FY 2005 Budget Briefing by OMB Director

For Immediate Release
Office of the Press Secretary
February 2, 2004

Budget Briefing by OMB Director
Presidential Hall
Eisenhower Executive Office Building

10:32 A.M. EST

DIRECTOR BOLTEN: Good morning. The President's 2005 budget, which we are releasing this morning, continues to support and advance three overriding national priorities: winning the war on terror, protecting the homeland and strengthening the economy.

The President is committed to spending what is necessary to provide for our security and restraining spending elsewhere. Since September 11, 2001, more than three-quarters of the increase in the federal government's discretionary spending has been directly related to our response to the attacks, enhanced homeland security and the war on terror.

The President's 2005 budget continues this spending trend -- significant increases in essential funding for our security programs, combined with a dramatic reduction in the growth of discretionary spending unrelated to security. With Congress' help in enacting the budget we transmit today, we will be well on the path to cutting the deficit in half within five years.

We find it useful when we are talking about the budget to divide it into three categories overall. First, defense, which is the Defense Department. Second is homeland security, which is not congruent with the Department of Homeland Security -- most of the Department's budget is in this category, but some is not. And there are a lot of other expenditures in other departments, such as Health and Human Services, Agriculture, Justice, that fall within the homeland security category. And then third, here, is everything else -- non-defense, non-homeland spending.

The President's budget increases defense spending by 7 percent -- that's the yellow 7 percent over there -- to support our men and women in uniform and transform our military to ensure America has the best trained and equipped armed forces in the world. The budget increases homeland security by nearly 10 percent, to strengthen capabilities created to prevent future attacks. And it holds the rest of discretionary spending to half of 1 percent, less than the rate of inflation, while continuing to increase funding for key priorities, such as the President's No Child Left Behind education reforms.

The President's budget is built on the sensible premise that government spending should grow no faster than the average increase in American family incomes of approximately 4 percent. This budget proposes to hold the growth in total discretionary spending to 3.9 percent, and, again, to reduce the growth in non-defense, non-homeland security spending to half of 1 percent, below the rate of inflation.

In the last budget year of the previous administration, 2001, as shown here, discretionary spending unrelated to defense or homeland security soared by 15 percent. With the adoption of President Bush's first budget, here, in 2002, the growth rate was reduced to 6 percent, then 5 percent the following year, 4 percent for the current fiscal year we're in, fiscal '04, and then in the President's 2005 proposal, to half of 1 percent.

The President's budget builds on the pro-growth economic policies that have laid the foundation for the economic recovery now underway and for sustained economic growth and job creation in the years ahead.

The President's tax cuts have been critical to achieving his priority of strengthening the economy and creating jobs. Perhaps the best timed in American history, these tax cuts deserve much credit for today's brightening economic picture. That picture includes nine consecutive quarters of positive growth through the end of 2003, the highest quarterly growth in 20 years -- that was an 8.2 percent annual rate in the third quarter of 2003 -- and the highest growth for any six month period in 20 years, as well.

The picture also includes extraordinary productivity growth, continued strength in housing starts and retail sales, and encouraging signs of renewed business investment. These indicators suggest that job growth, which typically lags recovery, should continue to strengthen in the months ahead.

The President will not be satisfied, however, until every American who wants a job can find a job. So this budget supports the President's six-point plan for economic and jobs growth, including making permanent the tax relief that has fueled our economic recovery. The sustained growth that this budget supports will be good news for our budget picture, as well. As the economy improves, treasury revenues will, as well.

Like America, itself, the federal budget has faced extraordinary challenges in recent years: the stock market collapse that began in early 2000, a recession that was fully underway in early 2001, revelation of corporate scandals years in the making, and of course, the September 11th attacks and the ensuing war on terror.

With treasury receipts only beginning to reflect a recovering economy, and major ongoing expenditures in Iraq, Afghanistan and elsewhere in the war on terror, we still face a projected $521 billion deficit for the 2004 fiscal year. That size deficit, at 4.5 percent of GDP, is not historically out of range. Deficits have been this large, or larger, in six of the last 25 years, including a peak of 6 percent in 1983.

Under the circumstances that created it, today's deficit is certainly understandable. But that deficit is also undesirable and unwelcome. And with Congress' help, we will bring it down. With continuation of the President's economic growth policies and sound spending restraint, as reflected in the budget we're releasing today, our projections show the deficit will be cut by more than half over the next five years.

