Washington, D.C.–(ENEWSPF)–February 14, 2011 – 12:31 P.M. EST
MR. BAER: Hey, everybody. Thanks for coming. I’m Ken Baer from the Office of Management and Budget (OMB). Austan Goolsbee, the chairman of the Council of Economic Advisers, will go over the economic assumptions and take some questions, and then Jack will come up and he’ll say a few remarks about the budget and then take your Q&A.
MR. GOOLSBEE: Thanks, Ken. I’m Austan Goolsbee. As the prelude to the budget we thought we’d just get the assumptions out of the way at the beginning. I would make four short points. The first is that the forecast that we use has to be locked in for planning purposes as of mid-November of last year, so it predates the tax deal. As you know, many of the private forecasters upped their forecast based on what was in the tax deal, and most of that is not in the forecast.
Number two, real GDP growth on a year-over-year basis, the administration is forecasting 2.7 percent in 2011, 3.6 percent in 2012, 4.4 percent in 2013. So our growth rate for 2011 is a fair bit lower than the consensus of private forecasters surveyed by the blue chip or by the Survey of Professional Forecasters.
The longer run we anticipate catching back up, that the potential GDP of the United States has not been severely damaged by this recession. So our medium-run forecast is a bit faster. It’s within the so-called central tendency that comes out of the Fed FOMC forecast of last November, which is a — the reasonable range in which they drop off the highest and lowest. It is rather in the center of that central tendency.
So over a five-year period — the typical recession since World War II has been followed by a growth rate of a little less than 4.2 percent over five years. Our forecast is about 3.8 percent over five years. So it’s slower than the typical recovery and we assume that because it’s harder to get out of a financial recession.
The third point I’d raise is that the unemployment rate in our projection is that at the end of 2011 it would be 9.1 percent; by the fourth quarter of 2012, it would be 8.2 percent. That was obviously made in mid-November. The unemployment rate currently stands at 9.0 percent. Unemployment is likely to fluctuate through the year, but any revisions that we have will come out at the mid-session review.
Finally, for inflation we’re projecting that in 2011 the CPI inflation will be 1.3 percent — so actually decline from where it is now. It’s very much in line with other professional forecasters, and that in 2012, 2013 and beyond we’d go back to something like the Fed’s and others’ 2 percent inflation level.
That’s basically the overview of what the assumptions are. If anybody has questions I can answer those. Otherwise we’ll switch.
Q Why not — you kind of knew in mid-November what a likely tax deal — why not have two? I mean, it seems — explain why you didn’t say, look, here’s one if we don’t get a tax deal, here’s one if we do get a tax deal.
MR. GOOLSBEE: Well, as you know, running the budget machinery is extremely onerous. You can only have one forecast. So we have to make a policy forecast. As of mid-November, we had included the middle income part of the tax cuts getting extended for a year. But as you also know, we did not anticipate that the tax deal — in November, we did not anticipate the deal would be as significant as it turned out to be, just as most of the private forecasters did not.
Q What would that do to — right now you estimate the deficit at $1.6 trillion.
MR. GOOLSBEE: I don’t have the — we have not gone back to figure that exact thing out. There is in the analytical perspectives volume a sensitivity analysis of if the GDP growth rate is better or worse by one percentage point, what is the impact on the deficit. I think it’s about a little less than $100 billion. But it’s better not — rather than speculate about changing what the forecast should be, we update it at the mid-session review, so we will see what happens over those six months.
Q Is the CBO number probably more accurate?
MR. GOOLSBEE: More accurate?
Q On the deficit. On the deficit projection that they made of this year.
MR. GOOLSBEE: Look, into the deficit forecast go many things — the GDP, the unemployment rate and a number of others. On the short-run GDP forecast, it’s fair to say that our forecast predates the full budget deal of December in the tax deal, and the blue chip and over others have revised up since they’ve come out since then.
Okay, with no further questions, I will now turn over to the main event.
MR. LEW: Thanks, Austin, for reviewing the economic assumptions. And now I’ll say a few words about the budget and then be happy to take your questions.
The budget that we sent to Congress today is a responsible plan that shows that we can live within our means and we can also invest in the future. It cuts spending, and crucially, it cuts the deficit.
