Office of Management and Budget Click to print this document
July 12, 2002
Room 450
Dwight D. Eisenhower Executive Office Building

2:33 P.M. EDT

DIRECTOR DANIELS: I'll give a quick synopsis of the budget portions of the mid-session review. I hope everyone will pay similar attention on Monday, when the entire report comes out. It will have for the first time a full section on management of the federal government, which has not been a feature of previous reports and we hope you'll be similarly interested in that.

But I'll just brief today on the budget sections, and then take any and all questions.

The report we're issuing Monday will show, I think, some significant and interesting developments. First, the economy has proven much stronger than we estimated in February. Our projections in February turned out to have been far to pessimistic, about .7 percent growth for this year, low by 2 full percentage points, versus what we now see and what the consensus forecasts see.

Nonetheless, revenues, tax payments to the federal government, which generally rise and fall, historically have risen and fallen with the economy and with economic growth, have been weaker than we expected. And this is due, apparently, almost entirely to what I will call stock market related income: capital gains and, to lesser extents, income from mutual fund distributions, options, perhaps bonuses tied to stock performance.

And this is a new, I think, important phenomenon we're all going to have to understand much better. No one, as far as I know, really saw this coming. And as I say, it has produced a new paradox in which we were too cautious about recovery from the recession, about economic growth. But, still, receipts to the federal government trailed significantly below what we saw even a few months ago. Wage and payroll taxes are running close to our federal -- our February estimates -- sorry -- and above last year. But overall revenues down very significantly.

It's now very clear that the explosion in revenue to the federal government between '95 and 2000, which the federal government tax receipts grew by $600 billion -- more than 40 percent in five years -- it's very clear that was more closely tied to the stock market run-up than perhaps was thought at the time. And now we're seeing the mirror image effect.

So, as I say, this is a new phenomenon we all have got to understand better. This chart here gives you a rough sense of the close correlation and the dimension of the change.

Now, looking forward, the recession, milder than we had anticipated and the recovery more rapid than we anticipated gives us the prospect of regaining balance in the federal government perhaps by 2005. There's no assurance of this, it's subject to the usual three big "ifs." The first is the economy. We still are operating on conservative assumptions. Our forecast for this year is below the private sector consensus, and we're essentially identical with the blue chip consensus going forward.

We believe -- and the revenue estimates we use come from Treasury, but we believe they are also very, very cautious. We are forecasting much lower growth rates in revenue than we've experienced in recent years.

The second big "if," the course of the war. The budget base line incorporating the President's policies does include further increases in defense. But one cannot know what the needs may be and what decisions the President may make.

And then the final and largest "if" is the course of other spending. The most important chart in the document is the one to my right, and it reflects the fact that following the President's policy we will return, or could return to balance in 2005 and experience surpluses thereafter. This doesn't -- as I said, this does contemplate some increases in spending for defense, also for health care, the beginnings of prescription drug coverage, health care tax credits for the uninsured being some of the bigger features.

But it also contemplates real restraint in spending in the rest of the budget, and that's the biggest "if."

It is very crucial to get off the current trend line, or the recent trend line. And I've illustrated that here by showing that in contrast to the path of the President's budget, so-called base line path with the policy changes he's already recommended, the difference between that and simply extending the 7 to 8 percent annual increase in discretionary spending that has been the pattern of the last four or five years -- so not an extravagant assumption at all, just simply continuing on a business as usual path. The difference over the next 10 years is $2 trillion. It is the difference between surpluses and large permanent deficits, and that's really the policy question facing the country fiscally in the next few years.

So we are pleased to bring this to you, on time delivery this year, in contrast to last year, when the administration got a late beginning. And we appreciate your attendance, and any questions you may have.

Q Can we interpret from this that the income taxes paid on capital gains, including the stock market effect, you're anticipating it falling to the neighborhood of $50 billion, from this year's roughly $110 billion, is that --

DIRECTOR DANIELS: Well, we think that may well be the neighborhood. We draw those question marks in the line that we think is most likely, and also the patterns -- it follows the correlation, the rough correlation we've seen historically. We won't know for a while. This data does trail. What we know most about is non-withheld income, that is the part that is not held back from people's payroll checks. That is dominated by capital gains, but there are a number of other -- there are other factors in it, such as proprietorship income.