This dramatic reduction begins in the fiscal year of this budget, 2005, for which we are projecting a deficit of $364 billion, roughly 3 percent of GDP. That's the second green line shown on the chart there. The rapid deficit reductions continue in subsequent years, with our projections showing the deficit falling to 1.6 percent of GDP by 2009, over here. This is not only well below half its current 4.5 percent level, it's also well below the 2.2 percent average deficit during the last 40 years.

The deficit reduction you see reflected on this chart is the combined effect of economic growth and spending restraint. As the economy recovers, tax receipts as a percentage of GDP rise to historical levels by the end of the budget window, while spending restraint keeps outlays flat or slightly declining as a share of GDP.

The spending restraint reflected in the budget is not automatic, so we are also proposing new statutory budget enforcement mechanisms, establishing in law limits on both discretionary and mandatory spending, and requiring that any increase in spending be paid for by spending offsets. And the President is keeping his administration focused on what the American people care about: results.

The measure of government success is not how much we spend, but rather how much we accomplish. This budget includes a scorecard that measures the progress Agencies are making in achieving results so that the government continues to be accountable to the taxpayers.

Since President Bush took office our nation has confronted a cascading set of challenges. The President and Congress responded on all fronts, with tax relief to get the economy going, the largest reorganization of the federal government in 50 years to create a new Department of Homeland Security, and the largest increases in the defense budget since the Reagan administration, to wage and win the war on terror.

The President's 2005 budget builds on this record of accomplishment. With renewed economic growth and the Congress' cooperation in restraining spending and focusing it on our most critical priorities, we can accomplish the great goals the President has set for the country while dramatically improving our budget situation.

I'd be pleased to take your questions.

Q A couple numbers questions, if I could, and then a broader, thematic question. Do you have a total number of programs being cut and eliminated, two categories?

DIRECTOR BOLTEN: Yes. We -- this budget shows a -- and this is for major programs, but we are proposing terminations of 65 programs, many of those have been carried in previous budgets but there are some new ones, as well. And it also proposes reductions in about 63 major programs.

Q Your receipts table was two totals, one that includes proposals assumed in the baseline -- that's your language -- one that does not. What does that mean?

DIRECTOR BOLTEN: I'm not sure. Austin, what --

MR. SMYTHE: We assume in the baseline that we used, the starting point for the budget, we assume the extension of 2001 and 2003 tax cuts. We end up at the same bottom line, regardless of what baseline we use. We also assumed and proposed the extension of those tax cuts in the President's budget.

Q Okay. One more, if I could, a broader question. The President says in almost every stump speech, I came to this office to tackle problems, not to pass them on to future generations and future presidents. With these soaring deficits, aren't we getting to the point where future generations are going to end up footing the bill here?

DIRECTOR BOLTEN: We do face long-term problems with our entitlements, and this budget is designed to address not only the short-term problems, but the long-term problems. It puts us on a responsible path in the short run. And in the longer run what we need to do is address our exploding problem with unfunded liabilities in our entitlement programs. And this budget will put us on the path to begin that process.

In the shorter run, as shown here in these figures, what the President is proposing is a budget that will dramatically reduce the deficit to a point where hopefully we will be headed shortly toward a balanced budget and will put the country in a good position to address the longer run problems that are contained in our entitlement programs and will begin to be realized when the baby boom generation starts to retire.

Q Can you explain how the White House and Congress miscalculated the true cost of the Medicare prescription drug plan?

DIRECTOR BOLTEN: There was no miscalculation. The CBO estimate for the prescription drug bill was and remains $395 billion per year. The HHS actuaries, those over at the Department of Health and Human Services, had different estimates, they had different estimates all along, in a very technical and complicated area. And they've tried to resolve some differences but they -- some of the differences have remained, they're still working on them. And their deficit -- their projection of the cost of the Medicare bill has come out to be higher. But there has been no miscalculation about those numbers. There's a disagreement between actuaries about it. Now what's important is, that as the legislation is being done, there's only one scorecard, and that's the CBO scorecard. This happens pretty often.

In tax legislation, for example, when we were doing the '03 tax cuts, the legislation required that the tax cut be limited to $350 billion. That's by CBO scoring. Treasury scoring, as it turned out, was different. It was about $60 billion less for the tax cuts that were actually enacted. But what counts is the $350 billion for the tax cut that was made in '03. And that's what the members were voting on. So it's very common for there to be differences. This was an unusually large difference, but it's one in a very complicated area, where there are wide differences of opinion about assumptions and about some of the new programs going forward, because they especially involve a lot of private sector participation.

