Press Briefing on the Budget by OMB Director Mitch Daniels


Office of the Press Secretary

For Immediate Release
February 3, 2003


Room 450
Dwight D. Eisenhower Executive Office Building

10:59 A.M. EST

DIRECTOR DANIELS: The President believes in on-time delivery, as you know, so I hope starting a minute or two early won't inconvenience anyone. Everybody set?

We have made today three deliveries, actually, each of them on time and two of them reflecting firsts. First of all, I direct your attention to a new document in the budget called "Performance and Management Assessments," one we expect to be a part of all future submissions. And this captures the administration's self-assessment of its management performance and, for the first time, an objective performance rating of 234 separate programs.

This constitutes our delivery to Congress also under the Government Performance and Results Act. It's two months ahead of schedule, and far more comprehensive than any previously made.

Also today, in the Federal Register we're submitting on time, for the first time of any administration, the annually required report on the cost of federal regulations. This is also a subject worthy of your attention. Federal regulations cost American consumers hundreds of billions of dollars each year, and this is a report updating the public on the costs and the benefits of administrative government action.

And then, of course, we've presented the President's program for the year, captured in the budget document -- which by now has been furnished to all of you. Like all such programs, it constitutes a series of hundreds of choices and priorities that the President has selected.

The President has chosen as his top priority the safety of Americans to be secured both through aggressive prosecution of the war on terror, a strengthened national defense base, and the construction of a homeland security infrastructure now that one is necessary in our country.

Along with that as a top tier priority, he's placed the economic well being of Americans through a bold initiative, the third of his presidency, to strengthen the economy and, in particular, to create more jobs in a recovery that has created too few.

And beyond this, there are a host of other priorities and some new initiatives: education, veterans, an improved Medicare system; as well as new action proposed to alleviate the suffering and needless death of AIDS in Africa and elsewhere; speed the arrival of a pollution-free car in the American marketplace and many others about which you can read.

A balanced federal budget remains an important priority for this President, and the budget we present today -- even with all the new initiatives -- shows deficits bottoming in this year and moving back in the direction of balance. Those, if there are those who would elevate a balanced budget to an even higher priority, will be free of course to discuss which of the President's priorities they would not do or would do much less of. And that's what a good, healthy policy debate is for.

So we thank you for your attendance today and invite your questions.

Q What are some of the greatest advances you've seen in program performance this year and what are some of the greatest turns for the worse?

DIRECTOR DANIELS: Well, we don't have adequate basis of comparison, is the first answer to your question. This is the first year in which I would -- what I would call a serious attempt has been made to evaluate, impartially on an ideology-free basis, what works and what doesn't. So we're really just establishing a baseline. Trillions of federal dollars have been spent in each recent year without much of any information about what works well and what doesn't. And this President pledged to do something about that. Today is the first long step forward.

Q Why not include some estimates for the cost of a war with Iraq?

DIRECTOR DANIELS: We all earnestly hope that there'll be no war, and that that could be averted. So it would have been very unnatural to include costs for a conflict that Saddam Hussein could avert at any day by complying with the world community's 11 years of demands that he disarm. We will be prepared -- should that day come when the President orders some action or some expansion of the current war on terror, we'll be prepared to move quickly to talk to Congress about the necessary resources.

Q Could you talk a little bit about your plans for a supplemental -- not only for Iraq -- but possibly in the wake of the Columbia disaster and whatever else you might be thinking might be necessary in a supplement?

DIRECTOR DANIELS: Referring back to the previous question, obviously, if there is an expansion of the current level of the war on terror, we would move quickly for a supplemental. Even if that does not occur, we're monitoring the ongoing costs in Afghanistan and many other venues, and that might well occasion, even in the absence of active hostilities in Iraq, a supplemental. Those are the only two reasons we're looking at, at the moment.

Q So nothing for the Columbia --

DIRECTOR DANIELS: I wouldn't rule it out, but certainly up to this point, we don't see this as a money issue at all.

Q Would you be opposed to increasing funding for NASA, if that's what Congress wants to do, beyond what's in the budget now?

DIRECTOR DANIELS: No. This administration has increased funding for NASA, increased funding for the shuttle and increased funding for the shuttle maintenance account, after a decade of cuts and flat spending. So NASA has been an important priority, and the shuttle specifically, for this President. And we'd be receptive, I know, to new ideas that may come now. Obviously, it's a little soon to have planned any such thing.

Q Once more on NASA. I'm told, although I haven't looked at the figures yet myself, that the increase in the overall NASA budget is really accounted for, and then some, by the increase in the shuttle account. And otherwise, what happens to the rest of the NASA budget?

DIRECTOR DANIELS: Well, as you might imagine, in a $15 billion budget, there's some coming and going. It's true that the shuttle receives very high priority, and spending on the shuttle program total goes up some $600 million. Spending on shuttle maintenance and life extension, specifically, also goes up very sharply, as it has since President Bush arrived.