And so actually understanding what capital gains versus, let's say, options income or other specific pieces like that were, data tends to trail by more than a year.

Q Can I just follow by asking, how long ago given the volatility of the stock market and what's happened -- how long ago was this projection -- I mean, what sort of S&P level is this predicated on? What's the level for the Dow in these projections?

DIRECTOR DANIELS: Well, the -- it's interesting. You know, I have, and the budget always produces a sensitivity table, in which the model projects the effect of various changes, an extra percent of GDP of 1 percent more or less of inflation, unemployment and so forth on the budget. A factor which has never been there, but one day may need to be, is some measurement of stock market movement. We have no model at this time, and it will be very difficult, I know, to produce one, but we need to try to understand this phenomenon earlier. That was my message earlier.

We have, as you know now, a tax system in which the incidence of income taxation falls on the upper half. One percent of American taxpayers pay over a third of the income tax, 5 percent pay over half, 50 percent pay almost all, 95 percent. And those taxpayers, in recent years particularly, have come to receive more of their income in what I'll call stock market related forms, as opposed to standard wages. And so we have some change here, and it's particularly in a time when the market went up very fast and came down very fast. We've had a real whipsaw that was hard, I think, for anybody to see in advance.

Q Mr. Director, this administration over the course of the last year or certainly this year, since the budget came out, has proposed or has supported any number of different tax cuts that have not been offset. Some would take effect in the long-term, such as tax cut permanency, others in various bills moving through Congress would have a more short-term effect. In light of the fact that the deficit in the first couple of years is larger than you previously projected, and the surpluses would be a little smaller in the middle years, and in light of the fact that revenue is lagging, as you just described, is there any chance that this administration would then back away from its call for non-offset tax cuts in the future, and urge Congress not to do that, for fear of increasing the deficit picture?

DIRECTOR DANIELS: Oh, but I don't know which ones you're thinking of, but odds are not. This is a fragile recovery still. It's very important that recovery occur, or growth occur at at least the conservative levels we have projected. And tax increases at a time like this we think would be a bad idea from, first, the jobs and income standpoint, a pocketbook standpoint; and, secondly, from the standpoint of the government's own situation.

There is no question our report will list a few of many, many economic testimonies that the tax cut of last year -- in part, by luck -- was very well timed and very well designed. These numbers would be a lot worse, in my opinion, if there had been no tax cut last year.

Q Just to clarify, you regard any offset as a tax increase?

DIRECTOR DANIELS: Well, I take them up one by one.

Q One of the things that these numbers seem to point out is just sort of how little control you have over the fluctuations in the -- so, bearing that in mind, why is the administration, you know, going to the mat on the current negotiations on the supplemental over a billion or two dollars and then over $9 billion for the '03 bill?

DIRECTOR DANIELS: Yes, absolutely. This illustrates exactly the answer to your question. At the size of the federal government has now attained, $2 trillion, the compounding effect is very profound. That's exactly the point here. The President's budget contemplates growth on the order of 3 or 4 percent over time. The difference between that and 7.5 percent is $2 trillion.

So, also, when we are trying very hard to get back to balance, every dollar counts. And with this President -- this President never intends to spend a single taxpayer dollar unnecessarily. But right now every dollar does count. We're spending more than we really ought to be, and that's because a war forced us to do that. But that ought not be a permanent state of affairs.

You know, I'm amused when -- or bemused -- when people on Capitol Hill and elsewhere talk about a mere $4 billion and a supplemental they'd like to add, a mere $11 billion in the '03 appropriations bills. In Indiana, where I come from, people don't use "mere" and "billions" in the same sentence very often. And especially under the circumstances illustrated on this chart, we can't afford to, either.

Q Can you talk about the methodology that was used, whether or not you used dynamic scoring and your reasoning behind that?

DIRECTOR DANIELS: No dynamic scoring has been used -- again, in this report. There is no agreement to do it. And, admittedly, it would be a very, very difficult thing to know how to do it accurately and fairly. So there is no dynamic scoring here. This refers, of course, to the question of what effect, for instance, lower taxation might have on revenues, if it increased growth it might partially offset its cost.

