Bill Clinton photo

Press Briefing by Assistant to the President for Economic Policy Bob Rubin, Chairman of the Council of Economic Advisors Laura Tyson, and Office of Management and Budget Director Leon Panetta

February 07, 1994

Room 450

Old Executive Office Building

10:48 A.M. EST

MR. GEARAN: Good morning. We'll start off the briefing today -- we'll have three presentations, then we'll hold all questions until the end of their remarks. Bob Rubin will start, followed by Dr. Tyson and then Leon Panetta; and then they'll all be available for questions. Thank you.

MR. RUBIN: Good morning, I'm Bob Rubin, Assistant to the President for Economic Policy. The principal focus today obviously will be on Leon's comments -- Leon Panetta's comments with respect to the budget, and Laura's comments with regard to the economy. We thought we'd start with a little bit of context, some contextual comments on process and strategy.

Fundamentally, as this administration has functioned, one of the objectives the President had was to make sure that all of the economic programs and all of the economic activities of the administration worked together, tied together. And, in fact, I think that has happened and happened quite effectively.

The economic programs of this administration share a common process. They fit together into a broad-based economic strategy and they are based on a common economic outlook and common economic analytics. Let me just add as a digression, somebody who had formerly been head of the CEA said to me the other day that one of the interesting aspects of this administration is that in economic perspective, the CEA has really been part of every economic issue and every economic policy issue -- they're at every table; and he distinguished between his administration and this one in that respect and said he thought that probably it had never existed before in an administration. It's part of trying to do things in a cohesive fashion and making sure that all perspectives are part of every economic policy decision. In any event, that integrated functioning of the economic team, in our view, is probably unique to this administration, results in better decisions, strategic coherence, and cohesive follow-through.

Let me go to the budget itself for the moment. The process this year, as has traditionally been the case, is that OMB worked with every agency to go through the particular agency's budget situation. Then, OMB developed recommendations with regard to that agency's budget, and then the difference came.

OMB brought those recommendations to a broad-based forum consisting of key economic, legislative and other advisors to the President, plus the President and the Vice President. We had, roughly speaking, 13 or 14 meetings -- I don't remember exactly how many -- and each agency in its turn presented its view of the

recommendations to this broad-based NEC forum. And then at the end, we had three meetings totalling about eight or nine hours with no agencies present, but all the advisors to the President and the President and the Vice President, and, reviewing everything that happened, and in a process led by OMB Leon Panetta, the President went through all of the open decisions and made his final sign-offs -- his final decisions on the budget. The result was that every agency had a full and fair hearing before a broad-based panel plus the President and the Vice President. And the President, for his part, had input from all of his advisors so that he could make a fully informed decision with all of the relevant information and analytics and points of view in his possession.

As the President said once during the transition, process isn't very glamorous, but process has a lot to do with outcome. And, as I've just said, I think in this instance in the budget process, and in general in the economic area, we have had processes that pulled all of the various parts of the administration together. The results is, we've had cohesive decision-making and cohesive follow-through.

Strategically, the budget is a piece of a broad-based comprehensive strategy the President has put in place to put the country back on the right track, both with respect to creating economic growth now and for the long term. It includes: deficit reduction, investment, trade expansion, regulatory rationalization, and health care reform.

As Chairman Greenspan said the other day in his testimony -- this is not an exact quote, but the paraphrase of it was that the country, in his judgment, the fundamentals of the country, the underpinnings, I think, was his word, with respect to the economy were in better shape than they'd been in, in two or three decades. In our view, there is no question that that, in large measure, is the function of the President's economic strategy.

More specifically, this year's budget, as Leon will explain very shortly, continues the President's powerful deficit reduction program, and at the same time, operating within the constraints of deficit reduction, continues the President's investment agenda, putting in place programs that will create the underpinnings for the future economy -- education, training, infrastructure -- all the things that are requisite for competitiveness.

Let me end by saying that it would have been very easy in this year to have had a enormous internecine warfare and strife, given that, a, we had a rigorous deficit reduction program in place and, b, we had an enormous number of investment objectives to superimpose upon the existing budget.

Instead, we had a remarkably harmonious process, and the period since the decisions were made has also been remarkably harmonious. I think it is a great tribute to the processes that the President thought through and then put in place, to the integrity and the professionalism of leadership that Leon showed through this process, and finally to the attitude of the Cabinet members.

