surplus that did not exist.
WHITE HOUSE
Office of the Press Secretary
For Immediate Release February 7, 2000
PRESS BRIEFING BY
DIRECTOR OF NATIONAL ECONOMIC COUNCIL GENE SPERLING,
CHAIR OF THE COUNCIL OF ECONOMIC ADVISORS MARTIN BAILY,
TREASURY SECRETARY LARRY SUMMERS,
OMB DIRECTOR JACK LEW
ON THE FY 2001 BUDGET
Presidential Hall
10:53 A.M. EST
MR. SPERLING: Thank you. This is the President's 8th budget
presentation, but it reflects the same single strategy that the
President spoke of since he ran for office in 1992, and that same,
unified strategy is a two-part fiscal strategy that both promotes
private investment through reducing the deficit and debts, to increase
our savings and keep interest rates low to spur private-sector
investment; and secondly, keep public investments in our people, in
education and training, in science and research.
Seven years ago, the President spoke about this two-part investment
strategy. There was some skepticism from both sides. On one hand, those
most concerned with improving opportunity and reducing poverty were
skeptical a strategy that focused on deficit reduction and fiscal
discipline would actually rebound the to benefit of all Americans. And
secondly, there was skepticism on the other side that investments in
education and training were anything more than social spending.
I think that over the last seven years there has been an increased
convergence to the view that the President and the Vice President have
laid out that one needs both a strategy of increasing private and public
investment.
In terms of private sector, we have seen that the dramatic turnaround in
our fiscal situation has indeed had a dramatic impact on the investment
climate in our country. Consider this year alone. This year, the deficit
was projected to be $455 billion by CBO when we came into office. We now
project a $167 billion unified surplus. That means in one single year,
there are $622 billion more available for private investment -- a $622
billion larger pool of capital and savings that can be used for the
private sector.
There's no question that that turnaround is part of the reason that
we've been able to have the exceptional growth of nearly 4 percent over
seven years, with dramatic investment, seven years in a row, of over 10
percent for the first time in our history -- and yet long-term interest
rates have gone down, not up. Clearly, the turnaround in our fiscal
situation has helped create the circumstances for that investment-led
recovery, and the ability for us to keep growing with investment
productivity and capacity leading, and allowing growth to go on without
hitting inflation.
But what we've also seen, in answer to some of those who are skeptical
initially, is that this type of fiscal discipline has benefited
Americans throughout the income spectrum. We've seen that as the
expansion has gone on, a steady expansion with fiscal discipline and
smart monetary policy has led to an expansion in which businesses have
had to reach out more than ever to the fringes of the work force, and
have brought opportunity in dramatic form to more and more Americans, so
that the African American unemployment rate has gone from 14.2 percent
to 8 percent; the Hispanic unemployment rate from 11.6 percent to 6.4
percent.
If you include the earned income tax credit, there are 7.7 million less
Americans in poverty than there were. And all quintiles, from the bottom
20 percent to the top 20 percent, have grown at about the same income
rate, so that growth has been shared in a way that was not the case in
the expansion of the 1980s.
On the other hand, for those who were skeptical about the importance of
investment in education and training, one does not hear that skepticism
anymore. In fact, any meeting with business leaders, one of the first
issues that will come up now is the skills gap, is our education issues.
One doesn't have to be in a meeting with high-tech or other business
leaders for more than 10 minutes where the discussion is, indeed, about
what more can be done to improve our schools, to improve training, to
improve investments in research and development.
The President and the Vice President, while having to bring down the
deficit, have every single year pushed forward on an investment
strategy. And step by step, over seven years, that investment strategy
has been quite significant. So that even with this fiscal constraint,
Head Start, that was at $2.7 billion when we came into office, has
already gone up to $5.6 billion, and with our budget, would be more than
doubled to $6.6 billion.
If one had told you we would go from $290 billion in deficits to $167
billion in unified surplus, but that a program like Head Start would be
more than doubled at the same time, that would have seemed very
difficult. But it's a reflection of the commitment to this two-part
strategy.
Dislocated workers, at 517 million when we came into office, has already
tripled -- already tripled. The earned income tax credit is doubled,
largely due to the expansion of 1993. And again, the President comes
forward this year with another significant expansion of the earned
income tax credit.