Elsewhere in NASA's budget, there are some -- it's a scattering of small reductions, things like -- they had a marketing program to advertise to the commercial sector technologies that they thought they had uncovered. That program we didn't find had a lot of value, and we think the commercial sector is well aware of these opportunities.

Another area is the space station, which has been probably NASA's biggest single problem over the last decade, billions and billions in cost overruns. And the new management has been getting on top of that. And there are some savings from the previous baseline there.

Q By presenting most of these numbers over five years, rather than 10, and including no fix for the alternative minimum tax problem, are you not concerned that you're actually hiding the true extent of the federal deficit in years to come?

DIRECTOR DANIELS: No. The experiment, which as you probably know is only seven years old, of attempting to pretend that we could roll together thousands of variables and produce some accurate surplus or deficit forecast out six, eight, 10 years, really needed to come to an end. We made no such pretense for most of the history of the republic. Until 1971, no one tried to look out more than three years; and then for a quarter century, five years. Only in the last few years did we attempt 10 years. And it's led to a lot of nonproductive, even counterproductive debates over data that just proved not just flawed, but wildly misleading.

Now, there's plenty in this budget over a 10-year period we can make a reasonable forecast of what a given tax change might cost, a given mandatory or other spending proposal might cost over 10 years. And so there are plenty -- there's plenty of 10-year data. But the idea that we could, as I say, aggregate thousands of such variables -- each of which have errors, error ranges around them -- and produce a number that means anything, we've simply learned from experience is not true.

Q Do you have the -- of tax revenue decrease caused by tax cuts incorporated in growth package in fiscal 2003 and 2004?

DIRECTOR DANIELS: Yes, we absolutely do. The deficit figures, as I say, sort of bottom out around $300 billion and start back toward balance do include the President's full proposal. And the biggest consequence, the biggest impact of those proposals we show in 2004 fiscal year at something over $100 -- $114 billion. So well over a third of the forecast deficit is attributable to the President's plan to stimulate jobs and economic growth.

Q If a balanced budget still remains a priority, why have you not done a more thorough job of identifying programs that are not among the President's priorities and suggested to Congress that they be able to target spending cuts?

DIRECTOR DANIELS: Well, we're rarely criticized for not leaning hard enough against spending. I suspect, as in previous years, the President will be criticized more for not spending more here and there than for restricting spending. The proposal, as you know, limits both total outlays, actual dollars spent, and discretionary budget authority proposals for future authority to spend -- the 4 percent, which is what the average American family is expected to see in their paychecks' growth.

We are always very receptive to ideas we may have overlooked to restrain spending, and particularly on things that have not proven their value to the taxpayers.

Q You mentioned earlier that in terms of a supplemental one might reconsider spending in Afghanistan. Could you talk a little bit about what are -- you know, what would be moving that spending, what would be the cause of needing to look at that again in a supplemental? And, also, could you give us the latest estimate of the administration for the cost of a war with Iraq?

DIRECTOR DANIELS: On the first question, I talked about the war on terror -- Afghanistan is one theater, but there are many others -- the Philippines. And as the President has often said, al Qaeda is a network that's operating in scores of countries. We added to the budget for 2003 what we believe was the necessary amount for the stepped-up activity on that front. And it looks like we came pretty close, but perhaps not -- we may not have captured it all. There have been some -- a lot of increasing activity.

This is probably the best money spent, by the way, in trying to secure the safety of Americans. We don't count it when we're talking about homeland security, but money spent to intercept and stop terror before it ever arrives in the homeland is probably the best homeland security money we can spend. And so it may be that during this year we will learn that prosecuting that war costs somewhat more than the amount we had incorporated in the '03 budget.

And with regard to any war in Iraq, there is no number because there's been no decision. We have studied carefully a range of scenarios. And if the President is ever forced to such a decision, he and our military leaders will tell us what kind of conflict they envision, what its nature, what its likely duration might be. And at that point we'll be able quickly to assemble, I think, a good-faith request.

Q Do you -- does the administration have any position on the debate over dynamic scoring, particularly when it comes to tax cuts?

DIRECTOR DANIELS: Yes. Our position is that the so-called static scoring method we use now is inadequate to inform the public and the Congress. We know it's wrong. It makes the hyper-conservative assumption that, for instance, lower taxes or lower tax rates can happen and absolutely no behavior changes, and absolutely no economic activity, different economic activity occurs. Everyone knows that's wrong. The dispute is: wow would you calculate the likely feedback or recapture?

And we have to be very careful about that. We don't want to mislead ourselves. I think the answer -- as many people are now saying -- probably is not to abandon the current static model, to keep that as our starting point; but to begin to estimate alternatives, alternative outcomes; and to have the intellectual flexibility to think within that range. And I think that the drift of opinion is moving that way. I hope the new leadership at the Congressional Budget Office will, perhaps, take a lead.

Q Thank you. Your turn to the five-year versus 10-year scenario, it was on the basis of just such a 10-year projection two years ago that you made the case that the country could afford a very large tax cut. You're now saying 10-year projections are wildly inaccurate. Are you not vulnerable to the charge of trying to have it both ways?