And with that, I will turn the podium over to Laura, who will tell you what the economy is all about and what's going to happen.

DR. TYSON: Thank you very much, Bob. Recent economic data that's been coming in confirmed that the economy is on a sustainable expansionary path, with increasing output, rising employment, and a strengthening manufacturing sector. Improvements have come in a variety of intrasensitive spending, business investment, consumer durables, residential housing. These sectors of

the economy are stimulating and reinforcing growth in other parts of the economy. Consumer confidence is high, and inflation remains tame.

For 1994, the administration foresees continuing solid and sustainable growth in output and jobs, and very good performance on inflation.

I want to, before I go into the highlights of the forecast, just point out that 1993, in fact, unfolded much as we forecast a year ago. The first half of 1993 was slower than we forecast, the second half was faster. If you look at the year as a whole for the four quarters of 1993, on a fourth quarter to fourth quarter basis, real GDP grew at 2.8 percent, which was exactly what we forecast last February the economy would do if the economic stimulus package were not passed, which it was not.

Now, let me give you the highlights of our forecast for the coming year, and then a little bit into the future. Real GDP is expected, we project, to grow at a three percent annual rate for the next year. Thereafter, the growth rate will slow gradually as the economy reaches full capacity, full employment. Our forecast for GDP growth for 1994 -- this three percent for 1994 -- is unchanged from the one that we released last August.

The second part of our forecast. We forecast that the unemployment rate will fall gradually over the forecast horizon. I want to emphasize that our forecast is based on unemployment measures using the old survey; the only one that we have historical experience with. So what we have done in our forecast is take a projection, or a forecast for, based on what the old survey might have predicted and then give a range based on what the new survey numbers are likely to show. I want to emphasize there is an unresolvable uncertainty in the relationship between the old survey numbers and the new survey numbers. Nobody knows at this point enough about the behavior of the two different surveys to be certain, and that's why we decided to go for a range of forecast.

For 1994, we project that the unemployment rate will be 6.2 percent by the end of 1994 on the old basis, and between 6.5 and 7.1 percentage points on the new basis. We also project that the unemployment rate will continue to fall gradually and steadily for the following four years. I want to emphasize our forecast is consistent with the creation of eight million jobs over a four-year period. And the most recent twelve-month period that we have just lived through suggests we're on track for that target.

Our forecast projects that inflation will remain low. We forecast a 2.7 percent increase in the GDP deflator, and a 3.0 percent increase in the CPI for 1994. In subsequent years we project small increases in inflation. I want to emphasize here that our projections represent a slight downward adjustment in expected inflation compared to what we forecast for 1994 earlier in 1993. That's because 1993 we ended up with inflation rates -- actual rates -- which were below what we had originally forecast. When we went into 1994, we brought our inflation forecast down a little bit.

As far as interest rates are concerned, for interest rates we expect long-term bonds -- 10-year Treasuries -- to have a rate averaging 5.7 percent through 1994. The Treasury bill -- we have always anticipated from the beginning of our forecasting exercises that the Treasury bill -- that is the short end of interest rates -- would rise somewhat. We've been projecting that since the beginning. Our formal forecast is to have the Treasury bill yield increase by 40 basis points in both 1994 and 1995. And I want to emphasize again a point we've made over and over -- moderate increase in short rates is not incompatible with sustained growth and real activity and with nearly stable long-term bond yields.

Now, let me point out a technical issue here. I've been reporting on our forecasts for 1994 and beyond. It is the forecast that will appear in the economic report of the President. When the budget was done, the budget had to have economic assumptions on which to run earlier, and so there is a set of economic assumptions made on the basis of information we had as of early December 1993.

In general, they are almost exactly the same as what we are now forecasting, but we made the final official forecast after we had a little more information. So just as a technical point, the forecast I have just talked about and the forecast that will appear in the Economic Report of the President differ slightly from what's called the economic assumptions on which the budget numbers were run. And the difference is solely that we have better information right now than we had at the beginning of December 1993. And the difference amounts to this: In the forecast -- the official forecast reported in the Economic Report of the President -- we have reduced the unemployment rate by .2 percentage points. That simply reflects the reality that the numbers we got at the end of 1993 were better than anyone anticipated, and we have revised our future forecast based on doing better than we anticipated in 1993.