We have more than a trillion dollars in deficit reduction — two-thirds from spending cuts. And because of our policy it puts us on a path so that we’re going to reach a sustainable deficit by the middle of the decade. The government will no longer be adding to our debts, and as a share of the economy, we’re going to stabilize the deficit. We’ll, in short, be paying for what we spend every year. The goal, to put it simply, is for the deficit to be in the range of 3 percent of our economy by the middle of the decade.
It’s important that reducing the deficit is a crucial step for us to take. But at the same time, we need to invest in areas where if we don’t invest, it will undermine the ability to generate economic growth in the future. So we need to out-educate, out-build and out-innovate so the economy will create jobs in the future.
Let me go through some of the details of how our budget does this. On the discretionary side, the domestic discretionary side, we have a five-year freeze, which will save $400 billion over 10 years. That brings spending on this part of the budget down to the level that it was at as a share of the economy when President Eisenhower was in office.
Part of the cuts are in outdated programs, things that are duplicative and things that we would choose to cut just because it’s the right thing to do. Part of the cuts are not going to be in that area. They’re going to be things that we wouldn’t do but for the fiscal challenges we face. And we’ve enumerated many of them: reductions in community development block grants by $300 million; cutting the community services block grant in half; cutting the Low Income Home Energy Assistance Program by $2.5 billion; cutting the Great Lakes Restoration Initiative by $125 million. These are all things that in a different environment we wouldn’t be looking at making those kinds of reductions.
We take a billion dollars out of grants to large airports, almost a billion dollars from state revolving funds for water treatment plants. And in total, we have more than 200 terminations and reductions. And we have a book which I’m sure many of you will get a copy of that lists how we get $33 billion in savings just in this year alone.
The savings are not limited to the domestic area. In the national security budget, while we’re not freezing budgets in that area, we are making serious reductions. In defense, which has been growing faster than inflation for more than a decade, we can no longer afford to stay on that path. Our budget brings spending on defense down to a no real growth level. And that means $78 billion of savings over the next five years. It means that we’re going to have to reduce certain weapon systems that we can’t afford and that the military doesn’t believe we need for our national security — things like the C17 tanker aircraft and the Marine Expeditionary Vehicle.
If you look at the spending for Iraq and Afghanistan, they’re not in the base defense budget — they’re in the overseas contingency operations budget. And these actually come down considerably in 2012. Because of the withdrawal of troops from Iraq, and if you look at the savings in that area, overall spending in defense goes down by more than 5 percent.
Now, we’re not going to be able to get back into the kind of sustainable situation that we need to just by cutting discretionary spending. The budget looks at other areas as well. It looks at mandatory spending and it looks at revenue. I’d like to just highlight a couple of areas where we have savings in those parts of the budget.
Every year for the past many years, action has been taken in two areas. One, the Alternative Minimum Tax, where there’s a bipartisan consensus that middle-class taxpayers shouldn’t fall under the Alternative Minimum Tax. Another is in Medicare, where there’s a bipartisan consensus that we shouldn’t cut what we pay doctors in the Medicare program by almost 30 percent, because if we did they might stop treating Medicare patients.
The problem is the way we’ve dealt with it for most of the last decade is simply to put the expense on our national credit card and to kick the can down the road. Well, this budget says we can’t do that anymore. And in the case of the Alternative Minimum Tax, we have a specific offset that pays for an extension of the provision that would keep it from hitting middle-class families for three years.
What it would do is it would reduce the value of itemized deductions in the top income bracket, to cap them at 28 percent, which is what people in the bracket below get, and it would take the value of itemized deductions back to where they were in the Reagan administration.
We think that that is a responsible thing to do. It makes — it is a first step towards dealing with cutting back on the spending that goes on in the tax code. And we’ve put that in this budget as a way to pay for the Alternative Minimum Tax for the next three years.
In the case of the Medicare provision, we have $62 billion of specific savings in dozens of different parts of the health budget, which would pay for a two-year extension of the so-called doc fix. Now, last year, in December, Congress worked on a bipartisan basis and we worked with Congress to pass a one-year extension and pay for it. That was the first time it was paid for. It didn’t have to be paid for under the budget rules, but it was the right thing to do.
What we’ve done in this budget is we’ve said, here are the offsets to pay for it for the next two years, and now we need to work together so that we can deal with it on a longer-term basis so that it doesn’t become just another year-to-year charge.
I’d like to talk about a couple of aspects of the budget that I call the kind of stewardship area. One is the Pension Benefit Guarantee Corporation. We’ve seen over the last few years that the risk to the federal government, risk to taxpayers, of having to bail out entities is something that we really want to avoid in the future.