Children's health, at $48 billion over 10 years in the '97 Balanced
Budget Agreement, to allow 5 million poor children to get health
coverage, is now increased again this year with an even larger
commitment, to try to have that many low-income adults also get health
care so that we could reach a goal of 10 million people who are
uninsured being covered.
Education technology, closing the digital divide, an issue that hardly
existed -- the government spent $23 million on it -- we now spend 30
times that much, and that doesn't even include the e-rate.
So as we go forward, the President seeks to put forward a budget that
continues this balanced approach between fiscal discipline, reducing our
debt, and yet investing in the key investments in our people and R&D
that, both together, will lead to a productivity agenda by both
increasing private sector investment and investing in the skills of our
people.
That is why, as we look at the initiatives, whether on the tax cuts or
on the new initiatives, all of this should be done within the context of
the fiscally disciplined plan that pays off our debt by 2013, and an
effort to extend the solvency of both Medicare and Social Security.
There is no reason that we can still not make significant efforts this
year on both the Social Security and Medicare front.
We would still like to go forward with a bipartisan effort that could
get us to 2075 on Social Security, but at the least, we should do a
bipartisan down payment which takes the bipartisan agreement to take the
Social Security surpluses and pay down the debt, and use that interest
savings to at least keep Social Security solvent to 2050.
We are even more hopeful on Medicare reform, both in terms of the
commitment of the surplus, that Jack will explain, to Medicare, but also
in terms of real reforms and choices and prescription drugs to modernize it.
Finally, I think that one of the positive things you've seen from this
administration -- and I think to a large degree from the Congress as
well -- has been a rejection of the old rosy scenario -- a rejection of
trying to inflate our projections by inflating growth numbers beyond
what people in the private sector expect. But we should be wary of a new
rosy scenario -- the rosy scenario in which people pretend there's over
a $1 trillion larger surplus, not by inflating the growth numbers, but
by assuming completely unimaginable and unrealistic cuts in domestic
programs from education to veterans to agriculture. If you're assuming a
$1.9 trillion surplus based on the assumption that you're going to cut
30 or 40 or 50 percent of key programs in the future, that is
unrealistic, and that essentially creates a rosy scenario surplus that
we should reject.
If we do that, taking the surplus we have, the surplus estimates we
have, or the one that the Congressional Budget Office laid down at --
their current services one, which they came in at $838 billion -- if
we're in that ballpark, we will be in a fiscally sound ballpark going
forward.
If you will excuse me for a second, this is our last budget presentation
we'll have of this, and I do want to just very briefly thank some people
who made extraordinary efforts. This was the quickest and most difficult
budget we had to put together since '93, because the budget did not end
until November 22nd. But besides the great efforts that Jack Lew and
Sylvia Mathews, who's done just a fantastic job not only putting the
budget together, but in joining Jack on the negotiations -- all the PADs
-- Barbara Chow, Elgie Holstein, Dan Mendelsohn, Bob Kyl, Michael
Deitch, Sally Katzen and Josh Gottbaum; Joe Minirik, who's been a part
of every single budget that we've done. And then Dick Emery and his
staff, from Nancy Ridenour to Kim Nakahara, who just did yeoman's work
on this.
If there is another hero in our process, it was Jon Talisman, the Acting
Assistant Secretary for Treasury, who just did a simply remarkable
effort in putting this together under just enormous constraints, with
Len Burman, Joel Platt and Joe Mikrut on his staff.
I'd also like to thank on the White House, Jason Furman, Melissa Green
and Jeanne Lambrew on our staff; the Vice President and First Lady's
Office; Chris Jennings, as always; and Bruce Reed, who is the
President's long-time Domestic Policy Advisor, who is the source and
vision and many of the initiatives that are here, from crime to welfare
reform to education.
So with that, I'd like to turn it over to Martin and we will return for
questions when Jack is through. Thank you.
MR. BAILY: Thank you, Gene. I'm going to just set out briefly the
economic assumptions that have been used to make the administration's
forecast.