What I always say about this is, we're using the one answer we know is wrong. Economists debate whether you get back a quarter, a third or more of a tax cut because of more people working and paying taxes. But no one that I know of thinks that you get zero. But that's the assumption we use, so it's a very cautious one.

Q And what's your reaction that some Democrats --

DIRECTOR DANIELS: The projections are as conservative as they can be. And, you know, the real uncertainty -- the only uncertainty here is the one they have the most to say about: how much will we spend? And we can work on that together. We can produce a future and a fairly near-term future of balance, or we can produce a future of permanent deficits, and we seek their cooperation.

Q On the defense number, there's been a fairly public discussion about the possibility of going into Iraq, as many as 250,000 American troops deployed in an operation of unknown duration. Is that factored into your defense number in any way?

DIRECTOR DANIELS: Well, no specific operation at all, anywhere, is factored in. However, obviously this President has sought substantial defense increase for this year. He has also sought a $10 billion additional reserve against decisions he might make. And we have built in $10 billion additional growth above base line growth for the next five years.

So to some extent, we have provided for what may well be an ongoing hostile environment. But I don't know how to go further until we know what decisions he makes.

Q To what degree does the higher government borrowing that goes along with the forecast so far -- deficits over the coming years -- lead to -- what impact is that going to have on interest rates? And do you see any crowding out of private investment as a result of higher government borrowing?

DIRECTOR DANIELS: No, I really don't. You know, this has been said for recent years, over and over, that lower deficits or surpluses were essential to keep down interest rates. And the President believes that surpluses are important and we want to regain them as quickly as possible. But in honesty, there's no historical evidence at all of any correlation, or no curve that looks like this for government deficits versus interest rates. And, in fact, even though the recession has changed our fiscal picture, interest rates are at nearly at all-time lows and have remained throughout this administration. So just not an issue for the moment.

Q Mr. Daniels, in this dispute over the -- about the supplemental, the appropriators are accusing you of proposing shady accounting. This use of airline loan guarantees as an offset. And that rather than setting an example for Enron and other entities in corporate America, that you're showing them an example of shady accounting.

DIRECTOR DANIELS: Well, I'm glad you asked the question. You know, not to be impolite, but this was their idea. We did not submit an offset based on the fact -- and it is a fact -- that we're going to spend, or put at risk of, through the loan guarantee process, several billion fewer -- or billions less in taxpayer dollars. That's a fact. The airline rescue package provided for $10 billion in loan guarantees. The window closed last week. And if every outstanding guarantee were granted, the money at risk would be only $4 billion to $5 billion. So it's a fact that money appropriated will now be recoverable.

But please note, we did not propose that offset. The House of Representatives, the same people who said some harsh things today, came up with it. We looked at it and found it legitimate. It's real money. And so we -- frankly, with the thought that we would help them get to a bill they could accept, we said okay. And I found it a little ironic to be attacked about their own idea.

Q Mr. Daniels, can you tell me what you're assuming is going to happen with the stock market and with capital gains receipts for next year, to get the revenue projections that you're using for the '03 number?

DIRECTOR DANIELS: Jonathan, we have very guarded assumptions about -- we make no specific assumption about the market itself. But non-withheld receipts we expect to grow from this low base they've been driven to, but only modestly. We want to be very cautious about this, because no one really knows the report -- when you read the report, you will see us point out that we don't know the extent of non-realized -- unrealized losses that are out there, and -- or carried over -- or losses that have been realized, but will carry over to future years. So we're -- we've tried to be pretty cautious about expecting any upside.

Q To follow that, are you making any assumptions, dramatic assumptions on revenue changes in income tax? I mean, what -- as you've seen, other projections for next -- for the '03 are actually worse than '02, because they're assuming that revenues are going to continue to be pretty bleak in '03.

DIRECTOR DANIELS: Yes, we are, too. We're assuming modest growth. Over the whole time period, we assume between 5 and 6 percent annual growth in revenues. And that contrasts with seven and a half in the last decade. But this is a subject we've got to work on very, very carefully. And, again, it points out the need to be very, very careful about the thing we can control, and that's government spending.

Q Can I just follow up on that. Are you -- you said you're being cautious in predictions of the market, but are you predicting almost a sustained market, or investor malaise over the accounting scandals? I mean, are you assuming that investors are going to continue to have this lack of confidence?

