in the region of $400 billion a year. With our 141 proposed terminations and major reductions, we think there are a lot of programs that can be either taken out altogether or very substantially dialed down.

So there's still plenty of opportunities for savings within the discretionary budget, we believe without fundamentally undermining the proper functions of a federal government. Can that go on indefinitely? Who knows. The wisdom when we presented our budget a year ago was that it couldn't be done for even one year, and that wisdom proved to be inaccurate. The Congress was able to deliver bills that actually cut non-security elements of discretionary spending. I'm optimistic that they'll be able to do that again.

Q What would you say -- I mean, you've got extending the tax cuts, making them permanent costs about $120 billion in 2011. What is your response going to be to the critics who say all the cuts in Medicare, all the cuts in non-defense discretionary spending basically go to pay for extending the tax cuts?

DIRECTOR BOLTEN: First of all, all of the President's tax cuts in our budget projections are included. We assume the permanence of the President's tax cuts. So all of those measures are completely incorporated in the deficit numbers that you see us putting out, including into 2011.

Now, you've just used vocabulary that says the tax cuts cost something, as though spending programs don't cost something. There's a peculiarity of the budget vocabulary of Washington, D.C. that assumes that spending programs go on indefinitely, and that the built-in increases in those programs don't cost anything -- and yet allowing people to keep more of their own money does cost something. In my judgment, they should be treated in a parallel fashion in the budget.

To get to the heart of your question, though, and that is, do these tax cuts make sense at a time -- or does sustaining a low tax environment make sense at a time when we do need to achieve savings in our fundamental entitlement programs -- I would say, absolutely, yes. First of all, those tax cuts are essential toward sustaining the good economic growth we have now. And it's the people at the bottom end of the income scale who suffer the most when the economy is bad. It's not rich people who have a hard time when the economy turns down, it's those who are struggling who have the hardest time.

So the most important thing we can do with our federal budget is keep a good, strong, growing economy that's generating jobs. That's the best thing we can do for those at the lower end of the income scale. And then, beyond that, what we need to do is to solve the problem of the unsustainable growth in these entitlement programs, because even if you disagreed with everything I just said about the efficacy of a low tax environment, there is no plausible amount of tax increases that can possibly deal with the coming crisis in our entitlement programs. It can only be addressed by dealing with our entitlement programs fundamentally.

Q Josh, can you describe the costs, the revenue facts of the HSA tax incentives that the President outlined? And then, also, looking at the 22 percent alternative fuels package, can you be more specific about what number we're talking about in the President's proposal?

DIRECTOR BOLTEN: Yes. Alexis has just asked about the HSA proposals that are in the budget and the energy incentives for alternative fuels. I may ask -- I'm probably going to ask for a little bit of help here, but on the HSA proposals, those are on the revenue side. Those are proposals to improve the tax treatment of health savings accounts, which we consider to be a very important mechanism in giving individuals more choice and toward keeping health care costs low both in the short and in the long run in this economy.

I think most people will agree that they're a very exciting and important development. The revenue effect of the President's HSA proposals I think is in the $60 billion range, but I'm going to ask for some help for that -- over five years -- from Pat.

Second, on the energy side, the -- and by the way, what those proposals are designed to do is to help equalize the treatment of those who buy their own health care and take responsibility for their own health care with that that's provided through employer-based insurance, the more traditional kind of insurance, that has a lower deductible and co-pay. The proposals are designed in part to allow, A, people to put more money into their HSAs, and, B, to equalize the tax treatment between and HSA and regular employer -- and the more usual form of employer-provided health insurance.

On the energy credits, the 22 percent, I'm going to look back at Pat and get some help here. Maybe look over here -- we will get you the actual cost in spending. That's on the discretionary spending side. We will get you the number of what the actual cost of increasing those incentives is. It's a very important part of the agenda.

There's some -- as the President described in his State of the Union, there's some really exciting technologies that are in development now that are relatively close to being viable, including the increased ethanol-based fuels that the President talked about, but also some new batteries that can be used in automobiles, and also nuclear power. All of those are areas where we need to turn if we are to lower our dependence on imported petroleum products. And that's why there's that substantial commitment in the budget to that. And at some point we'll be able to tell you exactly what that commitment is.

Q Can I ask a follow-up on the HSAs, please?


Q Thanks. You said a moment ago that your proposal actually increases choices for individuals. But I'd like to know how that's the case if you're only limiting these tax credits to those that buy HSAs? And, secondly, are they refundable? And, thirdly, there's concerned that, particularly for those of limited means, that this could actually encourage them to forego either treatment by a doctor, or purchase of prescription drugs, since you're not providing up-front prescription drug coverage.