DIRECTOR DANIELS: I think we'll hear the charge, but I don't feel particularly vulnerable to it. At the time we indicated we had a lot of skepticism about 10-year numbers. At the time, we reserved, in the President's first budget, $842 billion -- about 15 percent of the hoped for, and we now know, illusory surplus over those 10 years -- at least for all we know it's illusory, it could come back -- and we said at the time that there is enormous uncertainty that we can look out this far. But we took the system, we took the estimates we inherited and worked with them.

In our second year, we indicated even more skepticism, and said we thought probably the 10-year experiment had been proven a failure and we ought to move away from it. We said it again in our midsession review, and we're acting on that today.

Let me just say this about surpluses and deficits. This forecasting is, we've all now learned, a very, very tricky business, because of the change in events. Who knew we would have an event like 9/11 that's already cost us $100 billion-plus. Very interesting to look back. No one saw the last surplus coming -- not five years, not three years, not one year ahead of time. In fact, in February of the year it arrived, both OMB and the CBO were still forecasting a deficit. It came because of economic conditions, and that's what will bring it back one day. And we may not see it coming any further ahead than our predecessors did.

Q Is there any wiggle room in this budget for the block grants to the states that many members of Congress are asking for, or the homeland security block grant that some in Congress are asking for?

DIRECTOR DANIELS: Well, Doug, there's an awful lot of money for states in this budget. I have a chart here that might interest you. But everyone knows that the states have encountered a lot of fiscal trouble of their own, most of them over the last few years. Federal grants to states really have eased this situation, the best I can tell, substantially. They have grown in the last four years at an average rate of 9 percent. They're up $122 billion. In other words, they've been growing a lost faster than state spending, so they must have been making a net contribution to alleviating these problems.

A lot of this is the consequence of established programs, like Medicaid, which has been growing very fast. But other of it -- other aspects of it are based on choices. The President has increased education grants to states. Obviously, we're seeking massive new grants in the homeland security area. He's just proposed for 2004 a $3-plus billion for employment -- reemployment accounts, a new way to try to get people back to work.

So, obviously, the concerns that states are experiencing are a concern to him, and this budget reflects it.

Q Could you talk about the deficit in this -- the President, in his message, calls it small by historical standards, but could you get into those percentages a little bit?

DIRECTOR DANIELS: Yes. Any way you measure this deficit, it is moderate. It is 2.7 percent of the economy, the gross domestic product. We've had deficit in recent memory bigger than twice that. If you measure it in constant dollars -- that is, take inflation out of the equation -- then it is smaller by something like 30 percent than the biggest one we experienced.

So at its present size, and given what it is for, given the choices that go into it -- we're talking about the physical protection of Americans, we're talking about the economic well-being of Americans, and these other priorities -- the President finds it acceptable. We want to move back, and the budget says we will move back in the direction of balance, and that's an important goal, too.

Q What about the Medicare overhaul? Is that cost, price tag, included in here? And if not, what does that add to the deficit?

DIRECTOR DANIELS: The Medicare improvements the President suggested is included. It doesn't have a lot of impact in the five-year time frame because it would be phased-in, doesn't become a double-digit event -- that is, I think, $33 billion in the third year, be about '06 -- so it is not a major factor in the first five years. But this is one of those areas where we do give a 10-year single point or single variable estimate of $400 billion, and it is included.

Q Mitch, can I follow-up on that? Is the $400 billion just a place holder number, since no one has really detailed the President's plan? What is the plan? How would you describe -- you've been in all the meetings --

DIRECTOR DANIELS: Yes. Well, it's an estimate, just as anybody's number is an estimate. The history of Medicare, of course, is that every estimate has been vastly exceeded by reality. But it's a good-faith estimate based on a pretty clear outline. Yes, the last few details are still being looked at and put in place. But we think we have a pretty good handle on the order of magnitude. And that's one reason it's a round number. It doesn't make -- doesn't pretend to false precision.

Q Describe the plan. Since you're here, why don't you describe the plan? How would it work?

DIRECTOR DANIELS: I think the President has been pretty clear about saying that it has to expand choices for seniors. It has to pay very close attention to the needs of the poorest seniors. And it has to keep an eye on the long-term sustainability of the program. Medicare, as a program, is an enormous, unfunded liability on the books of the federal government. We talk a lot in Washington about the national debt -- $3.6 trillion right now outstanding. The unfunded promises of today's Medicare system are more than three times that large. So we do need to be careful about the changes we make and what they might do to the imperative of making sure that we have a system tomorrow that serves as well as the one today.

Q Well, can you estimate, like, over 10 years what would be the savings of encouraging seniors to move into the private sector?

DIRECTOR DANIELS: You'll see that when the plan is ready.

Q And when will that be?

DIRECTOR DANIELS: We're moving as fast as we can.

