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Press Briefing by Alice Rivlin, Director of OMB and Martin Bailey, Council of Economic Advisors

July 31, 1995

12:13 P.M. EDT

DIRECTOR RIVLIN: Good morning, I'm Alice Rivlin, the Director of the Office of Management and Budget, and with me is Martin Bailey, a member of the Council of Economic Advisors. It's our pleasure today to release the midsession review of the budget.

The midsession review is a tradition in budgeting. Normally, in an ordinary year, the administration takes the opportunity, in the middle of the summer, to look again at the economy, and then to re-estimate its budget submitted to the Congress in February, in the light of the new economic projections.

But this has been quite a year for budgets, and since February, we have had the administration's new 10-year plan to balance the budget. So this midsession review will focus on that plan which built on the February budget. The midsession review updates that plan.

I will say a word about how it comes out, and then Dr. Bailey will comment in more detail on the forecast. We have two pieces of good news to announce today. One is that the latest estimate for the budget deficit for Fiscal Year 1995, the one that will finish in September, is $160 billion. Now, that's a large number, but it represents very significant progress, since the beginning of the Clinton administration, in getting the budget deficit down.

When we started, the budget deficit for Fiscal Year 1992 was $290 billion, and it was headed up, as you can see on this chart. The deficit had been rising very substantially through the '80s. And the estimates of the baseline -- that is, what would have happened if we had not changed policies in 1993 -- were that the deficit would have continued up, out of control.

That situation has been reversed. The deficit for this year will be about $160 billion, or 45 percent below what it was three years ago. We've done better than even we estimated. Indeed, in our original budget plan that the President put forward in 1993, we were estimating that the budget for 1995 would be $242 billion. We have beat our own estimate, very substantially, and we're now down to $160 billion.

The President's economic plan has worked directly on the budget to cut spending and to increase revenues. It has also worked indirectly to improve the economy and hence to lower the deficit further. It has built a foundation for the additional deficit reduction that we are now proposing and that the Congress is also working on. No one is proposing to repeal that plan or to repeal this progress.

The second piece of good news is that as we work through the 10-year plan the President announced in June, and apply the new economic assumptions and new technical estimates, we found ample confirmation that the policies that were announced in the President's plan to balance the budget would indeed turn the deficit into surplus by 2005. In fact, we now think we can do better than that.

Our estimates are that we would have a small surplus in 2004. We believe that the President's policies are moderate and sensible, and represent the common ground on which most Americans stand. They are quite different from the proposals being put forward on the Hill. The Republicans in Congress want to finance a huge tax cut that goes mostly to people who don't need it.

They want to get to balance more quickly. And hence, they are proposing extreme measures that slash Medicare and Medicaid, and that cut deeply into other programs that the country needs for future economic growth -- education, training, science and technology. They also cut deeply into programs that preserve the environment.

We believe that that is not necessary, and that these estimates confirm that we can get to balance in a reasonable length of time without abandoning the common ground. Now let me turn it over to Martin, to talk a little bit more about the economic situation and our forecast. Martin.

DR. BAILEY: Thank you, Alice. We did not make big changes in the economic assumptions between midsession review and the budget that was put out in January. The most important change is that affecting interest rates associated with the President's plan to balance the budget within 10 years.

Now, there were some detailed changes, and I'll mention a couple of those. The January 1995 forecast, which was prepared, if you recall, in the Fall of 1994, anticipated real GDP growth of 3.6 percent. As it turned out, growth was a little stronger in 1994, particularly the last quarter came in very strong. So as a result of that, we now have the actual number of 4.1 percent for 1994.

On the other hand, growth in the first half of 1995 has turned out to be a little bit weaker than we expected, and so we've adjusted in response to that new evidence. We do think that the forecasts for the remainder of this year for economic growth do look good. And so we're now forecasting that real GDP will grow at 1.9 percent from the fourth quarter of 1994 to the fourth quarter of 1995.

Overall, this is really just sort of slight bumps in GDP. They're not that significant for the overall budget forecast. In fact, on a year over year basis, growth remains at 2.8 percent in the current midsession review forecast, just as it was in the January forecast. So that's a fairly minor change.

Now, some of the reasons we think that growth is going to pick up in the second half of 1995 is that businesses are now well along in reducing their inventories. We still have strong investment in export growth, and lower interest rates should stimulate spending in the interest rate sectors -- particularly housing and consumer durables.

Now, from 1996 through 2000, the administration assumes that the economy, GDP, real GDP will expand at a rate of around 2.5 percent. After that, the rate drops to 2.4 percent, slightly lower labor input growth at that time. These projections are consistent with, or even, in some cases, a little below the private sector and blue chip forecasts. So we think those look, if anything, a little on the conservative side.

We expect that the unemployment rate will remain a little below 6 percent. And we think, as we had before, inflation is going to be around 3 percent. Now, in the midsession review, the administration assumes that the President's plan to balance the budget by 2005 will not affect the baseline projections for GDP growth, unemployment, and inflation.