As the President said earlier and as Gene reiterated, the economy's
performance in recent years has been dazzling. Real GDP growth was more
than 4 percent the last four years, 4 percent last year; 2.5 million
jobs were added to payrolls in the past 12 months, nearly 21 million
since 1993. Strong real wage growth, 4 percent unemployment, and yet,
inflation has remained low, supported by productivity growth that's been
approaching 3 percent in the last few years.
This continuing good economic news, together with the revisions that
have been made in the national accounts data, has caused us to revise
the economic assumptions incorporated in the '01 budget, compared to
those used earlier.
Throughout this administration, the forecasting team I think has built a
record of using credible economic assumptions for budgetary purposes. We
have been committed to ensuring the budget estimates are based on sound
assumptions, broadly consistent with the views of consensus of economic
forecasters.
We expect real GDP to grow at 3.3 percent in 2000 -- that's a
year-over-year number -- 2.7 in '01, and that growth will average around
2.8 percent over the 11-year projection period.
The estimated real GDP growth is built on the assumption that
productivity growth will average around 2 percent a year over that same
period. This is above the trend of around 1.4 percent, 1.5 percent that
existed for about 20 years after 1973. It's a bit below the pace of 2.5
to 3 percent we've had in the past few years, tries to set a level
between those two.
Inflation of the GDP level is expected to be 1.6 percent in 2000, but to
be about 2 percent in subsequent years. CPI inflation is to be fairly
flat from what it is now, running at about 2.5 percent.
The unemployment rate is projected to be 4.2 percent in 2000, will edge
up in subsequent years. These projections differ in fine detail from
those of the Congressional Budget Office but, overall, are very similar,
indeed. Growth of GDP, unemployment, inflation, those are all very
similar assumptions to those that have been made by the Congressional
Budget Office. The blue chip consensus forecasters have a GDP growth
number for this year and next year that's about three-tenths of a
percent higher. Again, that's very close to what we have.
The moderation in economic growth that's built into our forecast,
compared to the last couple of years or so, is in large part from our
view that the growth of consumption will slow. Personal outlays have
grown faster than disposable income in each of the past seven years. We
expect consumption going forward to slow to rates more consistent with
the growth of disposable income.
The administration's economic team does not believe that real GDP growth
of just under 3 percent a year going forward is necessarily the best
that this economy can do. If the policies of fiscal discipline and
investment in people and technology continued, growth could, indeed, be
stronger than we are projecting. But there's tremendous uncertainty
associated with any economic projections. This new forecast we're
putting out does reflect the good economic news that we've had, but it
maintains a realistic, maybe even a little conservative, view of the
future, one appropriate for budget analysis.
Thank you.
SECRETARY SUMMERS: This is a budget that preserves our progress and
builds our future. I want to comment on three aspects of it. First, debt
reduction; second, tax measures to help working families; and, third,
offset measures with respect to corporate tax shelters.
With respect to debt, this is a budget that, as the President indicated,
provides for the elimination of the national debt by 2013. That is, in
effect, a major tax cut, in two respects. It is a major tax cut because
it removes the burden of the interest payments on $3.5 trillion from the
American people, and ensures that principal payments will not need to be
made in the future.
We are seeing very dramatically the benefits, in the form of lower
interest rates. Each one percentage point reduction in the interest rate
over 10 years is equivalent to an approximately $250 billion tax cut in
the form of lower mortgage costs for American families. Reducing the
national debt is taking a direct burden off the American taxpayers.
Second, the budget illustrates that while paying down the debt, while
preserving and strengthening Social Security and Medicare, while
providing for a prescription drug benefit, we can, if we are prudent,
find room to assure that core government continues, and to provide tax
reductions targeted to middle-income families. The budget contains $350
billion over 10 years in tax cuts for the benefit of American families.
We will be highlighting -- discussing those tax cuts in detail at the
Treasury Department this afternoon. Let me just indicate some of the
major measures.
First, expansions of educational opportunity, building on the HOPE
scholarship by providing for the college opportunity tax measure -- that
will allow the deduction of as much as $10,000 in tuition costs for
middle-income families. Second, making health care more affordable,
including through a $3,000 credit for long-term care and, crucially, a
25 percent credit for those who have lost jobs between the ages of 55
and 64 and retired, and seek to buy into the Medicare program.