Q Mitch, on security, on homeland security, I just wonder, there are a couple of things that may develop over the next few months -- the President's commission may come up with some recommendations, Congress may find different threat priorities than you've established, there may be events that sort of change the complexion of the threat. How flexible are you on spending for homeland security? Would you see switching of money to address new threats or higher priority threats, or would you see a supplemental that would come back and address a broader threat than you see?

DIRECTOR DANIELS: Any of these things is possible. Let's just -- let's just review the bidding for a moment.

Under this administration, homeland security spending doubled in one year, between '02 and '03, and has tripled over three years -- tripled over three years. It is the highest priority in this budget, rising another 8 percent after the doubling year. And incorporated in that are some major new proposals the President has made. He's out talking about one today, a very large -- potentially multi-billion dollar program to ensure we have vaccines and treatments to protect Americans against bioterror; half a billion dollars to tackle the job of collecting and integrating our information, and our intelligence information about the threats that are there.

You asked a very important question when you talked about shifting priorities to address threats as we learn more about them. We really have to concentrate in this year on the "how well we're spending" question, not merely the "how much." We, as I say, have tripled spending in a very short period of time. And what's not yet clear is that we are spending it in the right places to reduce the total threat level.

Thank goodness the Congress joined with the President to reorganize a scattered and chaotic set of activities into a new Department of Homeland Security. That was an essential first step. And I think maybe the central job for the new Secretary and for the Homeland Secretary Council is to become smarter, as fast as we can, about what are the real threats; what are the most dangerous threats; and make sure we have the resources put against them. It's nobody's fault, but it's unlikely that as we've scrambled to move new money in and to take care of the issue right in front of us, that we've really done this.

I mean, let's think just for a moment -- there is not enough money in the galaxy to protect every square inch of America and every American against every conceivable threat that every hateful fanatic in the world might conjure up. So the real essence of homeland security is going to be number one, go after terror where it lives. That's, as I said before, probably the best money we can spend. It's not even part of the dollars we're discussing here. And, secondly, to become smarter and smarter about knowing where our greatest vulnerabilities are and moving to protect Americans against them.

Q It sounds like what you're saying -- and, please, correct me if I'm wrong -- that despite what happened on Saturday, the administration will not be rethinking its NASA budget, and that the increases that are in there for the Space Shuttle, the administration considers generous enough and that all these calls to have the technology upgraded and actually replaced from the old 1970's technology that, in view of the shuttle program now, will not be on the table this year?

DIRECTOR DANIELS: Well, I'll take you up on your invitation to correct you, because you're wrong. The President has proposed yet another significant increase for NASA, particularly for the shuttle program --

Q But beyond what's in the budget. I'm sorry.

DIRECTOR DANIELS: And it's a little early, don't you think, to have any idea about what more might be necessary? But the President is committed to moving forward in space. He's made that plain. His budget makes that plain. And if there's a lesson in the last couple days, it's, I suppose, another sad example that more money alone can't always avoid very sad setbacks.

Q Can I just ask you a question, this budget proposes to do an awful lot with more market-based reform of Medicare, a pretty fundamental change in tax policy, while beefing-up spending for homeland security and also, eventually, there's talk of possible war. Could you give us an idea, what was the President's thinking when you sat down to make all these decisions? Did he tell you to do it all, to go for it? What was his thinking behind doing that? And it also puts a pretty conservative stamp on government. What's he trying to accomplish, and what was his thinking about taking on all these very large challenges at once?

DIRECTOR DANIELS: This is a President of big projects and big ideas; you're quite right. It's not the first time Americans have seen this. But he's great to work for in this respect, because he's very clear; he makes his largest priorities very plain. And I believe that we've captured and expressed them in this budget, as I attempted to lay out at the very front end.

Among his priorities was to keep control of spending, both because it's good for the economy and because it's the right fiscal policy for government. And therefore, after addressing his priorities, we were as careful as we could be about lesser priorities and, in particular, looked for those things which had either outlived their usefulness, duplicated other activities for government, or could not prove their value.

Q Have you had time to cost out the retirement proposals that were unveiled on Friday, in terms of ten-year costs as opposed to short-term costs?

DIRECTOR DANIELS: I'm sorry, which proposal are you talking about?

Q The change in IRAs and 401(k)-type plans, the three separate new accounts that would essentially generate revenue up front, but over 10 years, when the baby boomers start retiring, potentially have tremendous costs --

DIRECTOR DANIELS: Yes, Treasury has numbers on that. I'll direct you to them. We do not -- our forecast did not have it as a large fiscal event, either on the upside or later on the downside. It's much more of a tax simplification effort -- which goodness knows we need -- and as a further encouragement to people to save for their own future, to be in control of their own retirement. And that's the motivator behind that proposal.

Q Mitch, do you have any assessment in here of the impact of deficits on interest rates to the federal government?

DIRECTOR DANIELS: Well, we have a forecast for interest rates. As you know, they're at their 40-year low, and that's having a very beneficial effect. Somewhere here there's a chart which illustrates it. We do see interest rates rising a little bit from this almost unthinkably low level that they have reached in the last few years. And as the economy grows, we'd better hope that rates do -- we'd better hope that rates do come up some, because it will reflect a growing economy and more demand for money.