DIRECTOR DANIELS: No, we make no explicit assumption, no budget ever has, about what the market will do, let alone what investors are thinking. All we can attempt to forecast is what the tax consequences ultimately will be. And there we see a recovery from this very low point we've fallen into, but a slow and gradual one. > Q Director Daniels, given that the market has had two lousy years, and nobody in February was looking for a gangbuster year this year, why was this such a surprise? I mean, it seems pretty common sense that capital gains would be going down, and that you wouldn't be getting as much as you did in the go-go years.

DIRECTOR DANIELS: I guess I would say that the models that everyone has used historically have fastened, as I understand them, principally on the link between economic growth and tax payments. And that's become somewhat disconnected, because of the new realities I was talking about earlier.

So as I said at the very beginning, it's very important to note, we underestimated by a very large margin economic growth. Many budgets have been criticized for rosy scenarios. That always meant they forecast a stronger economy than actually was going -- was likely to happen. We estimated a far weaker economy and a slower recovery, and yet through this disconnect, revenues were even lower than history taught us to expect.

Q I'm wondering if you could sort of preview Monday for us? Based on this chart on your right, can we assume that in the management section of your briefing that you're going to target some programs that should be phased out, that are poorly managed?

DIRECTOR DANIELS: This is -- this is one of the five principal objectives of the President's management agenda, to begin to measure what works and what doesn't in the federal government, and to move money to what works and away from things that don't. And you will read about that in the report, and you'll read a lot about that in the next budget. It debuted -- that rather common sense concept debuted in this year's budget.

Q When you talk about the disconnect and the desire to study that more, what specifically are you doing as Director to leave some kind of -- are you talking about something specific that you want to do internally?

DIRECTOR DANIELS: Well, our friends at Treasury are the experts and the custodians of this. And I trust that -- I know that they're working on it very hard. I think that they've made a lot of headway and all I'm saying today is that I think all of us need to come to understand it better. I don't think there's a model out there that has correctly forecast and anticipated it. But it's our folks at Treasury that we work with in the so-called troika process that have the responsibility.

Q -- incorporation of the President's next budget, are you expecting Treasury to debut something in terms of modeling, are you expecting anything to be different by December when he signs off on a budget?

DIRECTOR DANIELS: All I can say is that this will be one of the questions we look at the very hardest: have we been careful enough -- whatever history says about receipts related to economic growth -- have we been careful enough about this component of receipts?

Q As you noted, federal spending has risen by 7 to 8 percent over the last four or five years. It's not a terribly good record. What can you do differently this year to actually rein in federal spending? One obvious solution is for the President to come out and say spending bills that come in over the ceiling will be vetoed. Are you ready to say things like that?

DIRECTOR DANIELS: The President has said that the budget resolution passed by the House of Representatives -- which is the only one, unfortunately, that passed this year -- is acceptable to him, and that the levels that add up to that budget will be acceptable to him. And it may be that he has to police that.

But the answer to your question is that circumstances compel a significant increase in spending this year. The President asked for a greater increase, it's only fair to point out, than this recent trend rate. Because we've got damage to pay for, a war to fight and a homeland security apparatus to build. That need not be the case, however, year on year in the future. And the answer to your question is those things have to take the paramount importance they deserve. Everything else that we have suggested can grow, but only at 2 percent.

Let me point out to you that the 50 states of this country collectively -- and many of them facing difficulty now, too -- collectively are holding total spending growth to 2 percent this year. And that's all we have asked the Congress to do with respect to the other programs of government, not to freeze them, not to slash them -- simply to restrain the growth to 2 percent. That ought not be an unattainable goal. The 50 states just did it.

Q Is that 2 percent, though, for the next five -- each of the next five years?

DIRECTOR DANIELS: Well, I was referring to this year, but looking forward at the next few years, it would be a number like that. It will depend on inflation assumptions, for example.

Q -- policy, or -- revenue, is the administration looking at any way of closing existing tax loopholes for -- what is your view as far as the Ways and Means proposal that came out yesterday, in terms of corporate inversion? And do you see this as any possible source of revenue?