Q Can you describe what the wide differences of opinion are, in terms of how many people are joining up --

DIRECTOR BOLTEN: Well, I'll have to direct you to HHS and the other experts on what the precise differences were. I understand that some of the differences included different estimates about how quickly the volume-buying discounts would kick in for prescription drug purchases, there were different assumptions about how widespread participation would be, both by individuals and by private plans.

Very technical stuff, very difficult to predict. So it's not surprising that there were differences. The important part is that CBO has made an estimate. As recently as last week the CBO director stood by that estimate. That's what the members were voting on when the administration was calling for a $400 billion bill. We were calling for a bill that met CBO requirements, and that there is a difference with the HHS actuaries is not surprising and shouldn't change anybody's view of the overall Medicare bill.

Q When the President makes the pledge to cut the deficit in half, can you clarify, is he talking about a percentage of GDP or constant dollars? And when does the clock start, because cutting it in half after $500 billion is different than $375 billion.

DIRECTOR BOLTEN: The deficit we're cutting in half -- that the President has set the goal of cutting in half -- is the '04 deficit, the peak deficit, which we project at $521 billion, which is about 4.5 percent of GDP. When we talk about it, we're talking about it as a percent of GDP, because that's the way the economists look at it. The nominal number isn't the important number, as far as the economy is concerned. What's important about a deficit is, what is its size in relation to the overall economy, what is its tendency to soak up capital that would otherwise be used in the private sector.

So economists tell you that the right and the relevant way to look at a deficit is as a percent of GDP, as we do in this chart. Now, for those who want to look at nominal numbers, the path we -- that is projected in our budget, you'll see in the numbers, also shows that we're cutting it in half by that measure, as well. So you can pick your measure. The economists will tell you this is the right measure. The President's plan puts us on a path to cut the deficit in half, either way.

Q Along the same lines, two questions about the deficit. Why do you keep talking about 2009, when the chart shows you cut the deficit in half by 2006? And if you extended this chart out for another five years, what would it look like?

DIRECTOR BOLTEN: Taking the latter part first, we do five-year budgeting, so we don't have this chart going out another five years. I know CBO does 10-year estimates. But as we present budgets, we do it on a five-year basis, so I don't have numbers for you on what happens in the subsequent five years. But my expectation is that we would have a continuing trend of bringing these deficit numbers down.

As to why we focus on 2009, rather than 2006, we're being conservative. The budget window is a five-year window; the President has spoken about cutting the deficit in half within five years, and we want to be sure it's a realistic goal that is well met. And as you can see from these numbers, it is well met.

Q I know you just said that you think that if you had extended that out, that the trend would continue. The Congressional Budget Office shows -- says that if you make the tax cuts permanent, actually the trend would reverse and we'd start seeing larger deficits. I'm curious why you think you shouldn't budget beyond five years, but you should be making policy prescriptions out well beyond five years -- in 2011, President Bush won't even be President, even if he is reelected.

DIRECTOR BOLTEN: Well, the policies that are good policies are policies that ought to persist. And that applies especially to our tax code, on which people use to plan to make their investments. So it makes sense to put policies like the tax cuts that the President has proposed, put them in place permanently.

Five-year budgeting we've moved to because that's a rational period within which to view the budget. The budget estimators have very difficult jobs and they've -- but whether you're at OMB or CBO or Treasury, or wherever you are, the track record is not exactly perfect. The average miscalculation on a one-year basis, like trying to calculate for the year ahead, I think over recent years has been about $100 billion. On a five-year basis, it's been over $200 billion, and it gets much bigger as you go into the out-years. CBO has an interesting chart on that. So we're trying to do our budget calculations in a range where we feel we can be most confident and still do serious planning.

Q Are you hinging your ability to achieve this five-year deficit reduction goal on this budget enforcement mechanism that you're proposing? I mean, if this spending limit isn't set in law, will you be able to reach your goal?

DIRECTOR BOLTEN: The question relates to whether we can reach our goal if the budget enforcement mechanisms that we will be proposing are not adopted. Well, first of all, we're very hopeful that they will be adopted. I was up with a lot of the Republican members at their retreat at the end of this past week, and there was a great deal of support for the reinstitution of statutory budget enforcement mechanisms on the Hill.