We also reduced the Treasury yield, that is the 10-year Treasury yield, by .1 percentage point, again because of what was happening to rates between the beginning of December and the time we made our final official forecast.

Let me end this on not a technical note, but an important general note. We believe our forecast continues to be an extremely credible one. We are not painting a rosy scenario, just as we did not do last year. Our forecast, we do not believe to be in any way unduly optimistic. We believe that our credible forecast has been a key to the success of our deficit reduction program, and I guess as far as emphasizing what factors of credibility or what I might point to, to suggest we have credibility, number one, would be our 1993 forecast and how the economy behaved relative to what we forecast, suggests we were credible then.

Number two, if you look at the CBO projections about key economic variables, they are nearly identical to ours at this point.

So, thank you very much, and I'll be happy to answer questions, but now let me turn over to the real star of the show here, Mr. Panetta, who will tell us all about the budget.

DIRECTOR PANETTA: Good morning. As you know, this morning the President sent up the budget. I want you to know that, in the spirit of this administration, first of all this is a userfriendly budget in that those who suffered from hernias last year and the year before with regards to all of the budget being in one document and one volume, we have returned to an approach whereby we have the backup materials contained in the additional volumes, but the summary of the budget is here, and for those that want a quick view of the key elements of the budget, it's in this document, which is titled "The Budget of the United States."

Now, again in keeping with the spirit of the administration, if you're a high-tech wonk, we also have a CD rom, which has the budget as well. It doesn't have all of the appendix here, but at least it's got the basic elements are contained in this as well. So the information is here, and hopefully everyone will have easy access to it, even though they may not always agree with the elements of it.

We sent the budget up this morning. I might say that the President asked to say that he would liked to have been here to

kick this off, but he, as you know, is in Texas, as is the Secretary of the Treasury, Lloyd Bentsen.

The budget builds on the foundation for long-term growth and prosperity that we began last year with the President's economic plan. This is -- please, make no mistake about it, as people go through this and look at the cuts and what have you -- this is a tough budget. It is, by its very nature, a tough budget because of the hard freeze that we have to deal with on the discretionary side.

It's a tough budget that I think keeps the nation on track, and that's really -- the main thrust here was that what we passed last year in the economic plan and what this budget reflects is the importance of staying on track with what the President and the Congress and the nation built last year in terms of deficit reduction, continuing the deficit downward -- this is the most consistent deficit reduction in 40 years. It actually cuts the budget deficit by 40 percent, almost $126 billion from where we had projected the deficit. And, in addition, it keeps the economic recovery on track as well, because keeping deficits on a downward track we think is essential to economic recovery, and we think that economic recovery is essential, obviously, to producing the kind of jobs that are important for the people of this country for the future.

In addition to that, it continues the key investments that the President began last year in our future. So this is a budget intended to keep the nation, our economic recovery, the investment strategy that the President began last year on track.

One of the reasons that I think President Clinton was elected in the November election of 1992 was that the American people basically wanted to reverse the budget policies and the economic policies of the previous 12 years, and he has essentially carried out that mandate.

The budgets of the past 12 years were characterized by the following: they were borrow-and-spend budgets that resulted in deficits going up. When we came into office, the projected annual deficits had us going for $300 billion to $400 billion to $500 billion, ultimately to $600 billion annual deficits as we entered the next century.

Secondly, they were fundamentally unfair, particularly to the middle class and to working families in this country. They failed to invest in the areas that we thought were most important for the future and they were fundamentally misleading in that they oftentimes contain gimmicks and rosy scenarios on economic assumptions to basically hide from the American people the true implications of the policies that were contained therein. So, as a consequence, these budgets usually arrive on Capitol Hill dead on arrival.

Budgets that we have tried to present Capitol Hill are budgets that are disciplined, first of all, in that they, in fact, are turning the deficit around and moving the deficit downward as opposed to the path we were on -- that's I think, characterized most significantly by this budget which, in 1995, instead of a $302- billion deficit, is focusing on a $176-billion deficit, a drop of almost $126 billion.

Secondly, instead of tax on fairness, we have a tax system that, according to the CBO, the Congressional Budget Office, is more progressive than at any time in the last 17 years. Instead of ignoring the future, we are investing to improve economic growth to make today's workers and our children more productive for the future.