CHAIRMAN BOLTEN: It's a long question. I may ask you to repeat some of it. But first of all, in terms of providing choice, the HSAs, themselves, I think, are an important new element of choice in the health care market. They are additive to all of the other kinds of health care options that exist today. And for a lot of people, they're a very good option. And we're excited about them because they hold the prospect of making individual citizens better health care consumers, but more inclined to be good purchasers of health care.

Now, as to the -- well, refresh me on the second part, because I was about to go to the third.

Q Well, specifically for those of limited means, is this tax credit refundable?

DIRECTOR BOLTEN: There is a refundable element in the tax credit, yes. And, third, as to creating a disincentive, I gather you sense because of the high deductibles and co-pays, people might be disinclined to get preventative care, that sort of thing? HSAs, by law are required to cover preventative care mechanisms. In other words, those are not part of the original out-of-pocket expense. So I think these things are actually pretty well constructed. They're not for everybody, but I think for a lot of people they are well constructed both to be a good deal for the individual consumer, and very importantly to bring down health care costs in the long run.

Let me go back on this side. Yes, ma'am.

Q Yes, hi. Can you explain how you get to the $16.7 billion figure for PBGC reform, and how far is that dependent on the Congress passing a particular form of legislation, given that it's got bogged down in the House -- what actual reform we're going to see?

DIRECTOR BOLTEN: Yes, the question is about the $16.7 billion savings proposed in PBGC reform. The question was, can I explain how we got to that $16.7 billion. The answer is, no. But we will be able to do that for you; I'll have somebody who is expert in that. It is dependent on the Congress in pursuing some more substantial PBGC reform. But I think most of the members who are involved in these issues agree that there are more steps that need to be taken to put the PBGC on a sound financial footing. They took some good steps last year, and there is yet more that needs to be done.

Q Josh, some people are afraid that the alternative minimum tax will wind up being a kind of stealth tax increase because a lot of people are getting pushed into those higher brackets as their salaries go up. What is the budget view, is that anything to address, these AMT increases?

DIRECTOR BOLTEN: Matt's question was about the alternative minimum tax. The budget assumes that legislation that is now pending before the Congress that would patch the AMT for 2006, the budget assumes that that would be adopted. So the deficit figures that you see reflected include an assumption that legislation that has not yet been passed is likely to be passed, as I think most people expect it to be, and as the administration believes it ought to be.

In the longer term, the administration believes that the AMT is a significant problem, is a distortion in the tax code, and particularly because it requires and will require more and more people to calculate their taxes on two different -- on two different bases, and does need fundamental reform.

Our view has been and remains that that reform can and should be accomplished in the context of fundamental tax reform. Now, with this patch in place, we recognize deficit effects in 2006 and 2007 from the patch, so we assume that that's going to be in place. Beyond that, we're hopeful that the AMT can be addressed in fundamental tax reform that is revenue neutral.

Yes, sir, in the back.

Q May I just follow up?


Q So if the patch were extended to the out-years, would you see a significant change in the deficit picture because of --

DIRECTOR BOLTEN: If the patch were continued into the out-years, outside of the context of revenue neutrality, revenue-neutral changes, it would increase the deficit. I don't have exact numbers on how large, and I believe even with that -- even if the Congress were to decide to patch the AMT indefinitely, we would still show a very substantially declining deficit path, but it would not be declining as steeply. But like I said, it's something that we hope can be addressed in the context of revenue-neutral fundamental tax reform.

Yes, sir.

Q In addition to your proposals for reducing the rate of spending growth on Medicare, I notice the highlight sheets that were handed out said, paved the way for needed longer-term fixes for Medicare finances. There's talk that you might be proposing some sort of global cap on Medicare spending, such as I think this OMB once did in the past. What does that refer to, and do you have the -- the dollar amount? Do you have some further proposal you're going to advance on Medicare?

DIRECTOR BOLTEN: Yes, there are several proposals embedded in there. The most important one that is reflected in the 2007 budget is a proposal that keys off of a trigger mechanism that was included in the Medicare bill that was adopted in 2003. This may get a little arcane, but I think the Medicare experts in the audience, of whom they're legion, I'm sure, will follow this.

But the trigger that was included in the Medicare Modernization Act said that if the federal contribution to Medicare exceeds 45 -- is expected to exceed 45 percent of the cost of the program six or seven years hence, two years in a row, then the trigger that is in existing law says that that should trigger a proposal from the President that the Congress should consider. The administration supported that trigger when it was adopted, but felt it should have been stronger.