DIRECTOR DANIELS: I don't think either the President or the Secretary of the Treasury has spoken on that, we've not had -- so I won't either. But the Secretary of the Treasury is looking, as you know, at a broad simplification agenda. And this could comprise elements that you might find as loophole closers. I don't know what he'll ultimately recommend.

Q What average annual increase, percent increase are you assuming over the next decade for overall discretionary spending?

DIRECTOR DANIELS: About three to four, Alan, all in.

Q (Inaudible.)

DIRECTOR DANIELS: Well, let me say, I think it should be. There is a great deal of money that the federal government spends now, which is spends poorly. And we ought to -- if we ever get serious about isolating that and rotating it to things that are more urgent and that work well, we have an awful lot of room. As I pointed out, state governments find a way to do it; there's no reason that this government couldn't, too.

And, lastly, I'll just say that I see some other projections around that say that the deficits will be even worse, let's say, next year, than we have. They assume spending we don't assume, and we are not prepared to assume the defeat of the American taxpayer just because there's been a recent pattern of spending a lot of money.

Q The President has endorsed the House's $350 billion Medicare drug bill. The first question is, is that assumed in here? And the second question is, if it's not, are we going to see higher deficits or do you want to see discretionary spending reduced --

DIRECTOR DANIELS: First, the President has not endorsed that bill, although he said it had good elements to it, he thought it was a good idea if it moved forward, it would advance the cause and the process of trying to reach Medicare reform including prescription drug coverage. For that reason, it is not here. We continue to assume $190 billion, which is the net cost of the President's proposal, which includes a similar prescription drug coverage, does include some reform features that at present the House bill does not.

Q I'm sorry, if I could just follow that up. Are you saying that he would not support spending $350 billion for --

DIRECTOR DANIELS: I think the President wants to see what the process provides. He'll continue, I think, to argue for real reform in Medicare as we add prescription drug coverage. And for the moment, we're assuming -- we're not assuming anything beyond the proposal that he has made.

Q Will September 11th related assistance to New York be affected at all by these new figures?

DIRECTOR DANIELS: No. The President requested the last installment of the $20 billion -- and, actually, it'll be closer to $21 billion when you add together the things that he has endorsed for New York City in the supplemental. And we look forward to getting that accomplished, if not there, in some fashion. But that absolutely is assumed in.

Q Well, what's going to happen with the supplemental?

DIRECTOR DANIELS: I continue to hope that -- and urge the Congress to pass this. We're in an unfortunate situation. In an attempt to force on the President and the taxpayer spending we don't need, they are withholding the spending we do need. And we've done everything we could think of to make it possible for that bill to pass and to be signed. But so far, without success.

It is a fact that we have about 40 percent of the money appropriated in December still left. It has -- we've been, try to be careful about how it was spent, and we have spent it more slowly than was expected. So we still have something like $15 billion unobligated. In addition, it's been 113 days since the President asked for money to prosecute the war, defend Americans at home and repair New York City. And in that time, we have first of all learned that we don't need every penny of what he asked for, and secondly, there's only 80 days left. And so we could not spend all of it if we got it all today.

So we asked the Congress -- or actually I should say, we offered to the conferees, first of all, to take back and rescind some of the money that remains unspent; secondly, to draw down, take out some of the money originally requested by the President. And, frankly, this was to make room for things they wanted, that the President had not found essential. And we're disappointed -- I actually as of late last night thought that this might lead to an agreement today, but sadly it didn't.

Q On that subject, Mr. Daniels, the conferees were indicating that they might have actually reached that agreement today, but Democrats, and particularly Senator Byrd, is blaming you for intervening, saying the administration is meddling too much in the process. If you could comment a little bit on that. And he -- Mr. Byrd suggested that it was the veto threat that essentially upset the final conferees meeting today.

And, secondarily, if there isn't a resolution soon, we heard from the Pentagon today that certain war-related programs will have to be looked at, and perhaps even not undertaken. Can you talk about a fall-back position in the absence of a supplemental in that regard?

DIRECTOR DANIELS: For most departments of government, we could manage, as I said. We have a lot of money left, more than we expected. But for a couple of the most critical functions -- Defense and the Transportation Security Agency, the bringing into being of better protection of Americans in the air -- the money has, from December has about run out. And, unfortunately, the Congress' delay, attempt to hold hostage this bill, so they could compel unnecessary spending, does put at risk certain activities.