In other words, we haven't made any adjustments to those numbers as a result of incorporating the President's plan. On the other hand, we have made adjustments to our assumptions about interest rates. The baseline's path -- that's to say, without the President's plan -- assumed 5.5 percent interest rates for the 91-day T-bill. This is going out -- they're a little bit different for just the end of this year, but going out into the out years, in the absence of a budget balance plan, we would be expecting 5.5 percent for the 91 T-bill rate, and 7 percent for the 10-year note.

Under the President's balanced budget plan, rates would be lower, falling very gradually, slowly over the 10 years. The short rate would fall to 4.4 percent, and the long rate to 5.3 percent. That's for 10-year rates.

Now, in determining the size of the decline in interest rates that could be anticipated from this balanced budget plan, we looked at a number of econometric models. We tried to sort through the literature and find out what different people were saying. Some of those models predicted very large declines in interest rates, much larger than we thought was plausible.

We also obviously looked at the CBO estimates of how much interest rate reduction would result in a balanced budget economy. And we ended up with a number -- an interest rate decline that is similar to the CBO estimates. It's also similar to the interest rate drop that was incorporated in the budget resolution that was passed by Congress in June.

So we don't assume exactly the same interest rates as CBO, but the decline that we're assuming is pretty much in line with what they had. We think that's appropriate for reaching a balanced budget economy. Now, for the past two and a half years, the economic projections of this administration have been really pretty much on target.

Nobody gets everything right on the button, but we think we've done pretty well. We think, if anything, our GDP forecast, we've under-predicted GDP. That's been a little bit stronger than we expected. If we make comparisons between our projections and then what resulted, the differences were only small.

We think we've established credibility on our forecast, and we think the economic assumptions presented in this midsession review are similarly sound and realistic. Thank you.

DIRECTOR RIVLIN: We'd be happy to take questions, directed at either one of us.

Q: Dr. Rivlin, CBO, when you put forth in June your 10-year balanced budget plan, said you came nowhere close to balanced; that there was still a $200 billion deficit at the end of the road. Are you expecting to be any closer to CBO with the midsession review?

DIRECTOR RIVLIN: I don't know. The differences are all differences in baseline. They did not cost our proposals. They simply have a higher baseline deficit than we had then or than we have now. The differences stem from the economic assumptions. From the differences in growth rates, as Martin has said, we think our growth rate assumptions in the out years are on the conservative side of mainstream.

The other big difference is in the forecast of medical care inflation, where the rates have come down some, although they're still very high. And we're a little bit more optimistic than CBO. When you compound those differences over 10 years, which is something the budget community has never done before, you get large differences.

Now, CBO normally makes a new forecast of their own about this time. I don't know what their plans are. We'll see if we're any closer by then. But I expect that there will still be differences in the baseline. And we believe that we're on solid ground.

Q: Senator Packwood said last week that there may be room for negotiations, but he sees the basis for that as getting on moving toward some sort of common assumptions, and sets a minimum of cuts in Medicare of 160 against their base line. You have 124 over seven. What's it going to take for you to get talking to each other? Certainly you've moved a little bit with the nine years, instead of 10 years.

DIRECTOR RIVLIN: Well, we haven't proposed anything new. That is a re-costing of our budget under new assumptions. We don't have a different set of proposals here today than we had in June.

If a negotiation takes place -- and in the end, one will have to -- we will have to start with negotiating a baseline. I think that's the easiest thing to start with. And then we will be looking at the various differences. The differences are large in Medicare, they are very large in Medicaid, and we will have to see if there is room for a middle ground.

Q: Dr. Rivlin, because there was recent talk of recession, which didn't pan out, how long does it traditionally take before consumer confidence overcomes those storm clouds and people start accepting your new optimism?

DIRECTOR RIVLIN: Let me let Martin deal with that, but consumer confidence is very high at the moment. That is not something we're waiting to have happen. The indices of consumer confidence have been doing extremely well. That's one of the reasons we think that growth will pick up in the second half of the year.

DR. BAILEY: Well, as Alice said, we certainly do not see a collapse of consumer confidence; on the contrary, it has come back. Really, if you look, even though the second quarter number was fairly weak -- half a percent of growth -- there were a number of things in the GDP report which I think would lead you to see stronger growth going forward.

We're really in an inventory adjustment stage. There was an excess housing, which was holding back housing starts, and that is really being worked off. There were excess auto inventories, those are being worked off. So really the ingredients for stronger growth are there and we expect them to materialize.

But in terms of consumer confidence, as Alice said, that does not look to be a serious problem. It took a dip, as you'd expect, as the economy hit slower growth, but is now coming back.

Q: In terms of the stronger growth materializing, do you expect it to be sort of a relatively quick bounce-back, or is it going to be slow and steady over the next six months?

DR. BAILEY: Well, there's still a certain amount of adjustment to be worked through. There is still some excess inventory to be worked off. We expect the housing market to come back, not immediately, but certainly during the second half of this year.