Finally, the numbers are real. We don't have any rosy scenarios here. I think the economic assumptions that Laura just talked about are, in fact, generally the consensus assumptions. It might even be interpreted as being more conservative than the consensus assumptions about where the economy is going. There are no gimmicks, there are no smoke and mirrors. What you see is what you get in this budget. And for that reason, we continue to be confident that when we present this budget to Capitol Hill as we have today, that we in fact will get support for the basic recommendations and will be able to move a budget resolution through both the House and the Senate that largely reflect the priorities that are contained in this budget.

Let me talk a little bit about each of the areas that I just discussed.

On fiscal discipline, essentially these were the key marks that we were trying to focus on. We wanted to preserve the $500 billion in deficit reduction that the Congress and the President enacted last year. The budget sticks to the spending caps that were established by that budget. As I said, that's a hard-freeze cap on discretionary spending. What we spent in 1993 is exactly the same amount that we have to spend in '94, '95, '96, '97 and '98. So we are looking at discretionary budgets that contain no inflation increases.

Thirdly, it produces the lowest deficit as a percent of GDP since 1979. And as the President himself pointed out, these declining deficits -- we include the declining deficits for the last three -- for three straight years, assuming we get the deficit reduced in '95, we are looking at the first time in over 40 years, since the Truman administration, that we have seen three years where the deficit has been brought down. And, in addition to that, obviously -- and I think confirming the fact that the numbers are real here -- the Congressional Budget Office just within the last few weeks indicated that the deficit numbers are approximately in the same area that we reflect in our budget.

Next chart. The deficit itself, as I indicated when we came into office, is the upper line, and obviously reflects the path that we were on with $300 billion deficits going up to $400 billion, going up to $500 billion deficits, ultimately. We were looking, as I said, in 1995 at a deficit projected at $302 billion before the President's plan was enacted. The bottom lines reflect where we think this budget will take us. It will take us to $176 billion deficit, which represents a 40 percent cut in the deficit. The cut is primarily due to two factors: First of all, the specific deficit reduction measures enacted in 1993, and the improved economic outlook which is also due in part to the President's plan.

Let me just mention, this is the -- this line here is obviously the line that we would follow if we enacted the President's health care reform proposal. This green line reflects the deficit that we would have without health care being enacted. As you can see, in '98, the '95 budget shows the $176 billion. It starts to level off and then it begins to go back up, largely because health care costs, ultimately, and that's obviously the importance of passing health care reform is to try to keep that line on a downward trend.

Let me also mention that of the $126 billion in the cut in the deficit, which is the cut from $302 billion to $176 billion, $83 billion of that is due to the enactment of the economic plan. About half of that comes from revenues that will be flowing into the trust fund to reduce the deficit. Half of that are the spending cuts that were enacted as part of that plan, as well. In addition to that, there is about $22 billion of that number that can be related directly to lower interest impact, either in terms of the economy or

interest on the debt. So that you could say that over $100 billion of the $126 billion, either directly or indirectly, relates to the enactment of the economic plan and the budget obviously that we are presenting now that continues to implement that plan. The balance of it are basically reestimates, largely in Medicaid and some other areas like that.

Next chart. As a percent of GDP, which is one of the things, obviously, that is an important measure of the deficit's impact in terms of the economy, the deficit declines from what was a high of 4.9 percent in 1992 to 4 percent in '93 and 2.5 percent in '95. We have virtually cut the deficit-to-GDP ratio in half. And you can see the trend that we followed between '89 and '92 in which the percent went up. And you can see where that trend takes us as a result of enacting the economic plan.

How do we get there? We get there through spending cuts. And let me just go into the spending cut portion of this. The spending cuts are going to be tough choices, and obviously they involve some difficult decisions because you can't get there unless you make these decisions. On the spending cuts, we basically have recommended about 115 terminations. Actually, the number is slightly higher as you go through each of the budgets probably -- this is an approximate number in terms of terminations. Most of those terminations take place obviously in areas that we think are nonpriority areas and in programs that we've identified and that the agencies and departments have identified for elimination. Three hundred cuts -- containing that 115, there are 300 cuts below the '94 level. So what was spent in '94, in '95 we have cut those programs below their '94 level in about 300.