Third, support for working families through a large expansion of the
EITC, to include families with more than three children, through making
refundable the child and dependent care credit, and through in a
targeted way reduction in marriage penalties and tax burdens for married
workers with a general increase in the standard deduction.
Fourth, promotion of savings for retirement through a new program of
retirement security accounts that is targeted at providing up to a two
for one match from the government for the 70 million Americans who do
not have a private pension, do not have a Keough plan, do not have a 401
K plan, and in most cases do not have an IRA. This is a program that
will work directly through financial institutions and private employers
to reinforce the incentive to save.
And, fifth, tax simplification through relief from the alternative
minimum tax, allowing taxpayers to take dependency exemptions separate
from that alternative minimum tax. The budget also includes tax measures
to encourage philanthropy and promote energy efficiency and to improve
the environment.
Finally, let me just say that the $350 billion in gross tax cuts are
offset by approximately $100 billion and $96 billion in measures to curb
a range of subsidies and to attack abusive transactions carried out by
corporations. These measures include an attack on corporate tax
shelters, including an excise tax of 25 percent on the fees of those who
promote transactions that are deemed to be abusive.
We're not talking about loopholes or subsidies here. We're talking about
transactions that are judged to be abusive and devoid of economic
substance. The budget also includes proposals to go after transactions
that take place in tax havens and to go after secrecy provisions in tax
havens, and also includes a range of other issues, including one that is
directed at strengthening the current regime where there have proven to
be significant loopholes that allow individuals to renounce their U.S.
citizenship and, in the process, renounce their tax liabilities.
All told, these tax measures can help American families even as we do
what is most important for American families, which is pay down the debt
on a substantial scale.
Jack.
MR. LEW: Thank you, Larry. I'd like to walk through some of the basics
of the budget and start with what I think is really the basic story of
this year's budget.
This year's budget is about balancing fiscal discipline with investment
in the future. And I think in order to understand the importance of it,
you need to do no more than go back and recall where we started out.
In 1992, when we were looking at the budgets for the first time, 1993,
when we proposed our first budget, we saw a sea of red ink. It didn't
stop where it stops now. The entire light green area was all red. We
have paid off $2.5 trillion in terms of deficits that were projected
that aren't there anymore. And it was the result of hard policy
decisions in 1993 and 1997, and we've accomplished a great deal.
If we go to the next chart, this is the explanation of how we've gotten
to where we are. Spending as a percentage of the government has come
down in each year that President Clinton has put budgets forward. When
he started, the government was roughly 22 percent of the economy. This
year, it's 18.3 percent of the economy. For each of the next years in
the 10-year window, it comes down from year to year. So what we've done
is, with a smaller government as a percentage of the economy, with fewer
workers, we're doing more. It's balancing fiscal discipline with prudent
investments.
The next chart, which is very much like the chart the President used
this morning, is the result of these efforts. You can see the mountain
of debt built up, and we were looking at that line going up and up and
up forever. The only reason it turned around, and the only reason it's
coming down, is that we've taken the tough decisions.
And it's not projections anymore. What we've actually done -- in 1998,
1999 and this year -- is, we're paying down the debt -- $297 billion
scheduled to be paid off by the end of this year.
The importance of this chart is that this is where we go if we stick to
a policy of fiscal discipline. And when Gene was talking about the
baseline, where we start this year has everything to do with where we
end up. If you start with realistic, honest numbers, and make the tough
decisions within that framework, we can get to paying off the debt by 2013.
But we can't pretend -- we can't go to numbers that no one really
believes. Of the choices before us -- and I think the Congressional
Budget Office did a service to the policy process by putting clear
choices in front of all policymakers -- there's really only one
realistic starting point. And that is to assume that we're not going to
go down from where we were in 2000, and we're not going to be frozen for
10 years; that just as spending in 1999 went up 7 percent from 1998,
just as it went up 3.5 percent in 2000, there is a need for some increase.
We've begun with -- over 10 years, the assumption the government will
grow roughly at the rate of inflation. And that provides resources for
all the investments that Gene was describing, to give us the ability, if
we make the tough choices, to invest in education, to invest in
environmental protection, to invest in national security, both in terms
of defense and diplomacy, and all the other things that we've talked
about. The alternative is going back to a fiscal policy that didn't
work, that got us to the top of the mountain, but doesn't get us to the
bottom.