Not quite the question you asked, Finlay, but it's a very important data point. This is our national mortgage payment. As a share of the budget, just five years ago it was 15 cents. Fifteen cents of every dollar spent was taken up simply paying off the interest.

Now, as a consequence of some reduction in the federal debt, including the President's first year, but most importantly of much lower interest rates, we're down to 8 cents right now, and we see it staying below a dime during the five year time period. This is very important, and makes it possible for us to move back toward balance, even while addressing the nation's needs.

Q You mentioned earlier programs that aren't performing or can't prove their worth. Could you highlight a couple or three programs that this budget either gets rid of or cuts way back on, that are in that category?

DIRECTOR DANIELS: If I highlight too many, you won't read our book, and I sure hope you will, because a lot of very, very talented civil servants put an awful lot of time and effort into it and will, on an ongoing basis.

It's very difficult -- I don't want to pick on any one program, but let me just give you one suggestion.

Q I promise to read it. (Laughter.)

DIRECTOR DANIELS: No, I know how this works.

Well, we have been giving out, for a long time, something called health professions grants. Their stated purpose was to move -- they started many, many decades ago, and their purpose was to create more doctors, in particular to move them into under-served areas. We now have a doctor -- we certainly don't have a doctor shortage. Some people believe, compared to other health professions, we have more doctors than is necessary. And this program has not been moving them into poor areas, rural areas, it hasn't been fulfilling its purpose.

Meanwhile, there is something called the National Health Service Corps which goes straight at the issue of more minority health professionals and much more directly leads to their at least starting their careers serving our poorest citizens in our under-served areas.

And so assessing those two programs we find that money ought to move really from the one to the other.

Q Nearly 20 years ago, I believe it was 20 years ago, we had the big tax cuts of -- which led to very high deficits and it was only a short time later that the Reagan administration had to endure tax hikes and take back some of those tax cuts.

Are you confident enough about your outlook that you could rule out that ever happening again? Because in other respects --

DIRECTOR DANIELS: "Ever"? You mean, like, in the next 200 to 300 years? (Laughter.) Let's get the history right first.

After the tax cuts of the '80s, like the tax cuts of the '60s, and like most other tax cuts, revenues in the next few years went up a lot. Revenues went up a lot. Now, there was a lot of other history going on in the '80s, and that involved the rebuilding of defenses, it involved a Congress which wanted to keep on spending on a number of other fronts. And also it involved, until those tax cuts took hold, a weak economy. And that's what gave you the deficits.

So the answer is, if we take those steps -- and the President has proposed yet again aggressive steps to grow the economy -- that's our best chance of another unexpected surplus coming back.

Q Let me try a previous question again, because I'm not sure we quite heard an answer. Can you give us --

DIRECTOR DANIELS: You heard an answer, just not the one you wanted. (Laughter.)

Q A response, but not --


Q Give us maybe some general idea, at least, if these deficits that you're projecting over the next few years have no effect on interest rates, maybe a negligible effect, or some substantial effect, as many Democrats on the Hill would say.

DIRECTOR DANIELS: Well, the idea that there is some connection between deficits and interest rates is an article of faith for some people, but I say "faith" because there's just no evidence, zero. And at least at the levels that we are now experiencing, historically very moderate -- and as we see it, declining deficits -- one would not expect an impact. You can expect an impact from greater economic growth, which we all hope will occur and which this budget attempts to make more likely.

But as a direct effect of these deficits, no. We've gone from surplus to deficit, and interest rates have gone down. So I do not see that correlation.

Q Back on history and on the same general subject, the previous administration, nonetheless, did address deficits and interest rates by agreeing to, as the first President Bush had done, increase taxes in 1993. That had a significant effect on the budget outlook, again helped a lot by 1997 and Congress's agreement to -- how to balance the budget. You seem to have basically decided that those ideas were wrong, that those acts of trying to attack a deficit didn't seem to make sense or didn't have the consequences that you think increasing taxes or balancing budgets do have.

DIRECTOR DANIELS: The starting point always has to be what will be good for the economy. It's an economy that produces balanced budgets, not the other way around. It's not at all clear that tax increases in the early '90s had much to do with deficit reduction. Deficits stayed very high until we got, first of all, a Republican Congress that began to control spending; secondly, a stock market which took off -- not in '93, not in '94, but only in '95 -- then a huge surge of revenue that came from that market and from economic growth two or three years after that.

So I don't buy that there was causation the last time. And certainly, the President doesn't believe that a weak economy that's growing at rates that are too low today would be benefited by tax increases; quite the contrary, about the last thing we need if we want to see more people back to work.

Q In here you've got a discussion of the different e-government -- projects that are combined or joint -- sort of a new method for identifying the different types. One of those types is actually a large government-wide initiative area that would require, in here it says, a new type of funding, a new funding mechanism. Can you elaborate on that?