And in our budget we have a proposal to give the Pension Benefit Guarantee Corporation the ability to set premiums, which are now very low, in a way that matches the default risk. This would give them the ability — participation is voluntary in the Pension Benefit Guarantee Corporation, but it would shift the burden of the risk from the taxpayers back to the companies that get the benefit. And it would very much reduce the risk that there be a need for a taxpayer bailout in the future.
In unemployment insurance, this has been a very tough time for the unemployment insurance trust funds. Each of the states has a fund. They’ve been heavily, heavily burdened by the recession. We have a proposal that would have a two-year moratorium on federal increases in unemployment insurance taxes. And I should point out because the trust funds have — state funds have borrowed from the federal government, those automatically would go into effect without the moratorium.
And we’ve said give the states two years to get their funds back in solid shape. That means that going into the next time they need to draw down because unemployment is an issue, they’ll be in a financial position to do so.
And then in 2014, once we’re well into the recovery, we’ve proposed that we adjust the wage base in the unemployment system so that in real terms it stays where it was the last time it was set in 1983 under President Reagan.
Let me go through a few other areas of the budget. On the tax side, the President has called on Congress to work with the administration on corporate tax reform, to simplify the system and eliminate special interest loopholes. This would not only level the playing field, but it would give us the ability to lower rates and make American companies more competitive internationally.
And while it does not contribute to the deficit in the short term, the President in the State of the Union and in this budget continues to say we need to work together to find a solution to the long-term issues in Social Security to make sure that this generation and the next generation can rely on their benefits. And he calls for us to work together in a bipartisan way to keep this compact with the future.
Now, this is a budget that lives within our means so that we can target critical areas where we need to invest in the future — in education, in innovation, and in building our infrastructure.
Even in the areas where we invest, there are very tough choices in this budget. And I’d like to talk for just a minute about education and the Pell Grant in particular. Pell Grant is the most important way that we open the door of opportunity to college for 9 million students. It is part of what we need to do in order to have a workforce that’s trained for the jobs of the future. And the costs of the Pell increases have been rather dramatic, more so then they were originally expected to be.
In this budget, we took a number of very difficult decisions to protect the Pell increase to make sure that there doesn’t need to be pressure to reduce those annual grants, which are now $5,500. And what we’ve done is we’ve put in a number of provisions — two in particular that I’d like to mention which have substantial savings that will make it possible to protect those Pell grant increases.
One is a provision that says students should get Pell grants for the school year, but not for summer school. Historically, Pell grants were only available once a year for the school year. A few years ago, the program was changed so that summer school was treated as a separate award. It was expected to cost a few hundred million dollars. It cost several billion dollars. We can’t afford that. We’re not sure exactly why the cost grew that much. We need to protect the basic Pell program. We say summer school shouldn’t be eligible; one Pell grant a year.
Another proposal — graduate students get student loans; we need to make sure they continue to have access to student loans. We need for access to higher education to be as easy as possible. But under the current law, no interest starts to build up until they graduate. We have a proposal that would start interest accruing while in school, but it wouldn’t be paid back until graduation.
In K through 12, we have a variety of reform proposals that really reward innovation and they reward success. We consolidate dozens of K through 12 programs into a much smaller number that emphasize competition and really emphasize rewarding things that work. We actually eliminate 13 education programs outright.
To invest in the industries and jobs of tomorrow, we invest $148 billion overall in research and development. And this supports our goal of putting a million electric vehicles on the road by 2015, doubling our share of electricity from clean energy by 2035, and reducing energy use in buildings by 20 percent by 2020.
In part, we pay for this by eliminating 12 tax breaks that now go to oil, gas and coal companies, which will raise $46 billion over 10 years.
We also have a comprehensive surface transportation bill, which creates hundreds of thousands of jobs in the short term and has a $50 billion up-front investment. This is going to support projects of national importance, including high-speed rail, and it consolidates 60 duplicative programs which are often earmarked into five.
Now, the investment here is significant, and it will require that we work together on a bipartisan basis to make sure that it doesn’t increase the deficit.
The budget also has a number of reforms which change the way Washington does business: putting more federal funding up for competition; cutting waste and reorganizing government so that it better serves the American people. The budget cuts more than $2 billion in administration overhead, things like travel, printing supplies and advisory contact services. It embraces the competitive grant programs based on the Race to the Top model and applies that to programs from early childhood education through college. It applies it to allocating grants for transportation, for workforce training programs, and for the way we encourage commercial building efficiency and electric vehicle deployment.