But the answer to your question is, no, our projections are -- we will be able to show cutting the deficit in half, even if those mechanisms are not in place. Those mechanisms just make it easier to hit the path we're talking about, because they help the administration and the Congress enforce the discipline that these budgets propose.

Q Following that, will the pay-as-you-go provisions apply to all spending, or is it just non-defense, non-homeland related discretionary spending? And how important is it that OMB recommend a veto of spending bills that don't include those offsets?

DIRECTOR BOLTEN: With respect to the budget enforcement mechanisms, we'll be proposing caps on discretionary spending, and they will apply to all discretionary spending. That includes defense, homeland, and non-defense, non-homeland, together. And we will be proposing for mandatory spending -- that's where the phrase "pay-go" comes in, and pay-go means that all mandatory spending increases must be offset with mandatory spending cuts. So that's how that mechanism will work.

And the second part of your question?

Q Will OMB recommend vetoes to spending bills that don't include offsets?

DIRECTOR BOLTEN: It's early to speculate about vetoes that may or may not be in the offing for legislation that's still being cooked, but -- in fact, it's just beginning to enter the kitchen -- but we do expect to take a firm line on overall spending limits. We took one last year; we were well-supported by the leadership in both the House and the Senate, and the leadership of the Budget and Appropriate Committees. The President made it -- made an agreement with the leadership in both Houses on what the limits of spending would be. And the Congress, in the end, lived up to those limits.

We expect to be as tight or even tighter this year, and we expect to have good cooperation from the leadership again that should make any sort of veto threats unnecessary.

Q Unless I missed something, you haven't made any provision in this for any supplemental for Iraq, in the '05 fiscal year. Are you anticipating having one at some point during the '05 year? And can you give us some sense of how that money in the existing supplemental is being spent out and when you expect to run out of money?

DIRECTOR BOLTEN: Thank you for raising that. This is an important point. In '05, we are projecting a $364 billion deficit, about 3 percent of GDP. That's the budget we are presenting today. But that number does not include -- and we've been very explicit about that in the documents that you are getting today -- that number does not include spending for our ongoing operations in Iraq and Afghanistan. So we will need supplemental funding to continue that.

The Iraq reconstruction money that the Congress adopted this past fall is -- goes well beyond '04, through '05 at least, so we don't expect to need to come back to ask for any additional reconstruction money for Iraq. But to support the troops on the ground, the incremental cost to the military of actually conducting the ongoing war on terror in Iraq and Afghanistan is something that we will need to request supplemental money for.

You asked about what's our current spend rate, roughly. Right now in Iraq and Afghanistan we are projecting outlays in '04 that are well below $50 billion for the ongoing operations in Iraq and Afghanistan. So that -- I think you should regard that as kind of the upper limit for what might be needed in '05. Hopefully, the needs will be less, but it will all depend entirely on the security situation. And the uncertainty of the security situation is one of the reasons why we need to wait and request that supplemental at a time when the security situation is clear.

Do you want to follow up?

Q More generally, your deficit path here assumes very tight limits on spending. This year in particular, it's an election year, you're asking both parties on the Hill to vote on very, very painful budget cuts in a lot of domestic programs. You're not including things like AMT and other provisions that have wide bipartisan support that would extend out through the five year period and into the next 10 years.

How realistic should we consider these numbers, given the lack of provision for those things in these numbers?

DIRECTOR BOLTEN: The numbers are highly realistic. The estimates we've got here include permanent extension of the President's tax cuts. So that's all baked in. It includes the higher Medicare estimates that was asked about previously. And it includes, I think, almost all of the provisions we need to make for a realistic budget, with the exception of, in the short run, the costs for the Iraq and Afghanistan war. That's the one area where, I think, you need to add numbers to the budget -- but I think those are costs that are likely to be reflected in the early years of this five-year path, and costs beyond that I think are likely to be worked into the base.

Q So when do you anticipate asking for the supplemental from Congress?

DIRECTOR BOLTEN: We do not anticipate requesting supplemental funding during '04. This would be '05 supplemental funding, which we are planning to request in '05, when there is a clearer picture of what the security needs will be.

Q And just a general question. On what basis are the 63 -- 65 programs eliminated? What was the --

DIRECTOR BOLTEN: A variety of -- the question was, what basis was used to decide on which programs to eliminate or reduce.

There were a variety of bases, in some cases we say, mission accomplished, that this was intended to be a short-term program, it's done its job. In other cases we say, this is a program that is duplicative of other programs that we have in place -- especially when we have new and better programs to deal with the same subject matter. And in some cases, it's because the program is not showing the results it should be showing.