DIRECTOR DANIELS: If you're talking about the e-government fund, the President has requested it each year -- because many of the improvements we have to make do run across departments. We're going to propose to spend $59 billion on IT next year. It's a very large sum of money. Let me say that a lot of that is under question, and we will not permit it to be spent unless the people running those programs can bring us a business case that shows it makes sense.

Part of making sense is you get a good return on the dollar. You get more productivity; you get better service to taxpayers. Part of making sense is that it doesn't make more diffuse and chaotic our IT system in the federal government. We need systems that can talk to each other, even if individual departments don't get every little tailor-made bell and whistle they want.

So we are -- you're quite correct, we've identified 25 programs, and most of which cut across departments horizontally. We debuted several of these recently. Free tax filing is mainly a one department step forward, but as you know, well over 60 percent of Americans this year will be able to file online very quickly and for free because of that. We debuted e-regulations a couple weeks ago in this room, allowing citizens, whatever their viewpoint, to comment -- to be aware of, and then to comment on regulations that could affect their lives or their small businesses. And we've had hundreds of thousands of people take advantage of that.

So these are very important steps forward in terms of bringing government closer to the people, as the President pledged to do.

Q You brought the window, the forecasting window to five years. But the President is specifically making some policy decisions that wouldn't take effect until far after that window -- like making the tax cuts of 2001 permanent. But he's also proposing some proposals that the cost would not appear within that window.

How exactly do you justify that, and how do you square it with the President's pledge not to pass on costs to future generations and future Congresses?

DIRECTOR DANIELS: Any such proposal transparently describes its cost and describes it in the year in which it will occur. As I said before, it's perilous enough, but we can make a good-faith estimate at what any one program, any one proposal, any one variable might do. All we have said is you can't put all of those -- each of which brings its own errors to the equation -- into one gigantic equation and hope to know anything real about a total number for surplus or deficit years out.

Q Getting back to the impact on interest rates, isn't it really a simple case, though, of supply and demand? I mean, you're going to be increasing substantially -- you say "moderately" -- but substantially also the federal, level of federal debt. There's a given demand for it. Aren't you going to have to raise prices and charge, you know, pay out higher interest rates to satisfy --

DIRECTOR DANIELS: Well, don't forget what the supply is. There's a worldwide financial market now, trillions of dollars -- "T," trillions -- of dollars, and I think what's been learned over recent years is that whatever effect might be there is from an extra -- a movement of the size that we're talking about here is not enough to make any fundamental difference. I'm not saying that at no time, ever, will we ever see a correlation. I'm just saying, the next time will be the first time.

Q Could you comment on how initiatives in the budget will help agencies address recruitment and retention problems, on both civilian and military side?

DIRECTOR DANIELS: Yes, thank you. I hope so. I mean, in the first place, the President is renewing his call for what we call freedom to manage legislation. We believe every department ought to have much more freedom than they do now to go out and get the best people, to reward the people who are really doing a great job, to keep the people that they might lose, because they're topping-out in pay.

And as you know, with a few sort of pilot exceptions, most departments are trapped in a very antique program. Everybody kind of goes up the same amount, almost regardless of how good a job they're doing or how much load they're pulling. So that's the starting point.

But on top of that, there's a new proposal this year which aims to take a significant piece of the generous amount of money set aside for increased pay, and instead of spreading it evenly to everybody, the great worker and the lazy worker alike, to put that at OPM, at the Office of Personnel Management, and invite every department to bring forward a plan to do what you're talking about: to recruit, to retain, and in particular, to pay the excellent performers, the real stars, of which we have so many, what they're really worth.

And this is an important breakthrough that we certainly hope the Congress will take us up on.

Q You've suggested that deficits of the size we're talking about won't have much of an impact on a global economy of multi-trillion dollars. Then what's different with the tax cuts of the size we're talking about? Why is the administration so confident that they'll have such a huge impact on that same large multi-trillion dollar global economy?

DIRECTOR DANIELS: I think they're two different -- we're talking two different questions here. The tax relief and the rest of the President's growth proposal is aimed at the U.S. economy, no question about it. That's where its effect would be felt.

I think the question over here was, would some additional borrowing by the U.S. government lead to some effect on interest rates, of the kind we have never, ever seen. And there I -- I believe with justification -- pointed out that the market for U.S. Treasury Bonds is now worldwide. And, therefore, that amount is the numerator over a much larger donominator.

Q I mean, to summarize your message, to say deficit hawks, is that it's not really that bad and it's not going to last that long?

DIRECTOR DANIELS: My message to my fellow deficit hawks, you mean? Because, you know, like the President, I believe this is a very important concern. A balanced budget is a high priority for this administration. It is not the top, let along the only, priority. Chart, please. (Laughter.) It is one very important priority, among many.

Folks in this room know what the baseline is, this black line at the top. This is if we take the government of today and grow it at the rate of inflation. So it is today's government carried forward, we just don't do anything new.

If a balanced budget were the single -- should be -- were the single point of national priority in importance, we could do it. It would be no great trick; we could do it in a couple years. CBO's baseline shows just the same thing.