We also set up a process that will enable us to quickly dispose of excess federal property so we can actually save billions of dollars by not holding on to property that we no longer need and that could be used on the private market.
Cutting spending and cutting our deficits is going to require us to put political differences aside. It’s going to require that we work together. We need to make sure that we’re making the kinds of cuts that we need to, to get our deficit under control, but we also need to make sure that we’re not cutting the things that are vital to the future growth of the economy and how we create jobs for the future.
We have a responsible budget, which we think does exactly that. It puts us on a path towards having a sustainable federal budget where the deficit comes down to a level where we’re not adding to the debt by the middle of the decade. And in short, it’s a program where we will live within our means and still invest in the future.
Why don’t I stop there and take your questions.
Q Thank you. This budget does not incorporate the main elements from the Erskine Bowles commission created last year. And I’m wondering, was there a political calculation made that the atmosphere just isn’t right, right now, for talks on comprehensive deficit reduction?
MR. LEW: Well, first, this budget does accomplish what was the task given to the commission, which was to bring the deficit down to 3 percent of the economy so that we would have a sustainable level of federal financing in the future.
Secondly, the budget draws heavily on the ideas of the commission in areas like corporate tax reform, which I mentioned; medical malpractice reform; even the government reorganization and handling of surplus property. So there are many, many provisions in this budget that reflect the good work done by the commission.
I think the commission did something very important. It put on the table a lot of ideas, brought some degree of bipartisan consensus, but even more important, civil discussion over things that have been very contentious. And the President in this budget, in the State of the Union, tries very hard to distinguish between this down payment and working together on the long-term solution. This budget is a down payment. It’s a very meaningful down payment. If we can accomplish what is in the budget, we will set both our federal budget and the economy on course in the right direction.
In the areas where — for the long-term future, there’s been a lot of discussion on things like Social Security — should it be in the budget, shouldn’t it be in the budget. I want to make clear, first, that Social Security isn’t contributing to the deficit in the next five or 10 years. We’re considerably beyond that. Social Security is something that we need to address in the long term to make sure workers in this generation, retirees in this generation and the next generation, can rely on their benefits.
The President said in the State of the Union and we repeat in the budget that the President wants to work together on a bipartisan basis to have a conversation about how we can do this in a way that meets our values. So I think that there’s a lot of things in this budget that actually prove that the commission did very important work and that there is still a lot more work to do.
Q Just a follow-up to that, on the tax reform. Will the President call for talks with Republicans? How does that process get going?
MR. LEW: Well, the process gets going today with the President sending a comprehensive budget to the Congress. It’s a comprehensive budget, which puts all areas of the budget on the table. It accomplishes the goal of stabilizing our deficit. We now look forward to working with the Congress on all the areas that it covered.
Q Thank you. On Medicare payment to doctors, it cuts $62-$63 billion. Of that, it looks like Medicaid provider taxes are the biggest line item — about $18 billion — and the second one is PhRMA cuts of $12 billion of pay for delay repeal. Could you explain those two budget items please?
MR. LEW: Well, there’s $62 billion of savings in this area. A little over $30 billion from provisions which we consider to be program-integrity provisions. There’s 16 of those provisions. They’re things like making sure that if a health provider has been paid improperly, we collect that back in a process called recoupment. It puts in place mechanisms to make sure that we only pay once for each service and that each service we pay for is covered in a legitimate charge.
So I think all of those — that’s roughly half, a little more than half of the savings — are things that are program-integrity issues, which I would hope are not controversial in terms of either the political debate or the industry.
In the area of Medicaid, there’s two provisions that have particular savings. One is a provision that says that if states are coming in for federal matches we should make sure that we’ve calibrated the match so that there’s a real dollar being paid for a real dollar that’s being matched. And that’s what the provider tax would do.
Another piece of the Medicaid savings says that as we look out beyond the implementation of the Affordable Care Act and as we look to a time when there’s going to be less uncompensated care, we need to calibrate what’s called the disproportionate share payment to make sure that we’re actually giving payments to providers who are treating people with uncompensated — who don’t have insurance.
So the third basket is — in the area of pharmaceuticals — essentially saying the Medicare and Medicaid should have access to things like generic biologic drugs. So I think all of these fit into a category that are in an area — where everything you do people study closely — should be a place where we can have a kind of serious discussion and accomplish them.