And we are preparing contingency plans. Certain purchases at TSA might have to be delayed. And in the defense area, some maintenance might have to be proposed, some training exercises. And this is all so unnecessary. So we would hope that, still, that the Congress would trim the fat and send the bill. And failing that, as I said, we offered them billions in offsets if it helped, so that they could have extras that they found important.

Q If I could just follow up. Did you indicate again to them today a Presidential veto threat that they say scuttled the meetings this morning?

DIRECTOR DANIELS: No, and I don't even know what they're talking about there. The President has made it plain for 113 days that the amount of money he asked for was all he thought was necessary. And we've tried and tried and tried to accommodate their interests inside that number. But nothing new was said, no conversations about vetoes today.

Q What elements of your original request were you willing to trim, in order to get it down to an acceptable figure?

DIRECTOR DANIELS: Well, we were -- we really asked them to have a look at many elements. For instance, economic grants, national economic grants, which are aimed at unemployment and training and so forth, there's not time left between now and the remaining 80 days to get all those out the door. We could -- they had already sought to trim that, we said that could be trimmed still further.

The best example is there's more money, by far, than can be spent on personnel and expense -- and personnel related expenses, because many of the departments that are growing in the homeland security area can't hire people fast enough. And that money should be easy to cancel.

Q Mr. Director, when you put out the numbers for the budget in February, if I understand this correctly, the OMB set of numbers assumes the President's policies being enacted, is that correct?


Q One of the things that you proposed in February with the budget was a total of $591 billion worth of revenue measures. It doesn't appear that Congress is going to enact such measures this year. Do your numbers still assume the President's call in February for those kinds of revenue reductions, or do they not?

DIRECTOR DANIELS: They do, Bud. They have very, very little effect any time soon. They are at the end of the time period, but they do.

Q Coming back to the supplemental, you mentioned that you may have to scale back some training and maintenance at DOD. And TSA you may have to curb some of the spending there. Could you be a little more specific on what could happen to that agency?

DIRECTOR DANIELS: It's in part a matter of some large contracts. They're trying to -- they've done a fabulous job over there, trying to put together a large and complex operation in short time, meet certain deadlines in the law Congress passed. And there are some large contracts that have to be led along the way, for hiring and also for equipment. And some of those may have to be postponed.

Q Would you have to go back to Congress then and ask them to extend the deadlines, because they're running up against November and December 31st deadlines to get the equipment in place?

DIRECTOR DANIELS: Well, we're not there yet. We don't know. I know they're still working very hard to meet the deadlines. For other reasons, there are things about the original law that probably do need to be adjusted. It was a good -- a great job of legislation under the circumstances, but we know a lot more now than we did just a couple months after September 11th.

Q You said that in Defense and TSA were the areas where you were close to running out of money. What are the areas where you actually had more money than you wanted to?

DIRECTOR DANIELS: Almost everywhere else. There's money in almost every Department of government. And we have -- let me explain it maybe this way: Defense, at the end of May, had used 76 percent of its supplemental money from December. And so something in excess of that by now. The rest of government had only used 39 percent of the money. And many, many departments had used 10 or 20 percent. So it will not be possible to spend all that money by September 30th. And, again, in an attempt to be helpful and to make room for preferences of the appropriators, we offered to rescind some of that money. It would be real money, real savings to the American taxpayer and I still hope it's something we could agree on.

Q Yesterday at the White House briefing, Ari painted very dire consequences if this doesn't happen. He talked about furloughs and even naval deployments that defer -- resulting in some disruption in naval deployments. If this would result in such dire consequences to homeland security, why wouldn't the President do whatever it takes to assure that this isn't jeopardized?

DIRECTOR DANIELS: Well, the President and the Secretary of Defense and Secretary of Transportation and all other responsible members of the administration will do what it takes to see that vital security -- national and homeland -- activities move forward. We've done an awful lot already during the 113 days we've waited.

But the President, respectfully, does not intend to be held hostage for more spending, particularly when we don't even need all that we originally asked for.