So the third quarter looks as if it will be stronger than the second quarter, and by the fourth quarter and into 1996 we think the economy is going to be pretty much back on track, to grow at something close to its potential growth rate..

DIRECTOR RIVLIN: But, remember, we're not talking -- when we say "bounce back," that sort of sounds like we're going to go back to very high levels. What we think has happened is that the economy has made a transition to sustainable levels in the 2.5 percent range.

Q: I wanted to ask you a question about interest rates. In particular, by your forecast it looks like you think the two-month Treasury bills are going to stay pretty much where they are, within a narrow range. Does that mean over the next year you don't expect the Fed to be increasing or lowering interest rates?

DR. BAILEY: As you know, we don't comment on specific Fed policies, and I'm not going to say what we think the Fed is going to do over the next year. I certainly think it's worth noting that Chairman Greenspan, in his Humphrey Hawkins testimony, said that he was prepared to accommodate monetary policy to the deficit reduction plans that are currently coming from the administration and Congress.

So we certainly believe that monetary policy will respond and will help us to maintain a balanced growth path, as Alice said, not bouncing back to very high rates, but bouncing back to something like 2.5 percent growth.

Q: When was the last time that the country went through more than 10 years without a recession?

DR. BAILEY: Interestingly enough, if you check are we more likely to have a recession because we've had a fairly extended recovery -- and the evidence suggests that there really is nothing that makes recessions old, that implies because we've had solid growth we're bound to have a recession around the corner. The evidence just doesn't support that.

So we believe that the prospects for continued solid growth are there. We don't have high inflation, for example, that one of the main things that's interrupted growth in the recent past has been serious surges in inflation. And inflation is very well behaved at the moment, so that should not be a source of a recession going forward.

DIRECTOR RIVLIN: Let me speak to the 10 years. Nobody thinks they know what the economy is going to do for 10 years. In order to make budget projections you have to assume a reasonable set of behaviors. And the tradition of budgeting has been to assume that after the forecast period in which you might think you knew what was going on -- which is no more than one or two years -- that the economy grows steadily at its potential growth rate.

And there are a few differences about what the potential growth rate is, but this is simply a projection of potential growth rates for 10 years. This is not saying we know for certain there will not be a recession in 2002. We don't know that and the CBO doesn't know that. Just to do a useful budget forecast you have to make an assumption of the steady growth.

Q: Director Rivlin, in June the administration said that it would take 10 years of the President's policies to get to balance. And this report indicates now that two months later you think you can do it in nine. Since the Republicans don't seem at all eager to back off of this seven-year plan that they've put forward, do you think it's reasonable to expect that there might be a way to compromise, to find a way to put the President's policies in a seven year window?

DIRECTOR RIVLIN: In a seven year window?

Q: Yes.

DIRECTOR RIVLIN: No, I don't. I think there are two big differences between us and the Republicans. One relates to the tax cut. They want to finance a much larger tax cut. We have a smaller, more targeted tax cut.

And the other is that they are eager to get to balance quicker. That forces them into extreme cuts in other programs that we think are not in the interest of the country. So we will continue arguing for the smaller, more targeted tax cut, and the more gradual path.

Now, whether it's exactly nine years or what, is not really important. We are arguing for a specific set of policies, not for a particular date at which you get to balance.

Q: So even with improvements in growth or revenue or baseline technical assumptions, you don't think that the President's policies could be melded into a seven-year period?

DIRECTOR RIVLIN: Oh, if the economy behaved very much better than we expect in these forecasts, actually, we'll get to balance sooner. But it wouldn't be sensible to assume that. That would not be sensible, at all. We are taking what we think are a conservative set of forecasts on which to base our budget estimates.

Q: Do you make interest estimates for seven years, or only for 10?

DR. BAILEY: Do we make interest estimates?

DIRECTOR RIVLIN: We make estimates for every year.

DR. BAILEY: We take each year individually.

Q: No, no. You projected what interest rates would be in the next 10 years if this plan goes in. Did you project what interest rates would be if by some ledger that demanded a seven-year path mandated by Congress came in?

DR. BAILEY: No, we did not make separate estimates for that.

Q: Have you calculated when borrowing authority might expire this year?

DIRECTOR RIVLIN: No, we did not.

Q: The technical revisions for receipts is $42 billion lower. Could you explain why? I know the overall receipts for most years are higher, except for '96, but there is that four year difference in technical revisions. I think you mentioned the recent tax collection and liability data, but that is a large number. Could you explain why it's that much lower?

DIRECTOR RIVLIN: We have Alan Cohen from the Treasury who might want to comment on this.

MR. COHEN: I think it's due to some re-estimation of the estimating models for revenue, and that accounts for part of it. And also, Treasury is always updating their revenue estimates on the basis of more recent tax collection and liability data. So that's on ongoing process and that changes the technical estimates.

THE PRESS: Thank you.

END 12:35 P.M. EDT

William J. Clinton, Press Briefing by Alice Rivlin, Director of OMB and Martin Bailey, Council of Economic Advisors Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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