And what we are doing this year is making that trigger -- proposing to make that trigger stronger by giving the proposal -- the President's proposal additional impetus, that if the Congress does not act to reduce the federal government's share of overall Medicare costs below 45 percent, then that reduction will happen automatically, so that there would be a sequester of Medicare spending across the board, not unlike the old Graham-Rudman mechanism, but just in the Medicare area, that would reduce the government's share of the spending by increasing increments each year that the costs were not brought back below 45 percent.

You want to follow up?

Q Follow on. Just so we have a sense of imminence here, were this proposal to be adopted. Where are we today, in terms of that percentage? How close to the trigger are we today, where you're proposing --

DIRECTOR BOLTEN: The question is, how close are we today to the trigger. Interestingly, six months ago we were very close to the trigger when the -- which is when the actuaries would have said -- I think, is it, six years hence -- six years hence, where the federal share of Medicare spending will go below 45 percent. Because the Medicare program, particularly Part D, is costing less than had originally been projected -- Part D being the prescription drug benefit -- is coming less than the actuaries had originally projected, that trigger year has moved out several years. I don't know exactly where it is, but it's not within the five year window, at this point, of the budget.

But these things will move around. The important part we want to do is get into place a mechanism that will actually bite, and require reform action to be taken when that spending level gets a little bit lower.

Q Does that not mean that as people then buy into your Medicare prescription drug, you're going to now set up a system that's going to trigger off -- trigger a cap on total spending? Isn't that a sort of a contradictory set of policies?

DIRECTOR BOLTEN: No, I don't think so at all. Our obligation is to make sure that this is a sustainable program for the long run. A program that is growing at 7 percent, 8 percent a year indefinitely, way above the rate of growth -- projected growth in the economy, is a program that cannot be sustained. Is it our hope that the trigger comes into force and that we have to do some kind of sequester mechanism? Obviously not. What that mechanism is designed to do is to increase the pressure for reform that ultimately can put Medicare on a sound and sustainable basis.

Q Can you explain how you derive $4 billion for ANWR revenue? And explain why you're crediting it against the deficit, especially next year, since it's unlikely Congress will even get to it?

DIRECTOR BOLTEN: Question is about ANWR, how we arrived at the revenue raising figure of $4 billion, and why we're claiming those revenues when ANWR was not adopted.

On the first part, the $4 billion is -- revenue estimate is from the actuaries' estimate of what bonus bids would achieve in the short-run. I expect the revenues would actually be much larger in the longer-run. That's a larger revenue figure than we carried last year, as you're probably aware. The new figures are based on more contemporary estimates of oil prices going forward, which is why that figure has gone up modestly.

Now, we carry it in the budget because the budget reflects the President's proposals. We don't expect every single one of the President's proposals to be adopted. But what this budget reflects is what we believe will happen if all of the President's proposals are adopted. You should bear in mind that that includes spending proposals that are not adopted, as well as revenue proposals that are not adopted, or tax proposals that are not adopted.

In the end, our experience is that most of these things turn out to be -- to balance each other out in our negotiations with Congress. But this budget reflects the President's proposals.

Let me take one more. Right here.

Q Given the reaction last year to your proposals on Social Security, aren't you concerned that reductions to the growth in Medicare will be a non-starter in an election year?

DIRECTOR BOLTEN: The President was disappointed that Social Security reform was not taken up during the past year. An election year makes it even more difficult to take up something as controversial as fundamental Social Security reform. When the President mentioned Social Security reform in the State of the Union, a large portion of the Democrats in the room stood up and applauded when he noted the inaction of the Congress the previous year.

But when the President then went on and said that these are problems that are not going to go away, that Social Security, the long-term unsustainability of Social Security is a problem that remains on the agenda, it remains on the President's agenda. And the President called for the parties to come together to deal with all of our entitlement programs, including Social Security, in a way that can make them sustainable -- and when he said that, both parties stood up and cheered. So I think that's cause for encouragement. It may be difficult to do in an election year, but this is a problem that isn't going away, and I expect it will be a major priority for the balance of this President's term.

Q But you don't anticipate the same problem with reform to Medicare?

DIRECTOR BOLTEN: An interesting question. Medicare is somewhat different from Social Security in that it is a problem of many different facets. Social Security, the problem can be addressed by one relatively direct proposal, as the President put on the table last year, that involves turning some dials in the Social Security program, itself, in a way to make it sustainable.

Medicare is more complicated, involves a lot more different pieces, has a lot to do with the overall health care costs in this economy. And so the way to deal with the Medicare problem, I expect, will involve many more complicated pieces, including things like the proposals that the President has put on the table this year for savings, but also include savings overall in the health care area, and then the kinds of fundamental reforms in all of our entitle programs that the President was asking the parties to come together on in his State of the Union.

Thank you all very much.

END 11:00 A.M. EST

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