The question is, what would you not do? What would you have the President not do? Would you not try to spur greater economic growth? Would you not continue the strengthening of our defenses and the prosecution of the war on terror and the strengthening of homeland security? Would you not move to improve Medicare, with true catastrophic coverage and more choice and prescription drug coverage? Which of the other new initiatives, smaller, but important, that he proposed -- education, more money for veterans programs, the new initiative against global AIDS and others -- would you not do? And that's the debate that we ought to have.

But if, in fact, the transcendent objective, the smartest thing to do was to balance the budget come what may, we could do it, we're not that far away. But it's a President's job to balance priorities, a balanced budget being one of those. If we correctly balance them, especially including economic growth, the budget will balance and probably before we expect it.

Q Can you explain some of the changes you're making to highway funding and the rationale for those?

DIRECTOR DANIELS: Highway funding?

Q Yes.

DIRECTOR DANIELS: Right. We are proposing a step forward in highway funding. In two ways, the budget will propose -- the budget for this year anticipates about $27 billion in highway funding Congress has not done yet. But for next year, $29 billion, and then growth beyond that.

And as you know, highway funding for the last several years has been tied to highway receipts -- gas tax receipts, excise taxes on vehicles and that sort of thing. And that's an important principle the President thinks ought to be preserved. We used to take some of those dollars and spend them on other things. Now we spend them all on highways, and we should.

They haven't been growing fast enough to suit some folks and they'd like to now spend other dollars. Up to a point we believe that we can agree. The budget does propose to do two things in particular. One is to include into the trust fund the taxes paid on ethanol -- not clear really why that didn't happen at the outset, but it didn't, and that's probably fair. That's a fuel just like standard gasoline.

And the second thing is, in a very carefully calibrated way, to spend some of the surplus which accumulated -- or some of the balance, I should say -- which accumulated in the highway trust fund. We've got to be careful how we do that. If we overdo it, we will make a gasoline tax increase inevitable and the President does not support that.

Q I wonder if you can elaborate what's in the budget on cyber security protection and elaborate on what you were talking about on the IT budget, the interest rates on that?

DIRECTOR DANIELS: We need major new investments in cyber security. And this will of course be -- this is probably an area, like we were discussing before, where the new leadership, Governor Ridge will choose to invest even more. I wouldn't be surprised. It may be a greater relative threat than some of the things that we are investing so heavily in right now.

Q With the deficit being 2.7 percent of GDP, is there a percentage of GDP that you feel would be detrimental to the economy -- important deficit to reach that amount?

DIRECTOR DANIELS: I don't know what percentage that would be, Paula. I don't know what the -- maybe a different economist would have their own different red line. All I can say is that if you look at history and you take in the context, we're not there now. We're not close.

Q How are your sessions with the congressional leaders on earmarks and discretionary funding going? Are you hoping for more success this year than in prior years?

DIRECTOR DANIELS: Well, I'll divide the question into two pieces. Discussions about -- you're talking about the '03, I think, spending that they're just now finishing up.

I think the discussions on discretionary spending are going great and I expect another successful outcome, just like the President has enjoyed at every step so far. On earmarks, we're not talking much about that. It's a talked-out subject, I think, for me. We make the point that -- we do, when asked -- that we think that congressional, sort of micro-management and earmarking has gone too far. But in the end, this is their decision. And as long as they show fiscal discipline at the level the President has said is enough, and as long as his major priorities for America are funded, at some stage, you have to defer to their decision making.

Q A couple of related questions. First, on homeland security, your 8 percent figure is off the base of the President's '03 request, is that correct?

DIRECTOR DANIELS: That's correct, off the base of the non-DOD request. What I think most people are thinking about --

Q Is that $25.9 or is that --

DIRECTOR DANIELS: It's about $35 billion. Remember that now we have captured much, but not all, of homeland security, in the Department of Homeland Security, and there are some significant pieces elsewhere, like bio-terror work that HHS does.

Q So it's not off the $37.7 billion top line --

DIRECTOR DANIELS: It's off the -- you've got about a total of about $41 billion, of which close to $7 billion is at the Department of Defense. So it's an increase from about $32 billion to about $35 billion.

Q And just a related -- also what's in and what's not in. Is the President requesting making permanent the entire 2001 package, including an inheritance tax? And given that that would be outside the five year window, are there 10 year numbers for that? And given that the dividend tax is going to be permanent, as he proposes it, are there 10 year numbers or multi-year numbers for that?

DIRECTOR DANIELS: Yes, on all counts.

Q Two questions. Unemployment compensation drops a great deal in your budget, by $7 billion next year. Is that wishful thinking or is that a program change? And also, you've talked about the deficits bottoming-out this year, although your numbers show that in the last year of your five year window it actually starts going up again. So I wondered if you could explain those two things?