Federal employment is going to be reduced by 118,300. This is part of the 252,000 reduction over five years. But for '95, we will see a reduction of 118,300. That's one of the reasons that we hope that the Congress will enact this buyout in order to give us the opportunity to be able to do this without having to resort to RIFs.

There's a $16-billion cut in noninvestment programs. That's basically one of the targets. Incidentally, overall, in order to get us to the cap and then get us to make room for the investments, in outlays it's about a $24 billion cut, overall. Of that, about two-thirds goes for deficit reduction and about a third of that goes for the investments on the outlay side. The five-year cut below baseline is $221 billion. And let me just give you a chart that reflects in part what we had to do.

Everybody has talked about not gauging the budget so much on the basis of baseline, but on what was spent in '94. And we basically are presenting this budget based on what we spent in '94 -- we aren't using baseline. But I think people do have to understand that baseline is an inflation reflection in the budget. Normally, the budget reflected the growth in inflation and, therefore, said that that level, with inflation, represented where the budget ought to be -- current spending. And there are those that would argue legitimately that if, in fact, a student loan goes up because of inflation and you then don't reflect that inflation, you're engaging in a cut -- certainly a cut for that individual. What we had built into the baseline for '95 through '99 is $221 billion in inflation for increases. So we are essentially having to reduce that, plus we've had to reduce more in order to meet the caps and in order to fund the investments.

Next chart. On the GDP again, as a percent of GDP spending as a percent of GDP, oftentimes the argument is made, yes, but what is this due to overall government spending? Overall government spending as a percent of GDP is going down. During the previous 12 years, in the Reagan-Bush years, it went up to almost 23

percent, in excess of 23 percent of GDP. It is now going down to about 21 percent of GDP. So it is clearly moving in the right direction in terms of federal spending to GDP.

Let me talk more specifically about some of the spending cut areas. To guide our approach on spending cuts, these were the guiding themes on spending cuts. Basically five themes: First, managing government for cost-effectiveness and results. The fact that we were at the end of the Cold War and could therefore find some savings as a consequence of that, better targeting government programs, eliminating nonpriority programs and paying for government services. Let me just give you an example in each of these areas. Obviously, managing government for cost-effectiveness and results, the 118,000 streamlining reflects part of that approach in better management. In addition to that, we include procurement reforms in the bill that were reflected in the National Performance Review, and we have also included, obviously, some of the streamlining, particularly at the Department of Agriculture, which is tightening up on their field offices.

With regards to better targeting, we're at the end of the Cold War. Obviously, the defense savings plus the savings with regards to the Energy Department in weapons productions reflect the savings that result as a consequence of that.

Thirdly, in better targeting government programs. These are some of the more sensitive cuts that we propose. The low-income energy assistance program: what we've done on that program is said that this is a program that we think can be better targeted. We have cut it, but we said in cutting it, can we not do a better job in targeting that program to the areas that need it? One of the problems with the low-income energy assistance program is that the formula that is built up around that program requires that when we send money out to assist people, for example, in a Minnesota or Maine or Buffalo who are facing hard weather conditions, that at the same time we've got to send money to Hawaii. It makes little sense to do that. Now, this is an area that we want to work with the Congress on. We think these funds can be better targeted. There is a contingency account that was included in this year's budget that we think can be used as well next year to minimize the impact here. But, clearly, this is an example of a kind of federal program that needs to be better targeted.

On transit operating subsidies, again, we feel that there is about a 25 percent cut on transit subsidies, for operating expenses, because we believe that the place to put federal dollars is on the capital side of the budget with regards to mass transit investment. We're prepared to assist communities in buying buses, buying cars, buying the kind of capital infrastructure that they need for mass transit. But with regards to operating costs, this is an area that we think government needs to participate more in at the local level.

We think that the key thing at the federal level is fully fund the ISTEA formula, the highway formula, fully fund the capital side of the budget, increase it. It goes up about 40 percent, incidentally, but in exchange for that, assume a greater part of the burden with regards to operating expenses. That's the tradeoff.