Q What sort of cuts are you proposing for veterans care, especially G.I. Bill, housing, medical or therapeutic expenses? And do you know if the Republicans are also proposing any veterans cuts?
MR. LEW: Well, we have substantially funded the veteran programs. I’d have to get back to you on all of the specific details, but we have not cut back in a serious way on benefits to veterans. We’ve worked through the process of forward funding to come back in and backfill where the forward funding was not adequate to fund levels of current need.
So it’s a little bit confusing sometimes to look at the VA budget now because it comes in two pieces — the part that’s advanced appropriated — and what we did in this budget was in a year — I think this may be the first year that this has been necessary — we’ve then trued up the funding so that the VA actually has the money that it needs, not just to continue to provide benefits but to do some of the very important reforms that the VA is doing to improve the quality of its service and the way it does business.
Q — and what about Republican —
MR. LEW: I have to say that I’d have to get back to you because this weekend I did not actually have time to look at each of the specific proposals that was on the table.
Q Thanks. The President talked during the State of the Union about how this was a Sputnik moment for the U.S. And I’m wondering, beyond the $148 billion, if you had to add up everything that you think falls into Sputnik spending, what would it be? And if the Republicans don’t get it, what’s your — in your opinion, what’s your recourse?
MR. LEW: I can’t give you a number off the top of my head. I think the $148 billion in research and development is certainly the core of it. But education is part of it as well. I just came from a school in Maryland where the President announced the release of this budget and it was pretty exciting to look out at hundreds of students whose favorite subject is science, math, engineering. They’re getting the education that they need to be able to get the jobs of the future and to be able to build the economy of the future.
So it’s not just the R&D part of the budget. It’s also the education part of the budget that really is part of how we prepare to be able to stay at the cutting edge. We spend more than any other country on R&D. One of the things that we try to do in this budget is target our spending to those areas where, with a little bit of a push, the United States can get a step ahead, so that we can be the most competitive going into the future.
We can get back to you with some specific numbers that pull together different parts of the budget.
Q Mr. Director, it was interesting to hear you say that Social Security isn’t contributing to the budget deficit, but why is Social Security still on the table? Majority Leader Reid said, quit picking on Social Security. And isn’t it actually solvent until 2037 with the money that seniors have paid into it?
MR. LEW: What the President has said is that we need to look ahead and we need to make sure that people who are working today can count on the benefits being paid when they retire. It’s not an urgent moment to do it. There’s not anything that’s going to happen this year or next year. But it is the right thing to do, to do it way in advance and to look far down the road. And it is not something that would affect the short-term budget horizon, but it’s still the right thing for us to do in the right way. And the President laid out in the State of the Union and in the budget principles that we think reflect the right way.
Q You said it’s going to require all sides to put their political differences aside, but you have to know that both sides of Congress are very, very entrenched in their views and that House Republicans intend to cut $100 billion just in the next seven and a half months. So isn’t this really wishful thinking on your part?
MR. LEW: I think that it’s fair to say that every side begins with its deeply held views. We have our deeply held views; they have their deeply held views. I think it’s also true that you, looking ahead, have a hard time predicting where the moments of coming together are.
Last November, no one was predicting that the Congress and the President would come together and do something both important and historic in passing the tax bill that we passed last December. Both sides had to come off of positions that, if they pushed them, would make it so that there couldn’t be an agreement, and find that space in the middle where there could be an agreement. I think that’s the pattern of how you work in a bipartisan way. It was true in the ‘80s, it was true in the ‘90s, and it’s true today.
So I think that we’ve put down a reasonable plan, a comprehensive plan. It’s our plan. And we understand that that’s the beginning of the process. We’ve also said that we don’t have a monopoly on all wisdom and we look forward to working with the Congress. There’s no doubt going to be many challenging moments, but I think that we have to work together, work, frankly, in the interests of the American people to reach agreements where we can agree.
Q And the President said that he’s willing to work on Social Security with the Republicans, but why not just take the first step in this budget and do something about it?
MR. LEW: You know, there has been a lot of discussion about what the best way to move forward is. History is a pretty good guide. And in areas which require bipartisan consensus, I think you’d be hard-pressed to find a moment where either side going forward with a dramatic plan has actually moved the process forward. I worked on Social Security reform in 1983. I also worked on it in 1981. When a President came forward with a proposal, it reflected that President’s point of view, and it set the process back, not forward. It took years to get back to the point where the parties could come together, and that was facing an imminent financial crisis at the time.