If we can look at the next chart -- the President's budget allocates the
surplus, and in any allocation of the surplus, it's really a question of
priorities. We start with a $746-billion surplus. Now, we've allocated
more than half of that to Medicare -- $299 billion is being put out, as
this chart shows, to extend the solvency of the Medicare trust fund.
When we began, we were looking at a Medicare solvency date of 1999. That
was last year.
Because of the decisions made to date, and because of the economy,
solvency is currently projected -- last year at the end of the year, was
projected to go to 2015. With the solvency transfers that we've
proposed, the $299 billion, we extend the Social Security solvency to 2025.
In addition to the solvency transfers, we have, as we've described, a
prescription drug policy which, net, costs $98 billion. And that $98
billion includes prescription drugs and the coverage initiative that we
were discussing earlier for older workers without Medicare.
The total cost of the Medicare initiative is larger, is $168 billion,
but there are offsets within Medicare that make up the difference.
They're prudent stewardship of the program that will increase competition.
The third piece in the Medicare area is a $35-billion reserve for
catastrophic drug coverage. That is a new proposal, it's something that
we think is a very important addition to the prescription drug benefit.
Overall, we've allocated $432 billion to Medicare.
If we can go to the next picture. In the area of Social Security, what
we've done is, we've taken all of the interest savings after 2010, we're
paying down the debt by reserving the Social Security surplus, and some
of the non-Social Security surplus, and we're saying that all the
interest savings that we get from saving the Social Security surplus
should be put back into Social Security trust fund, beginning in 2011.
That would have the effect of extending Social Security solvency to
2054. It actually goes to 2050 with the transfers alone, and then
another four years, because of the equity investments that we've proposed.
The next chart shows how this works. It's really, I think, in a lot of
ways, a good summary of what fiscal discipline has enabled us to do.
When we started in 1993, we projected that when we got to 2010, interest
payments would be 23 cents out of every federal dollar. Based on the
budget we're putting forward today, when we get to 2010, only 3 cents
out of every dollar will be going to interest. That difference is what
makes it possible for us to extend the Social Security solvency to 2054.
And it's the benefits that we get from paying down the debt by saving
the Social Security surplus.
As Larry Summers described, we do have a tax cut. It's a $256-billion
net tax cut -- that's the portion that comes out of the surplus. We also
have offsets in the tax areas so that gross is just over $350 billion.
I think that the decisions that are made this year on the budget will
really boil down to two: how large is the surplus and do you start with
realistic, honest numbers that we can actually work with, not just this
year, but in the future; and, secondly, how do you allocate that surplus.
We believe we've started with the right assumptions: conservative
economics, spending projections that are realistic, that we can live
with. If you start with projections of a larger surplus, it means one of
two things -- either you're making assumptions about discretionary
spending that mean cuts that we would not defend and I don't think would
be defended in Congress. That means the savings either won't occur --
and if they don't occur, then we're spending more -- or they do occur,
and there's very bad policy outcomes. I think the definition of fiscal
discipline in a time of surplus is being realistic about where you
start, and then making the tough choices.
Within the surplus, if we start at the right point, we think that the
$746 billion that we project, and the $843 billion that CBO projected,
are very close. In terms of 10-year projections, they're really as close
to the same as you can get when different people prepare very
complicated forecasts. If we're in that range, we have to make the tough
choices; if the tax cut grows, it's got to push something else out.
We've put forward proposals that largely put the resources into
Medicare. That's a policy debate; it's a debate over priorities. We
think we've sized the tax cut right; we think we've sized the Medicare
investments right. And we look forward to a debate this year where those
issues can get worked out so we can do the business of the American
people. It's all about having a balanced program that does both fiscal
discipline and prudent investments.
And I think now we're ready to take your questions.
Q Jack, could you just -- or maybe Larry could just give us one example
of one of these abusive transactions that you're going to be eliminating?
SECRETARY SUMMERS: Businesses who lease a -- who buy a Swiss city hall
and lease it back to the town in Switzerland with a properly designed
maintenance contract are changing nothing of substance. The Swiss canton
still does its business in the Swiss city hall, but the effect is an
assertion of significantly reduced tax liability.