DIRECTOR DANIELS: Well, on the baseline, you're back in surplus in the five year window. Unemployment compensation may be distorted. I'll go check, but it may be -- the comparison may be distorted by the fact that to help the states, the President authorized a -- I think it was $8 billion disbursement from unemployment last year, under the Reed Act. And that may be bending the situation.

But with a lot of spending having happened recently, yes, we do expect that a stronger economy will once again bring unemployment compensation down.

Q You say in 2008 the surpluses -- that the budget is in surplus again?

DIRECTOR DANIELS: You have to look at --

Q Are you saying it goes from -- a $178 billion deficit to $180-something billion --

DIRECTOR DANIELS: I said at the baseline you could get to surplus. I thought you were asking me a question like the one we addressed over here.

Q I was trying to reconcile your claim that the deficit bottoms out with the fact that at the end of your five year window, it actually kicks up again.

DIRECTOR DANIELS: Oh. But at $120 billion less than -- I said it bottoms out at about $307 billion, and headed back up. And that's a true statement. Once again, back to the question over here. There are zero dollars -- we've captured all the dollars consumed by the President's growth package and assumed zero dollars of benefit. Absolutely guarantee there will be very substantial benefit in years two and three and four and five. We have not taken any credit for that.

Q Do you have any reason to think Congress will adhere to these -- this proposed 4 percent spending cap, you know, cap on discretionary spending? And I know it was early in the process, but would the President veto discretionary spending bills that were much higher than that?

DIRECTOR DANIELS: You ask me that on the very first day? (Laughter.)

Q Got to get started --

DIRECTOR DANIELS: Every year somebody asks, is there any chance Congress will stick to these levels? They have every, single time -- you know, sooner or later I guess people start to recognize the President is serious about this and he's effective. And at each point along the line there have been, you know, some good healthy arguments, and there should be and there have been some changes in priorities. But the President -- when the President has said the given amount is enough, that's been what happened.

And so I would not expect different this year and the President has been able to do this without having to veto anything, at least in the conventional sense, he sort of pocket vetoed a few billion last summer.

But, again, we hope to work cooperatively with Congress and achieve a good outcome again.

Q In the State of the Union Address, the President renewed his call for a partial privatization of Social Security. Have you made any estimates of what this program would look like and what it might cost in a longer-term projection?

DIRECTOR DANIELS: No. The answer is, no.

Q Just to clarify, based on what you said, when would you anticipate a return to a balanced budget, or is that something you can't see in the window?

DIRECTOR DANIELS: Well, I can easily see it happening within the window. The forecast we have in the out years are pretty small and could easily be overcome by a strong economy. As I said, nobody saw the last surplus coming. It came on very quickly and the next one probably would be much the same.

Q Are you saying that national fiscal policy trumps global economic growth in terminating our own GDP growth? You seem to be dismissive of the suggestion that you need to take into account global economic conditions and understanding what is going to happen to our own economy.

DIRECTOR DANIELS: Where did you get that idea? It's an important question, but it's the first time it's come up today. Global -- the status of the global economy is very important to what happens here. The U.S. economy has been, in a way, the only positive force in the global economy for the last couple, three years. One hopes that Japan gets on its feet. One hopes that Europe becomes more growth-oriented than it has been. But, no, those things are very important.

Let me say this about growth and the budget, however. These estimates that we've been talking about are based on the, I would call, a hyper-cautious revenue estimate. One reason, at these meetings, people always ask about the predictions for economic growth, GDP, is you're taking that as a proxy for how much money the federal government will receive. And it's true that in the past that was pretty much the driver. It has not been for the last two or three years. The growth of the economy did not turn out to produce the amount of revenue that the models all said it would.

And most markedly, last year when the economy grew 3 percent, and revenues went down. Nothing like it in our fiscal history. So the revenue estimates in this budget are very cautious. In fact, we manually adjusted them down substantially for this year and for fiscal '04, until we see revenues coming back -- and probably we're talking about stock market related revenues, capital gains and so forth -- until we see that, we're going to err on the side of caution. We are $55 billion below our CBO colleagues for fiscal '03, and $23 billion below them in fiscal '04.

I hope we're wrong. I hope we've sort of found the bottom in this respect. But until we know we have, in the interest of accuracy, we have, some might say, low-balled what can be expected.

Just one more question. Anybody who hasn't had one?

Q What do you think the chances are of Congress approving the amendment to the BEA that the President wants?

DIRECTOR DANIELS: I hope they're good. I've talked to the leadership of both budget committees about it. I think there's bipartisan support in Congress to reinstate the Budget Enforcement Act. It wasn't perfect, but it played an important role -- caps on discretionary spending, pay-as-you-go rules on the mandatory side. And the President has repeatedly said that it needs to be put back in place.

We suggested doing it for two years, which we think is a good balance between where we are, which is no caps, and five years or more, which begins to enter, once again, the realm of fiction and speculation. And last time they had caps that went that far out, they wound up using gimmickry and all kinds of chicanery to pretend they were still observing them.

I think we might be able to look out two years, and if we could do that, lock it in with a new BEA, we would have done the taxpayer a great service.

Thank you all very much.


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