And, lastly, on public housing, where we think again we need to better target and better manage those dollars. In public housing, what we have is a situation where we've got about $8 billion in the pipeline. That's in the pipeline; it isn't coming out the other end. Public housing, for one reason or another, is not being constructed as rapidly as it should be. And so what we have said is let's do a better job assisting communities to build the public housing at the other end. Don't simply go through the act of putting

it into budget authority here, pumping it into the pipeline without having produced the results at the other end. We don't help people, we don't help the elderly, we don't help those that are interested in public housing simply by putting money in the pipeline. We've got to force the process to work better at the local level, and that's why we've made this recommendation. Again, it's an area where we think if we work with the Congress, we can develop a better program, a more effective and efficient program, by doing that.

Let me turn to the investments that we have in the budget as well, because obviously if there is one major distinction, I think, between the budgets of the '80s and the budget that we've presented here, it is where we have targeted the investments. The investments are largely targeted at what we think are important for the future of the country to take us into the next century. But let me just go through each of these areas because they are important. Jobs and prosperity, obviously the key elements there are education and training.

In the education and training budget, we've increased that almost 24 percent. If you look at the last two years, from the '93 level, we've increased that budget by almost 43 percent. In the area of technology, as another example, technology has increased by 22 percent over '94, almost a 50 percent increase in technology over the last two years. And let me talk through each of these areas so you know basically what we're focusing on.

On the first area, with regards to technology, the primary investments here are in the Commerce Department's National Institute of Standards and Technology, the NIST program, which gets very close to almost an 80 percent increase, because it is an area that both the President and the Vice President wish to emphasize for the future.

The Vice President's proposals for information superhighways are increased as well. The Defense Department's Technology Reinvestment Program, the ARPA program, is another one, as well as the Defense Conversion Dual Use Technology Programs are increased substantially as well. Energy conservation R & D, NASA's Mission to Planet Earth, and the National Science Foundation all are areas that we focused on for increase.

As I said, it's about a 22 percent increase in the technology and research and investment programs.

In infrastructure, again, our goal was to try to protect the formula funding for the highway program, and so we have done that. We've provided a substantial increase for the capital grants with regards to mass transit, and we've also increased funding for the Department of Agriculture's World Development Initiative. And clearly, with regards to HUD, we've provided more money for community development and for the empowerment areas that HUD is working on, as well as funds for the homeless.

On the training and education side of it, and children's programs where we had a major focus, there are substantial increases, obviously, for Head Start, Title I for disadvantaged elementary students, Goals 2000 gets a big increase, although it hasn't finally passed the Congress -- the feeling is that it will pass and, therefore, we've covered it in the budget -- School-to-Work apprenticeship program is also provided for. National Service gets significant funding to get more people to be able to work in their communities, and then there is a significant increase for the WIC nutrition program for pregnant women, infants and young children.

Training is an area that gets a significant increase here. It's almost a 31 percent increase over '94. I might say with regards to the training programs, if you look at '93 and gauge it

against '95, there's almost 143 percent increase here, because these are largely the programs to assist individuals who are dislocated and need to be reemployed.

As you know, the Department of Labor is going to introduce a work force security initiative; we have fully funded that in this budget. It's a significant expansion of those programs, and it's also a significant restructuring of the programs in order to more effectively assist those who are out of work.

In addition to that, we provide expansion of the Job Corps program, and for one-stop career shopping.

For that area of the budget as I indicated, we have a 24-percent increase from '94 -- about a 43 percent increase from '93. In the environment, we provide funding for the climate change action plan at the Department of Energy, natural resource protection and environmental infrastructure in the Interior Department is funded, and EPA's clean water and safe drinking water state revolving funds. Those are key programs that we fully fund.

The environmental investments are up 24 percent from 1994. The health security investments -- we provide additional funding for the Ryan White Program, for childhood immunizations, we increase funding for drug treatment; and we also provide what is, I believe, is a record increase with regards to the National Institutes of Health, in terms of getting those grants out.

Lastly, on fighting crime. We include $2.7 billion here for fighting crime. What we did essentially is we took the number that is in the bill that was passed by the Senate, which is roughly about $22, $23 billion. We took the portion for '95, built that into the budget. It goes for an additional 100,000 police on the nation's streets; it goes to fully implement the Brady bill; to establish community partnerships against crime; in the Department of Housing and Urban Development, the program that was announced the other day by the Secretary of HUD; and we have a major initiative to tighten border security and also slow down illegal immigration. Those are all parts of the proposal that are contained in the fighting crime side of it.