I think what the President has tried to do is set a tone for the discussion so that we can engage in a responsible way. I believe that’s the way you have effective discussions. So I think we’ve done what’s most constructive, most productive.
Q Thank you. I have a question. You said that this reflects the President’s priorities on education and innovation and various things. What would the President say to a low-income elderly person in Massachusetts who can’t afford to pay their heating bill? Why are you investing in wireless and not helping her pay her bill?
MR. LEW: You’re asking why we make a reduction in the Low Income Home Energy Assistance Program, and I have to tell you this is a very hard cut. This is a cut that has real impact.
If you go back to 2008, the program was funded at roughly $2.5 billion. We had a huge spike in energy prices, and the program doubled to $5 billion. We’re now at a price level that’s close to where we were before that increase. Looking at our fiscal challenges, we can’t just straight-line the program at $5 billion. So we have gone back to the level it was at when prices were roughly the same.
Now, this does have impact. Again, I hate to talk about history or the old days, but I helped create the Low Income Home Energy Assistance Program when I worked for Speaker O’Neill in the late 1970s. It’s a program that’s done an enormous amount of good for an enormous number of people. It was never meant to be an entitlement program. It was meant to be a grant program that the states administered. Its funding level has fluctuated based on needs.
Balancing our fiscal challenges and the funding change from 2008 to now, we made the tough decision. And we have said in our documents in the budget that we will keep our on eye on where prices go and what need in the future is, but we can’t just kind of cruise at a historic high spending level when we’re trying to make these very difficult savings.
And in terms of investing in the future, we’ve I think been very clear that we need to create more opportunities to invest in education, in innovation, and in building the infrastructure for the future. So we’ve had tough tradeoffs.
Q Actually speaking of those very things, could you give us a one-year 2012 number for new — these types of new investments? What is the total amount for 2012? Are these temporary programs, permanent programs, or a mix? And if so, what would be the 10-year cost?
MR. LEW: I’ll have to get back with you with exact numbers year to year. But, in general, appropriations are annual requests. So we have the 2012 funding levels in our budget. In the case of the infrastructure program, what we’ve proposed is reauthorizing the surface transportation bill, so that would be a multiyear commitment. As far as what the total comes to, we can get back after.
Q You said in your opening of your remarks that we were going to be paying for what we spend every year with this budget. But looking specifically at the SGR fix, most of the savings that you — the pay-fors for that fix are coming in the out-years, not in the years where you’re actually going to be fixing the payment level. Presumably then you’re going to have to find another solution, which seems like turning it into the same year-to-year problem we’ve had with the SGR payment rate in the first place. Can you speak to how that’s consistent with the principles you laid out?
MR. LEW: So under the way budget scoring rules work, you typically look at the savings in the entire window, and you can apply them to spending in any one of the years. So by locking in savings over 10 years, we are actually paying for the two-year extension.
As far as the future goes, we are going to need to redouble our efforts in this window where we have three years of paid-for fixes to work together to come up with a sensible reimbursement approach, which we pay for and fix on a more permanent basis. Building in a window between the law enacted in December and what we’ve proposed of three years should give us the opportunity to do that. Where you have bipartisan consensus that the law taking effect doesn’t make sense, three years should give us the time to figure out how to fix it and pay for it.
Q But are you paying for it — you’re not paying for it as you’re spending it? You’re paying for it afterward?
MR. LEW: No, we’re paying for the two-year extension. We’re fully paying for the two-year extension. So that — I’m distinguishing that from dealing with the permanent fix. It’s a very significant down payment.
Q It appears from the aggregate numbers that you’re anticipating a growth in the federal workforce of about 15,000. Given the emphasis you place on the programs you’re cutting, to what would you attribute the growth in general? And are there any specific areas in which you expect expansion?
MR. LEW: There are many agencies that are shrinking. There are a few that are growing. And the growth is in areas for the most part that relates to new activities. So, for example, implementing financial regulatory reform requires new personnel at the Treasury Department, at the SEC, at the Commodities Future Trading Commission. So I think if you look agency by agency, you will see that it’s not a story of broad-based growth; it’s in most cases pretty concentrated.