The President is focused consistently on results, his administration is focused on results, the budget is focused on results. If a program isn't delivering results for the American people, we're going to be proposing to either fix it or take it out of the budget.

Q Do you have any prepared estimates on aid to state and local governments? And how do you respond to the criticism from state officials that your budget cuts are effectively shifting budget deficits onto them, as well?

DIRECTOR BOLTEN: The question is about state and local governments. This budget continues to fund robustly those programs where we're working with state and local governments in areas that -- where we see those programs are working. There's a great deal of money that flows out now from the federal government to state and local governments. In some cases, that's being cut, where we need to tighten our belts, just as the state governments need to tighten their belts. But in other cases, it's being sustained and even added on to -- for example, in the area of education, where we are still flowing a great deal of money out to the localities, to public education in states all across the country to support the President's No Child Left Behind initiative.

This budget, while it's very restrained in the domestic non-security area, it does still include increases for some of the top priorities areas. That includes education. And you will see when you look at the total budget numbers, you will see that for K through 12 education, all across the country, the President's budget has increases again this year, for a total increase between '01 and '05 of nearly 50 percent. That's how much the K through 12 budget is up in the education area over the course of the Bush administration.

Similarly, increase in IDEA funding, up another billion dollars this year -- IDEA is the program for special needs students -- up another billion dollars this year, for a total increase over the course of this administration of 75 percent.

So where there are priority needs, the President's budget will reflect those. For items that fall lower on the priority list, or are not showing results, there will be cuts in this budget.

Q Is it your hope that future supplementals, like the Iraq -- will be offset by spending cuts?

DIRECTOR BOLTEN: It's rarely possible -- the question was, is it our hope that supplementals be offset by spending cuts. It's rarely possible when you have a real emergency to produce appropriate spending cuts that can offset something like a war. So, of course, we're always looking for spending cuts to offset additions to spending. But when you're fighting a war, it's hard to come up with cuts that can match that.

Q What percentage of that deficit reduction do you expect to be obtained through spending restraint or spending cuts?

DIRECTOR BOLTEN: It's hard -- it's kind of hard to separate it out what element is spending restraint, what element is economic growth. They both work together in an inextricably intertwined way so that the synergy of the two things, spending restraint and continued strong economic growth, in part through the continuation of the tax cuts, those are the two elements that combine most potently to bring our deficit path down, as it is.

Q If the transportation bill passes in anything like the House or Senate form, what will that do to your numbers? And given the difference between what you're asking for and what they're proposing, would you recommend a veto?

DIRECTOR BOLTEN: I don't want to be -- it's not my place to be putting out veto threats from the administration, or so on. But what we are carrying in the budget for transportation, for highways and mass transit, is a budget of $256 billion over six years. That's what we believe can -- at a minimum, can legitimately be taken from the Highway Trust Fund, and that six-year, $256-billion total is an increase over the last six-year total of 21 percent. So we are proposing a significant increase.

There are proposals on the Hill that go well beyond that; in some cases, more than $100 billion over the six-year period more than the administration's proposal. Those would jeopardize -- I don't think they would eliminate the prospect of cutting the deficit in half in that five-year period, but measures like that will jeopardize the goal. And that's why I expect the administration will be taking a firm line to keep that cost down.

Q On the retirement savings accounts, the lifetime savings accounts, and so forth, how hard is the administration going to push that? It wasn't mentioned in the State of the Union, as I recall, at least not specifically. And what kind of support do you have lined up on the Hill to move this?

DIRECTOR BOLTEN: The question is about LSAs and RSAs, lifetime savings account, retirement savings accounts, which were carried in last year's budget. They are being repeated in this year's budget. I think the President actually alluded to it in the State of the Union. I know it's always a disappointment when things aren't mentioned in the State of the Union, whatever your favorite project might be, but particularly for this President, the State of the Union addresses have tended to be more thematic, rather than list-oriented. So no one should draw any negative inference if your favorite project was -- or favorite subject matter was not mentioned in the State of the Union.

It does remain a priority for the administration, the enactment of the LSAs and RSAs. I know Secretary Snow has that, along with the tax cuts, making sure the tax cuts are sustained, at the top of his priority list for this session of Congress. And there is support, I know -- and some bipartisan support, as well. I know Congressmen Portman and Cardin, who have been leaders in this area in the past, remain interested in the proposals that the administration is putting out. I don't know if they're entirely on board exactly where we are, but I think there is a good prospect to move some serious legislation in this session.