Lastly, on national security. Again, to stress what the President said in the State of the Union address, we have a commitment that there should be no further reductions with regards to defense spending beyond those proposed last year. We have established a plan for reductions in the Defense Department. They fit the bottom-up review that Secretary Aspin had developed at the Pentagon. We think we can do this in a way that protects our force structure, protects readiness and maintenance in our national security. The defense budget, incidentally, on budget authority is $252.9 billion; on outlays it's $259.9 billion. The '94 level on outlays was $268 billion.

The key for all of this is obviously to try to help our economy and try to move our economy forward. And probably, that's the most important point of all. I mean, I think we can -- you can look at budgets and describe them in terms of whether or not you get some of these programs enacted, some of the cuts enacted. But in the end, the fundamental test of a budget is whether or not it is working in the economy. And we think this is a program that, in fact, is working.

Let me just mention with regards to jobs alone, what we've seen in the private sector is more job creation since the administration took office than in the previous administration. We've been able to produce nearly two million jobs; some 1.7 million were in the private sector -- 70 percent more than in years, as I said, '89 through '92. Secondly, we have had real economic growth.

The economy has grown at a rate of 2.9 percent since '93. During '89 to '92, it grew at a rate of 1.4 percent. So, clearly, it is impacting as part of a strategy, part of the building blocks you need for economic recovery.

On investment -- and again here is the key between deficit -- why the focus on deficit reduction? Because we think that deficit reduction and a clear plan to reduce the deficit is important in sending a signal to the markets and to the world that we're serious about disciplining our budget. And that ultimately impacts as well on interest rates. By virtue of keeping long-term interest rates down, we have increased investment. And here you have the amount of increase in investment as a result of what's happening in the economy right now.

Business investment, which we think is a key measure of future growth, grew eight times as fast in '93 as it did during the years '89 to '92. And finally, continuing low inflation -- CPI has increased at the lowest rate since 1986. And that means, I think, we have laid the groundwork for a strong, steady recovery.

Let me quote Federal Reserve Chairman Alan Greenspan, who addressed this issue in his testimony. "The actions taken last year to reduce the federal budget deficit have been instrumental in creating the basis for declining inflation and expectations and easing pressures on long-term interest rates. Although we may not all agree on the specifics of the deficit reduction measures, the financial markets are apparently inferring that, on balance, the federal government will be competing less vigorously for private saving in the years ahead. Partly because of these structural adjustments, the foundations of the economic expansion are looking increasingly well entrenched."

With regards to the future and future spending trends, let me just present you with one final chart here, which tells us a lot about where the increases in spending are going to be for the future. The reality is that 90 percent of the increase in spending -- as we proceed from '95 through '99 -- 90 percent of the increase is going to take place essentially in three areas: in health care, in interest payments on the debt, and in Social Security. The area below there indicates discretionary spending which, as you can see, remains relatively small and controlled compared to these other areas.

I think what this says is, again, it is extremely important that if we want to stay on the deficit reduction track, that we have -- that we're now embarked on, that we've got to begin to address these areas, particularly health care because health care is the largest culprit in the entitlement programs right now in terms of being out of control. And so for that reason, we would again stress the importance that Congress has to enact a health care reform proposal that is able to control and lower costs in the health care area so that we can, in fact, keep this country headed downward on the deficit track.

To sum up, as the President has said about -- this is about the toughest budget Congress has seen in a long time. The cuts in the budget are needed, the investments in this budget are essential. We look forward to working with the Congress as they act on these budgets in the weeks ahead. And we are confident that Congress, in the end -- as they did last year -- will adopt this budget and keep us on track.

Happy to start answering your questions.

Q: Could you tell us how you treated the health care proposal in this budget, whether the tobacco tax is in, the MedicareMedicaid cuts?

DIRECTOR PANETTA: Yes. First of all, I should say that the overall budget does not recommend any tax increases. We do have some user fees that are part of the proposal. Secretary Bentsen mentioned the increase in the gun dealers' user fee. We also have some additional fee increases, but there are no tax increases that are asked as part of this budget; and we are not requesting reconciliation for those of you that follow that part of the budget -- we are not requesting reconciliation from the Congress as a consequence.