Q I have sort of a one-year question. At a time when your friends in the House are talking about cutting like $60 billion this year, it looks like your policies are actually increasing deficits in 2011 and 2012. And I’m wondering if that is a reaction to the state of the economy, intentional, and if you think it risks sort of antagonizing the process — because Republicans are sort of reacting with a certain amount of disappointment to this document.
MR. LEW: Well, 2011 is not a set of policies; it’s really the effect of policies already made. And we had a bipartisan agreement in December to pass a very important piece of legislation, which is one of the reasons we’re seeing greater economic growth and faster job creation. So it was the right thing to do, but it had a clear consequence. It increased the deficit in 2011 and it increased it in a number of ways.
First, we have things like the payroll tax holiday, which is putting $1,000 in the average family’s checkbook to spend this year. It also extended provisions that would have expired, and had they been extended for a normal year, some of the expense would have fallen into the prior fiscal year, and it concentrated all of the expenses in fiscal ’11 — so the last part of the calendar year and the beginning of the next calendar year.
So there are a lot of things that are making the ’11 deficit go up. But it’s not policy that we’re making in this budget; it’s really a reflection of policies made.
Q What about ’12?
MR. LEW: And in ’12, we have — there is some tail to the tax agreements; some of the provisions were two years. And we’re seeing the end of some of the spending associated with the extraordinary measures of the last few years.
We’ve said, and I think even the commissions have said and there’s a general agreement, that throwing the brakes on right away is not the challenge. If we were to be able to make enormous savings right away we would say that then you have to start worrying about what the impact on the recovery is. The question is what is happening as you get into 2012, into 2013, are we putting in place the policies that will get us to that sustainable level of deficits.
We think we’ve put them in. We think we have a sensible mix of policies. They do grow over time, but they — once we lock in the five-year freeze, it has real impact when you get to year two, three, four and five. The path in defense has real impact as you get into years two, three, four and five. And the entitlement savings, for example, the $62 billion, go on, as do the things like the tax provisions that pay for the Alternative Minimum Tax.
Q Jack, could you just walk us through how the two-thirds, one-third calculation is made? If you look on — to the $1.1 trillion in deficit reduction, I can see the freeze money. Are you counting the debt service money as a spending cut? And where are the other spending cuts beyond that —
MR. LEW: The spending includes the freeze, the mandatory savings, and all of the other spending programs. It does include interest on the debt, which is a spending item. On the tax side, it’s a net number, so it is showing that a third of the part of our $1.1 trillion deficit reduction is the net tax increase.
We have a considerable number of provisions that would reduce revenue as well. So when you go through the tables with detail, there are some things that raise revenue, some things that lose revenue, and it nets to the number that gives us the savings, which is one-third of the $1.1 trillion.
Q — in tax cuts and then —
MR. LEW: I can walk through all the numbers but I just gave you the structure of it. It’s net savings and net tax cuts, with the interest payments being counted as spending.
Q Thank you. Can you — it’s a little confusing in four general categories, and don’t be specific but maybe there’s some overall logic to it. When it comes to the wars, which you lay out in a table but then you don’t count in some ways toward your deficit reduction and you do in others — the wars, the SGR, the AMT, and the tax cuts, middle class and wealthy — it’s a little confusing what the theory is here in terms of what’s in baselines, what’s in the budget, what’s counted toward the deficit, et cetera. It would take too long to go through each one, but is there some overall way of you explaining how you laid these out?
MR. LEW: That’s a good question and I concede it is a little confusing. There’s a lot of aspects of baselines that are very confusing. The baseline assumes that the middle-class tax cut, where there was a bipartisan consensus to extend it, is permanent, and that the upper-income tax cut is not extended. So we don’t count the savings from letting the top brackets go back as part of our savings. That’s in the baseline.
On the war spending — spending for Afghanistan and Iraq is in a category that’s called overseas contingency operations. We do see that coming down from ’11 to ’12, and that’s real reductions in outlays. We have projected in the future that — we don’t know exactly what the levels will be, but there will be some level of ongoing activity, and we have estimated that to be $50 billion in the out-years.
So as we get to each year, that will either be a little higher or a little bit low depending on where we are. But the budget is not the place to project a very specific, precise estimate that implies when your troops move and what your levels of activities will be out in the future.
On SGR, we assume that it will be fixed. We’ve put it in as savings going forward.
On the AMT, we have only taken credit for fixing the part of AMT that we’ve provided offsets for. So in the baseline the AMT is assumed to be fixed, but it’s not assumed to be paid for except for the offsets that we’ve provided.