Q Can I follow up? A larger question. You said that with Congress' help you'll be able to cut the deficit in half, which is a big caveat. What are the consequences of Congress not enacting this budget?

DIRECTOR BOLTEN: Well, the President proposes, the Congress disposes. They have the constitutional power to deal -- to dispose of what the final appropriations -- what the budget numbers are, and what the appropriations are. So it's a constitutional tautology to say we do this with Congress' help.

There's been good leadership there so far, and I think the leadership will be strong. They were this past year, and every indication is that they will again this year be strong in helping bring about a budget and appropriations that are, if not exactly congruent with the President's budget, at least in the same direction.

There are a number of people on the Hill -- and this came through loud and clear in the sessions I attended with Republican members in Philadelphia last week -- there are a number of members on the Hill who want to take the budget even a little bit tighter, in some cases a lot tighter. So there are different strains on the Hill.

We think we're setting a responsible path here toward getting that deficit cut in half over the next five years, and we're looking forward to working with the Congress, which I think will be receptive to this kind of budget.

Q Can I ask a question about the political calculations of this budget in an election year, a bit about guns and butter, I guess. What does the President say are his priorities? This is the most meaningful statement, I guess, he makes on his priorities this year, and he seems to be investing heavily in the military and security and asking for the American people to accept domestic sacrifices in return. Is that the nature and the tenor of his presidency?

DIRECTOR BOLTEN: This budget does robustly support the priorities that the President has set: defense, national security and protecting the homeland. The budget also supports robust economic growth, because that is the most important thing that any domestic side of the budget can do for the American people today. The most important thing we can do to get job growth back into this economy and to continue a path of prosperity is to keep economic growth going. So with the continuation of the tax cuts that so far have, in most economists' views, been extraordinarily effective in helping to restore economic growth, continuation of those tax cuts is a very important element of the President's program.

So the message is not far from what you say. It's national security, it's homeland security and it's restoring sustained economic growth.

Now, on other parts of the budget, there will have to be belt-tightening. I don't know whether you want to call it, sacrifice across the board, but there will have to be belt tightening in a number of areas. But there is still room in this budget, which is tight in that third category I mentioned, of non-defense, non-homeland, there is still plenty of room in that budget to fund priorities. And education is a very good example of the one I just mentioned. There is room in that budget to still robustly fund our education priorities and make sure that the vision of the No Child Left Behind Act is realized.

Q What are the proposed federal civilian and military pay raises and the philosophy behind them?

DIRECTOR BOLTEN: I hope I get this right, from memory. The question is, what are the proposed civilian and military pay raises. The military pay raise, I recall, is 3.5 percent, and the civilian is set at 1.7 percent, if I recall that right.

MR. SMYTHE: One point. five

DIRECTOR BOLTEN: Is 1.5 percent on the civilian side. But on the civilian side, there is also a fund set aside called the Human Capital Performance Fund. We're proposing $300 million in that fund, which can be used to support merit increases to give pay for performance in government, which is done all over private sector -- we'd would like to see it done in government.

So that money, in addition to the 1.5 percent increase, will be available for civilian employees.

Q Last year, you proposed $500 million in the Human Capital Performance Fund. By the time it passed, it was $500,000. What are you going to do to make sure this gets to --

DIRECTOR BOLTEN: I think we've got a -- we've got a good story to tell on the Human Capital Performance Fund. As I said, that's the way businesses all across the country, probably your business, as well, that your pay is tied, in some sense, to performance. I see heads shaking here. (Laughter.) I guess maybe journalism doesn't apply. (Laughter.)

Q Exactly. (Laughter.)

DIRECTOR BOLTEN: A typical feature in most businesses is you pay people more who are performing well. We should not have a civil service system where everybody just gets a big, or even moderately sized, automatic increase. We need to make sure that the people get the increases they need to keep pace with inflation, to keep the family income relatively stable.

But beyond that, what we need to be looking for is to reward the many government employees and, I know from firsthand experience, there are a lot of them who are working real hard, performing terrifically, and deserve that extra -- extra reflection in their paycheck for that good performance.

Q What is your rate of inflation that you're figuring for the next fiscal year?

DIRECTOR BOLTEN: For '05, we are projecting an inflation rate of 1.3 percent. Is that the number you're looking for?

Q Yes. What about this year, '04?