Another example is an individual who expatriates from the United States,
but borrows against his funds that are kept in the United States, and so
in effect, is able to take his money out of the United States through
that borrowing transaction on which there's ultimately a default.
Q By what terms do you increase discretionary spending in real terms
next year for FY 2001 --
MR. LEW: Well, those are different questions. The discretionary budget
for 2001 is 3.9 percent above the discretionary level in 2000. It's just
over 1 percent above inflation. And just to put it in perspective, '98
to '99 was 7 percent growth; '99 to 2000 was 3.5 growth. So this is on
par with last year; it's not as big as the increase from '98 to '99.
Over 10 years, the growth in discretionary spending is just slightly
below the inflation level. We actually have $32 billion, $33 billion of
savings compared to an inflation-adjusted baseline.
Q If I could follow up, so, next year, you assume a real increase in
discretionary spending. Then, after that, you assume it will be below
inflation.
MR. LEW: We actually, for the out-years, have assumed exactly inflation
beginning in, I believe, 2005 or 2006.
Q But by what rationale? There was an increase last year. You were
proposing -- then your rationale is that it will never happen again.
MR. LEW: No, there is an increase in every year. There's no year in
which discretionary spending goes down. Frankly, what we're doing in
this year's budget is restoring levels in some programs, we're putting
forward initiatives that will be -- if they're maintained in the future
-- will be accommodated in the budget.
And there is a need, over the 10-year period, to have some constraints
so that we don't go back to just spending without limits. What we've
proposed is not to eliminate spending limits. What we've proposed is to
put in place a new set of limits that Congress and we can work with and
that can be enforceable over 10 years.
Q Congress last fall shifted something like $32 billion spending into
like 2001. I understand that's being dealt with somehow. Will you walk
us through how that's being --
MR. LEW: Yes. There's actually -- in the budget that tries to do that.
And rather than go through each of the numbers, I would refer you to the
chart. But let me explain the rationale behind it.
Starting work on this year's budget was an extraordinarily complicated
task, because it took us several weeks to figure out where things ended
up last year. Budgets had reached a level of complexity that taxed even
the most technically expert, in terms of trying to understand why
spending patterns were following the course they were following.
You have to remember, a dozen different decisions that were made for no
purpose other than to technically comply with spending limits when, in
fact, the spending limits weren't being complied with. We tried to undo
that. We tried to put all the spending back where it belongs so that the
things that were done in 2000, pushing it into out-years were put back
into 2000, so that we reversed and corrected the gimmicks that, frankly,
made the budget impossible to understand.
We think it was not the right way to do it. We offered offsets last year
that we thought were the right way to do it, that would have been
straightforward. But the result was, we think, one that needed to be
corrected. We have taken care of the needs for 2001, while correcting
what we think were the gimmicks from 2000 and previous years.
Q Does the 3.9 percent, does that include tobacco and undistributed --
MR. LEW: No, tobacco is not being used as an offset for discretionary
this year. It is in the budget, and I'd like to say just a word about
our tobacco policy. We've tried in this year's budget to have it stand
on its own, as it really should, as a tobacco policy. We have shifted
from an excise tax to a lower excise tax combined with a very strong
youth penalty, which is designed to make it not be profitable to sell
cigarettes to children.
We hope that this policy works, and we hope that over time the revenues
diminish. But most of the money that we're assuming in the budget comes
from the youth penalty. We have not tied it to discretionary spending.
It is in the budget; it's part of the overall budget, but it is not
linked to the discretionary levels.
Q Jack, could you talk a little -- coming back to Medicare, to the
offsets that you mentioned, you said the Medicare piece was $68 billion,
but the true cost is -- you know, one of the sectors out there that's
complained much about your policies is hospitals and nursing homes, et
cetera. Are they going to howl at this --
MR. LEW: Let me describe the policy, and let me let others react as they
will. What we've tried to do is really two things. First, to modernize
the program, to increase the competition, particularly on the
fee-for-service side. And those are savings that are important not just
as an offset for prescription drugs, but to bring the program where it
should be in the 21st century. The savings from there, I think, will be
relatively less controversial. They're very much along the lines of
bipartisan recommendations over the last couple of years. And we're
hopeful that we can get that done as part of a prescription drug package.