So I hope that helped walk through them in a clear enough way.
Q You mentioned earlier that you hadn’t read any of the Republican counterproposals —
MR. LEW: I didn’t say I hadn’t read any — I said I hadn’t read all.
Q You gave yourself an early Valentine’s Day present. In terms of what you’re facing in these negotiations, there are deep divisions within the Republican conference in the House. Do you feel at the moment that you have a coherent bargaining partner? And how would you sort of rate the complexity of these upcoming negotiations with ones in the past?
MR. LEW: I think that we need to see how things play out this week as the House takes up the 2011 appropriations bill. It’s clearly a very deep set of reductions and there are provisions in it, some of which overlap with things that we would look at, other of which we would take issue with. I think it’s a little early for us to be kind of responding until we know really precisely what they’re going to do.
Then the Senate has to act. This is the first step in the process. And there will be the opportunity for the White House to engage. I think that it’s always complicated when you have a House and a Senate that are likely to have different views and a White House that will have to work with them to reach a consensus. I think what we do have agreement on is that it would not be prudent to shut the government down. And we look forward to working through these differences once things settle down a little bit more in the House, and then in the Senate.
Q But there seems to be some difference among Republicans in the House — we’ve got a couple of people out today saying that they want the leadership to push it to that brink. What would you say to those folks?
MR. LEW: I think that the challenges of managing either the House or the Senate is the responsibility of the leadership. They’re working to deal with getting a bill through the House. I’m going to wait until they’ve taken action.
Q Thanks. A lot of the message of the budget seems to reflect the theme of the State of the Union, “winning the future.” If you were one of the 8 million or so Americans who are unemployed who ask what’s in this budget for me in sort of near-term, short-term benefits, job creation benefits, what would you point them towards?
MR. LEW: Well, first, the fact that coming out of December it was a matter of enormous importance for us to extend unemployment insurance benefits, so that we’re going into this year having a system that still provides a safety net for workers who are struggling is a very important backdrop.
Secondly, if you look at our infrastructure proposals, the fact that we look for a head start that would come at the beginning, is very much with an eye towards creating immediate opportunity.
I think that while we are very much of the view that there is a recovery underway, as Austan reviewed, and we are very much of the view that unemployment is going down, we’re not satisfied with where we are. We need to do better. We need to have the economy grow faster. We need to have more jobs created. And this budget is designed to deal not just with the short-term, but over the horizon to make sure that we have an economy that does provide those opportunities.
Q Can you elaborate how agencies can balance all the initiatives to improve the federal workforce with discretionary and pay freezes?
MR. LEW: You know, it’s going to be a challenge for every agency to work in very constrained fiscal — in a very constrained fiscal environment. As every family has to make choices and every business has to make choices, priorities will have to be set. And getting our priorities oriented around doing the things that are most important is going to be critical.
I don’t think it’s going to be easy. We have a great workforce that works very hard, and there are additional burdens being put on the federal workforce. We have tried to provide growth where those burdens can’t be managed within totals, but we also have to look internally to get administrative savings in most places. There are more agencies on the domestic side going down than up overall. And these are going to be challenging, difficult years.
Q Some of these cuts that you have already outlined, like LIHEAP and there are some things for clean water and sewage treatment, are relatively small programs where the cuts will really be felt. What made you decide to single out programs like that where there are, obviously, some much more expensive programs where $2.5 billion, the impact wouldn’t have been felt as much?
MR. LEW: We went through every item in the budget and looked for where there were savings that we could achieve. And in the case of some of these programs, we see proposals out there that would have deeper cuts. We have tried to strike a balance where we think the essential work can go on. And in the case of LIHEAP, I went through a rather detailed explanation of why the funding level was chosen.
I think if you look at the way we’re managing our resources in education, it really does underscore that even where we’re investing we’re going to have to make tough tradeoffs to live within our means and invest in the future. And it’s going to be challenging in many departments to contend with resources that are either frozen or shrinking, and challenges that are still important.
That’s why we think this is a budget that shows that we’re tightening our belt to live within our means; that we’re achieving savings in all areas of the budget. We didn’t just say domestic discretionary spending, but it’s domestic discretionary spending, defense spending, mandatories, revenues.
And we have what we think is a responsible, comprehensive approach that gets us to that bottom line. And now we look forward to working with the Congress so we can get something enacted that’s really in the best interest of the American people.
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