DIRECTOR BOLTEN: I believe it's 1.2 percent. Austin, check me on that. We'll come back to you and confirm that. I think it's 1.2 percent, 1.3 percent. What we see is -- our economists see continuing moderate inflation in the immediate term, and then inflation rising slowly, not as a result of these deficits, because we see the deficits coming down and putting less potential pressure on interest rates, but, rather, as a result of more robust growth in the economy. But, still, interest rates look to be on a very moderate path, and this budget supports that.

MR. SMYTHE: One point two percent is correct.

DIRECTOR BOLTEN: One point two percent is correct.

Q Do your budget proposals include the President's proposals for reforming Social Security? Do the projections include this?

DIRECTOR BOLTEN: The question is, does the budget reflect the President's proposal for reform of Social Security? The answer is that there's no formal proposal carried in this budget. The President has long advocated fundamental reform of our Social Security system, to put it on a sound and sustainable basis, through the use of personal accounts, which numerous experts agree is the right way to go. Those experts include the Bipartisan Commission -- that was co-chaired by the late, great Senator Patrick Moynihan -- that concluded that the right way to go with our Social Security system is to let people take a portion of their contribution into Social Security and invest it themselves, a portion of their retirement savings that they would own themselves and have some ability to direct what sort of funds it goes into.

That's the direction we're headed on Social Security. For an actual proposal, I think, will be -- is not reflected in this budget, will be forthcoming. But I think it's a subject of such great sensitivity and broad political interests, that we need to get the political debate going on it before there's an actual legislative proposal sent up to the Hill.

Want to follow up?

Q But given that those could cost more in the short-term, could you still reach your goal on having the budget deficits?

DIRECTOR BOLTEN: Yes, I believe we can. There are, in most of the formulations of these plans to give people personal accounts, there are transition costs. But I believe we can accommodate whatever transition costs there might be and still reach our deficit goals.

Q Just go back to the Medicare topic. You mentioned several times that it's no surprise that OMB has different numbers than the CBO, and that this is the way actuaries work. The President, on Friday, said that he learned two weeks ago, Secretary Snow made the announcement he only learned a week ago. What do you say to those lawmakers that say the administration is being disingenuous when they were promoting the $400 billion CBO number, and say, basically, they say we got duped?

DIRECTOR BOLTEN: The numbers that the -- HHS actuaries -- it's over at the Health and Human Services that the actuarial work is done -- the numbers that they produced, in fact, were only available, I think, maybe three weeks ago at the most -- three or four weeks ago at the most. I don't know exactly when they finished, but it was well after enactment of the bill.

So when Secretary Snow says, only learned about their estimate last week, that's true. They don't -- they didn't actually put out a formal estimate. When I say that there's no surprise that there's a difference in actuarial assumptions, that's true all the time between CBO and administration actuaries. And those who are experts in the Medicare legislation were aware that there were -- that the actuaries disagreed on some fundamental assumptions that could have substantial differential effects on how the numbers came out.

Q Right, but last summer, HHS had earlier draft estimates of different legislation -- admittedly, it's not the exact legislation -- but it put it at $551 billion.

DIRECTOR BOLTEN: Yes, and it was -- it was actually largely different legislation. Look, these numbers were moving around all the way through the course of the legislation. The numbers moved, I think, a good 10 percent in the last few hours, even by CBO's reckoning of this. So the fact that there are differences is not unusual in this area. And I go back to a fundamental point, which is that when legislation is being considered, regardless of what actuaries within the administration are calculating, or what their differences might be, it's the CBO number that counts, it's the CBO number that counts when the legislation is adopted, it's the CBO number that was recently reaffirmed. And by the way, when we send this budget up today, as we have just done this morning, what's going on right now is that CBO will be recalculating our proposals on their basis. And when the Congress considers our budget, it will be considered based on CBO calculations, not administration calculations.

Q I'd like to follow. Going back to Iraq and Afghanistan. You said there's no money for ongoing operations for Iraq and Afghanistan, and it's going to be in the supplemental.

DIRECTOR BOLTEN: Yes.

Q And in response to another question, you said the supplemental will not carry mandatory spending cuts or offsets. You say we could use a maximum of $50 million as a ceiling, based on past experience. If that's all accurate, how can you call this an honest budget?