Q So he's willing to have, like, the veterans not receive their disability payments and baggage screeners not to be hired and several military personnel possibly not to receive payments, furloughs -- he's willing to have all that happen over $4 billion --

DIRECTOR DANIELS: No, he's not willing to have that happen. He's willing to do it and take other measures and maybe find other ways to see that it -- legislatively to see that it doesn't happen, you know. But this is all, again, so unnecessary; 113 days, $27 billion, lots of money, should not have been necessary to prove some sort of point and try to force the President to take $4 billion or $5 billion extra.

Q How are you projecting '03 revenues when compared to '02?

DIRECTOR DANIELS: Up between 5 and 6 percent over the whole time period, I believe, Alan. From 2002 to 2003 specifically, up by 8.7%.

Q So you're projecting a 5 6 percent decline '01 to '02. What accounts for that turnaround?

DIRECTOR DANIELS: Well, it's almost -- it's axiomatic in economic recovery that revenues bounce back, and they usually bounce back much more sharply than that following a recession. But here, too, again we have assumed a relatively modest snap back for the reasons we've been discussing.

Q But along those lines and in light of just the events of the last two to three weeks, would you think that a re-examination needs to be taken now, since you made that --

DIRECTOR DANIELS: Well, I think we'll keep examining it all the time, Jonathan, absolutely.

Q A clarification on homeland security. This document assumes no additional spending for the Department, even though the administration has talked about transition.

DIRECTOR DANIELS: Yes, on a net basis, that's right.

Q (Inaudible.)

DIRECTOR DANIELS: Yes, with the new Department. I remind you that we've requested an enormous increase for the -- between $10 billion and $15 billion -- for '03. There's just an astonishing amount of new money. And I'll also tell you we're already beginning to find what -- the first of what I know will be a long list of duplications and economies. And within the next day or two, for instance, we will be suspending or freezing temporarily a host of redundant information technology investments all aimed at building communications infrastructure. This new department should have one world-class infrastructure.

And on the books right now are plans totalling between $1 billion and $2 billion. And so a review board has been constituted to pick the best of those and to move forward with one plan. This move alone will save hundreds of millions of dollars. We have the same thing coming right behind it in financial systems where, again, we don't need dozens but, rather, one.

And so the new Department, when all is said and done, there may be some near-term transition costs offset later, but there are going to be very, very large savings and also an enormous amount of new money requested from which to fund transition.

Q Back on the sup -- two Republicans today, Young and Stevens, said the President was being ill-served by you. What's your response?

DIRECTOR DANIELS: Oh? (Laughter.) One day soon, Alan, I think I'll bleed to death through the tongue, I've been biting it so much, and I will today.

Well, I leave that to their judgment. They're both excellent gentlemen; everybody involved is. I just think it inheres in the job. I've told some friends lately that I think the President chose the wrong nickname in my case, and that he might instead have chosen pinata -- (laughter) -- because I think some folks think if they can knock my head off, all the goodies in town will fall out. (Laughter.)

I think it just inheres in the job. And the real dispute here is between folks who I guess sincerely believe much more money should be spent, and the President, who feels there must be a limit, that we must bend this recent trend line, that we must move back towards balanced budgets. That's the dispute. I'm simply his instrument. But he has a 75 percent approval rating, and I don't. And so in their shoes, I think I would aim my criticism at me, too.

Q Director, I have a sort of non-budget related question. In last night's Treasury-Postal bill on the Senate side, they included a provision that said you can't put any numbers to the competitive sourcing. Does that thwart your efforts in the management agenda? Would you recommend the President veto that bill?

DIRECTOR DANIELS: Oh, I'm sorry, it's the bill that was offered the other day? Yes, we would recommend a veto of any such bill. It's very important that we begin, or begin again, to capture for the taxpayer both the better service and the economy and efficiency that can come through competition for those services that are suited to it. We're still, to too great an extent in the federal government, cutting our own grass, doing our own laundry, our own printing, and things that are available through the private sector. And there ought to be a competition. We don't care who wins. It's fine if the incumbent federal agencies win, as long as we get a better deal for taxpayers. That's an important initiative, and we would oppose any bill that attempts to stop it.

Q Do you see any risk in your future that due to the aggravation of fiscal condition, the long-term interest rate goes up and the consequently discourage the capital spending and the rate the economy recovery?