The other savings we have really come after the expiration of the
Balanced Budget Act, when there are some constraints on the growth of
costs through provider reimbursement limits. There's never been a time
when we've had unconstrained reimbursement growth. The Balanced Budget
Act -- there were some measures taken last year to constrain some of the
savings in response to some of the concerns expressed by providers.
But as we look out beyond the Balanced Budget Act we have, as fiscal
stewards, a responsibility to keep an eye on program growth and there
are moderate constraints that are less than the constraints in the past
that we think are realistic and correct. I'm sure there will be a long
debate on it, but those are the two categories of savings.
Q What does the term "unified surplus" mean, and what is the number for
the Social Security fund surplus?
MR. LEW: The unified surplus is all of the spending and receipts of the
federal government, taken together, and it's the bottom line, the next
result. In 2001, we're looking, after all of our policy, at 184 as the
-- I'm sorry, that's the debt reduction. The baseline unifying surplus
is 171, before any policy. The Social Security portion, the off-budget
portion, is 160.
We've taken all of the Social Security surplus and set it aside and in
the short-term, we're using it for debt reduction -- that's what's
enabling us to bring interest payments down. And beginning in 2011,
after we've reduced the interest payments, we then have transfers of
general revenue and Social Security to extend solvency.
Q Jack, on the bringing interest payments down, one has the sense that
they will be coming down because of your budget plan, but on the other
hand, the Fed keeps ratcheting interest rates up. So does it just come
out to a draw on interest rates, or do you see them really coming down?
MR. LEW: Well, as you know, we don't comment on the Federal Reserve
Board policy, but what I can say about our fiscal policy is that over
the last seven years, it's had an enormously salutary effect on the
economy. It has made it, I think, both in terms of business investment
and economy that made capital available for private initiative. In terms
of monetary policy, our fiscal policies accommodated what would have
been very, very good monetary policies.
Overall, we have continued on the path we've been on, and I would defer
to my colleagues with more economic credentials to go into more detail.
MR. BAILY: Well, I'll just make a quick comment on interest rates. We
basically don't try to forecast interest rates going forward. We do know
that the fiscal discipline has the effect of keeping interest rates
down. We've seen the evidence of that. In this expansion, for example,
real interest rates have been 30 percent to 50 percent lower than they
were in the 1980s, so you can absolutely see the effect of the different
fiscal environments on interest rates.
What we're projecting going forward is 5.2 percent for the three-month
interest rate and 6.1 percent for the 10-year. What we tend to do is at
the point where we're doing the forecast, we look at what interest rates
are, and we basically flatline out from that, and we don't try to make a
projection. We simply assume that they will remain at the level they are at.
SECRETARY SUMMERS: Can I just clarify one thing? There is the effect of
the budget on interest rates, which will be to reduce interest rates
below what they otherwise would have been. But, more important, if
you're not in debt, when interest rates fluctuate, your cost doesn't
change very much.
Right now, at this debt level, a 1-percent change in interest rates over
time costs the federal government about $35 billion a year. When we get
to 2005, and the debt is closer to $2 trillion, a 1-percent change in
interest rates would only cost the federal government $20 billion. And
by 2013, a 1-percent change in interest rates won't cost the federal
government anything.
So the clear point is that by reducing -- that was the first of the two
tax cuts. I described how debt reduction was a tax cut for two reasons
-- because you didn't have to pay interest and principal, and because
debt reduction reduced the level of the interest rate. The really
important point about this budget is that it reduces the amount of debt.
Q The President today is taking credit for a historic shift from
deficits to surplus, and certainly we understand the political
prerogative there. As an economist, though, sir, how much of this good
news would you say is attributable to a decade of cheap oil, 10 years
after the Gulf War, and a decade of peace dividend, 10 years after the
end of the Cold War?
SECRETARY SUMMERS: I think our progress reflects a number of factors,
and I think it's like the blades of a scissors. Without each of them, we
would not have had the progress.
One certainly is the information technology supply shock that Vice
President Gore likes to talk about. The Vice President emphasizes how,
in the 1970s, we had one key input -- oil. The price went way up, and it
flowed through the whole economy, and what you saw was stagflation, more
unemployment, more inflation, slower productivity growth. And in the
1990s, we've had one key input -- information and information technology
go way down in price. I have not yet thought of a good antonym for
stagflation. But we've had lower unemployment and lower inflation and
much more rapid productivity growth.