DIRECTOR BOLTEN: The question confuses me. The budget we're presenting today is one that is, from my perspective, completely honest. And we've been direct, right on the cover of it. And I was direct in answering the question to say that one item that is not included in here in the '05 number is an additional number for Iraq and Afghanistan, ongoing operations to fight the war on terror. And it's not appropriate to put a number in there, because we don't know what it's going to be. It's going to be requested in supplemental funding.

Now, how does that affect the -- if you're saying, how can we say we're still on a reasonable path here, I think what you have to expect is that in '05 that that green line might be a little bit longer, and it may be that our current expenditures pose an upper limit on it. I don't know, but I would hope that we would be spending substantially less than we are today, but we don't know.

But I would also expect that by the time we got out here, into '08 or '09 on the budget, that we would no longer be needing supplemental expenditures in Iraq and Afghanistan, that whatever our ongoing needs there were, they would be worked back into the Defense base. So while we're being very direct in saying in that early year, in '05, something like that, you're going to see a slightly larger deficit than is shown on this chart, because we need to factor in Iraq and Afghanistan, I don't think it affects, substantially, the long-term projections. And I think those will stand on their own merits.

Q David Walker, the head of the GAO, often makes speeches where he's far more alarmist about the budget deficit than you seem to be today. Is he simply wrong, or does he see something you don't see? Why is it that the GAO seems to be so much more concerned than this budget suggests?

DIRECTOR BOLTEN: We do need to be concerned about the long-term picture. And I'm assuming that that's mostly what he's referring to. I think the budget path we're presenting here, out over the next five years, extending probably into the next 10-year period, is a responsible budget path. It's tight, but it's appropriate, and it meets our priorities.

Now, we do still face long-term problems with unfunded liabilities in our major entitlements, principally Social Security and Medicare. The Medicare bill that was just enacted, although it has larger short-term costs, I believe puts us on a path toward ultimately getting those costs under control, because it brings competition and choice into a system that has not had it before, which should bring not only better care, but care delivered more efficiently. So in the long-run, I think the Medicare bill that was recently adopted actually begins to put us on a path of bringing the Medicare system within better -- in a better fiscal situation.

Social Security I just talked about, that that system needs fundamental reform to put it on a sustainable basis. It's not something that's going to bite us in the next 10 years, but it is something that's going to begin to bite in the longer-term. I'm glad to know that a lot of people are talking about it, because this administration is keenly focused on it. We'd like to talk about it, because we need to get those long-term entitlements under control. The budget we're presenting today is focused on this five-year window and shows a very responsible path.

Q On cutting the deficit in half, the current CBO numbers show that by '09 it would be $268 billion, which is virtually in half. So what are you doing here that wouldn't have already been happening?

DIRECTOR BOLTEN: You mean the CBO numbers?

Q Yes.

DIRECTOR BOLTEN: The CBO numbers, by law, they're required to make some assumptions that in many cases are not particularly realistic. The CBO numbers do not include the permanence of the tax cuts, which we are confident we will be able to achieve, because we think that the majority of the members of Congress will realize that the exact wrong thing to do at this moment in our economy is to plan on a tax increase, which would choke off recovery and make our deficit situation look a lot less attractive in the long run than it now is. And CBO is also required to assume that whatever supplemental spending we're making continues out indefinitely. So they take the $87 billion supplemental spending bill that the Congress passed this past fall and they say, it continues indefinitely. And that's not a realistic place to be.

Now the fact that they've arrived at a similar place in '09 suggests that we're operating in roughly the same range of economic assumptions, which are the most important elements in improving our deficit situation. But it's not something that happens automatically. It needs to happen with a strong pro-growth economic policies and with some spending restraint of the kind that's reflected in the President's budget.

Q At the time the Congress passed the Medicare bill, was there an estimate by the Medicare actuaries that indicated that it would be more than $400 billion, at that time?

DIRECTOR BOLTEN: I don't believe they completed their estimate until well after the Medicare bill was actually signed into law.

Q On the 65 programs, what's the savings on that in total, the ones that have been eliminated?

DIRECTOR BOLTEN: We do have a number on that, and --

Q The ones that are eliminated, 65 of them have been --

DIRECTOR BOLTEN: Yes, 65 terminations. There is a number associated with that. It looks like there's a lot of interest in it, so let's get it right.

MR. SMYTHE: It's $4.9 billion.

DIRECTOR BOLTEN: Four point nine billion. So there's a savings associated of $4.9 billion from the terminations of those programs.

Q One year?

DIRECTOR BOLTEN: Yes, one year savings.

END 11:21 A.M. EST

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