DIRECTOR DANIELS: I don't see that. It follows along the line of the question we had earlier. Again, interest rates, mortgage rates all at historic lows right now. And, in fact, the deficits we're looking at, whether you favor our projection or even some of those that have a slightly higher deficit for the next couple three years, are historically pretty low, measured against a $10.4 trillion economy, much lower than those that we've suffered in the past. So even if -- and to date we don't have any evidence of this -- but even if there is some causal relationship, I don't see any great risk.

Q Mr. Director, as you know, the Senate has yet to spend an -- set an FY '03 spending cap through a budget resolution or other means. A few weeks ago they came within one vote of committing a vote on a cap that would have been higher than what the administration has proposed. So there is some support for that, apparently, in the Senate. Are there any negotiations underway with Senator Conrad or others in the Senate where the administration might agree to a number that's higher than the 759, but lower than the 768 the Senate seemed about to -- ready to embrace, and which the Appropriations Committee over there has embraced?

DIRECTOR DANIELS: I've had many conversations with Senator Conrad about it, and appreciate his continuing interest in finding a new or a renewed control mechanism. The President agrees with that. Once again, the price tag was not acceptable -- the price tag for controls that might have helped. It gave no guarantee of control, but might have helped. The price tag was -- fairly measured, was $20 billion, and that's hundreds of billions over the years. That wasn't something that the President found acceptable.

Q Senator Lott had indicated that he might support a 764-65 number. I'm wondering if that's leading the way to the administration? Might you support a number that's midway between the two, in an effort to get a Senate spending cap?

DIRECTOR DANIELS: We'd like to see a spending cap at the levels that the House has voted for already. That would also, by the way, ensure a quick agreement between the bodies. Once again, at those levels, we are increasing spending 10 percent this year, due to circumstances. And I would hope that eventually the Congress would agree that that's really all we should be doing, especially in view of the difficulty we're having at the bottom line.

Q At those levels, many of the House appropriators, your friends, say that they don't have a schedule to move some of their bills because they don't believe they can pass them, and they are seeing gridlock in September. How do you respond to that?

DIRECTOR DANIELS: Well, I never presume to tell them how to do their business. I can just come back to the facts that the President has asked for money, he's asked for healthy increases. He's not asking that they do anything that state governments or U.S. federal governments during wartime before have not routinely done. And so we hope that they will think harder about that.

Q Are you concerned at all that they have no plans presently to advance bills like Labor HHS?

DIRECTOR DANIELS: The one bill that the President has concerns about is the Defense bill. It ought to be passed, we ought to have certainty. We ought to have the assurance of funding. The House has moved. We thank Chairman Young and the Speaker for that. And we do hope that the Senate will. And there seems to be some intent to do that. That the President has very serious interest in seeing happen quickly. And then we'd like to work out the rest, but all in the proper order.

Q Earlier you were talking about postponing some of the infrastructure buys at TSA. Then you mentioned the consolidation of the IT infrastructure buys at the new Department of Homeland Security. One of the big infrastructure buys at TSA is their IT infrastructure. How will, if they have nothing -- how does that fit together? How do you save the millions, if you have this $1 billion buy plan?

DIRECTOR DANIELS: Well, they're really independent questions. One is being forced on us by circumstance for the moment. The other makes sense anyway, for the reasons I gave. And it's important that, again, that TSA and the rest of the new Department have the best possible communication. And there needs to be, again, one network.

The worker at the airport in LaGuardia ought to be able, if she needs, to immediately contact someone at the Port of Los Angeles or at the border station in Texas or at the agricultural inspection station in Canada, and so on and so forth. And so you're quite right. They had a proposal on the street for a $1.4 billion investment over the next seven years. And, meanwhile, there are high quality infrastructures available. And some of it is Customs and INS and some other places. And this board needs to look and decide on which platform to build, and obviously not continue building on several at the same time.

Q Can you talk a little bit about the board that you just mentioned, and any specifics about what infrastructure they're leaning toward in the new Department of Homeland Security?

DIRECTOR DANIELS: I can only tell you these are IT professionals from some other departments that are coming together to be teammates in the new department. And I hope it will be the first of many good exercises for creating a new team and a new unified department. But we can get you some more information, it's early day.

END 3:23 P.M. EDT

Return to this article at:

Click to print this document