But we wouldn't have been able to realize all those benefits if we
hadn't had room for substantial investment; if we hadn't had the
double-digit growth in investment that Gene and Martin talked about; if
we hadn't had room for all of that information technology investment.
And what made it possible for us to have the room was the fiscal
progress that we made.
You know, there's a lot of what economists call positive feedback, what
others call rolling snowballs, in these things. Before 1993, we had a
dynamic of rising debt, higher interest rates, slower growth, less
revenues, higher interest rates and the whole thing went round again and
productivity growth and economic performance were deteriorating.
Through what we did in 1993, we changed from that vicious cycle to a
virtuous circle. So while, ultimately, credit goes to American workers,
American businesses and the force of information technology. I don't
believe we would have unlocked that energy without a decisive change in
our country's fiscal policies. And I think what is conspicuous in
evaluating that decisive change is what the forecasts were, not just of
our fiscal picture, but also of our national economic performance
picture in the early 1990s, when it had become a commonplace that the
Cold War was over and Europe and Japan had won.
Q Mr. Summers, the excise tax on Wall Street firms selling abusive tax
shelters, can that be done administratively, or do we need Congress to
pass some kind of a new law?
SECRETARY SUMMERS: You added the word "Wall Street" -- there are many
located in many different places and in different businesses who are
involved.
I want to be very clear, we are not talking about the entirely
legitimate business of providing tax advice. We are not talking about
the entirely legitimate activity of seeking within the law to minimize
tax liability. We are speaking about abusive transactions marketed with
confidentiality arrangements, devoid of economic substance where the
strategy is to just hope that no one notices. To levy the excise that I
referred to would require legislation. I expect that, as in the past,
over the next several months we will be taking a number of regulatory
and administrative measures with respect to the question of corporate
tax shelters, which has become an increasing concern to those concerned
with the integrity of our tax system.
Q Was your Swiss example a real world example?
SECRETARY SUMMERS: Yes.
Q Quickly, on the flow on your revenues, the tax receipts are about even
over the first five years or so, with the second five years. But on the
tax cut side -- you all have criticized Republicans for doing this in
the past -- you've got about $100 billion in tax cuts in the first five
years, and then the total going to $350 billion over the second. Isn't
that exploding in the out-years -- using the terms you all have used to
criticize Republicans with that?
SECRETARY SUMMERS: I'm glad you asked that question. The tax cuts are
significantly larger in the second five years, rather than in the first
five years, because the various of the proposals are phased in. They're
phased-in both for administrative reasons and, frankly, they're phased
in because there are larger projected surpluses in the second five years
than there were in the first.
The sharp distinction between these tax cuts and the tax cuts that we
were in the past and will in the future be sharply critical of, is that
these are fully phased in and are then stable at between 2005 and 2010.
If you look at the numbers for 2008, 2009, 2010, you'll see that the
taxes are basically in a stable pattern. That is very different from,
for example, one of the tax bills last year in which you are looking at
a cliff between 2009 and 2010, and another cliff between 2010 and 2011.
There is no growth except growth with the economy that is pushed beyond
the window in our tax proposals.
Q How well did you -- these tax loophole closures last year? You're
saying you have a gimmick-free budget or fewer gimmicks. And why do you
expect it to be better this year, when presumably, all these people will
be contributing to campaigns?
SECRETARY SUMMERS: Let me first say that one of the objectives of our
proposal is to move towards a gimmick-free tax system in which we don't
have abuses. I don't know what the prospects for their passage will be.
I would say this, though. If they are passed, we will have a fairer tax
system, we will have fewer resources of our economy diverted into
unproductive pursuits; and if they are passed, we will have more room
for tax cuts for American families that are consistent with paying down
the debt and strengthening Medicare and Social Security.
There is a choice, in part, to be made between protecting tax shelter
activities, and providing benefits for health care, for education, and
to help American families save.
END 11:40 A.M. EST
http://clinton6.nara.gov/2000/02/2000-02-07-briefing-by-staff-on-the-budget.html
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