On the health care plan, what we do is reflect those areas that are on budget from the federal government's perspective, namely we do include on budget what happens on Medicare, what happens on Medicaid, what happens in defense, on veterans. We also include on budget the subsidies that are part of the overall plan so that we have, in fact, reflected those portions of the health care plan which we think do, in fact, relate to the federal government.

What is not reflected here is obviously the premiums that would be charged by the alliances in the plans that are provided for coverage at the state level. And the reason for that is that it is our view that since those premiums are paid to the alliances, which in turn pay them to the insurance companies which in turn pay them to the providers, that none of those funds in any way are related to the federal Treasury. None of them are controlled by the federal Treasury, and the consequence is that we think that issue -- while we will reflect that on the budget, incidentally -- I mean, our goal here is to basically establish a presentation on the health care plan. It's not that we're not going to present the entire plan, including the premiums for presentational purposes in the budget; we will do that. But for purposes of what, in fact, is impacts on the federal budget, that will relate to the federal aspects of it and federal spending that comes out of the Treasury.

Q: On the -- you were talking about the labor accounts and saying that the jobs programs are all fully funded. Can you tell us where those are in the budget? We've got end-of-year investments just for 1994 and 1995, and they don't seem to extend, as everything else does, to 1999. Where are they?

DIRECTOR PANETTA: Are you talking about the jobs? The job training stuff?

Q: Yes, the job training.

DIRECTOR PANETTA: What do you want, a page number?

Q: Well, yes, actually. (Laughter.)

DIRECTOR PANETTA: All right, Barry, you've got a page number. (Laughter.)

Q: No, I mean, because you've broken out everything else, and you know, you have all of this investment stuff and you're talking about commerce and everything. But the only thing that you haven't broken out in four years is the labor stuff, and I'm wondering why you didn't do that and where it is.


MS. SAWHILL: I thought it was there. I think we just need to find the right page for you, so we'll do that.

DIRECTOR PANETTA: If you'll talk to Belle Sawhill, she'll get you the right page.

Q: You made the point earlier about the necessity of doing something on health care reform to bring the budget deficit under control on a longer-term basis. Looking on page 13, the administration's estimate on the deficit, even with health reform, still is in 1998, 1999, $180 to $190 billion. Does that mean we might have still a deficit problem even with health care reform?

DIRECTOR PANETTA: Listen, I think it's pretty clear that, again, when you're trying to bring the deficit down, you've got to take on a number of areas in doing that. We obviously took on some major areas last year in the economic plan, both getting entitlement spending, as well as revenues to help us reduce the deficit. This year we're taking on, obviously, some challenges on the discretionary side, as well as health care reform, and trying to implement those.

I think, obviously, as we proceed, depending on what we see are the consequences of the actions we've taken, additional steps may be necessary. But I think it's pretty clear that the important thing right now is we've established an important beachhead with regards to reducing the deficit, both with the economic plan, with health care reform, with the steps we've taken on discretionary spending, we're headed on the right path.

And it may be important that we take additional steps, but it depends a lot on how the economy performs, it depends a lot on the elements of health care reform and how successful we are there. So, you know, I'm one of those that, you know, having worked with this issue over a number of years, the reality is that this is not an issue you can sit back and relax on. You've got to continue to be vigilant, you've got to be continue to look at the progress we're making.

Right now I think all of us feel very good about the direction we've set. But that is not to say that we shouldn't continue to be vigilant in the future.

Q: When individual members, particularly members of the Appropriations Committee, start to resist some of your cuts and your terminations, what will the administration posture be? Will it be, "Show us other cuts," or will you be willing to scale back some of your investment spending?

DIRECTOR PANETTA: Well, you know, I've been asked the question -- did everybody hear the question? Basically, the question is when the Appropriations Committees look at this and begin to resist some of the specific cuts, what will be our position, what will be our posture with regards to that.

The major difference here in dealing with the budget is that we have built in some very important disciplines as part of the Budget Act that was enacted last year. First discipline is, obviously, the discretionary cap. The fact that there is a hard freeze cap in the budget that basically requires the Congress to do exactly what the administration has done, which is to stay below that cap, that is not something that can be breached unless the Congress votes to breach it, which isn't very likely. And if it is breached, we then have a sequester tool which basically cuts all spending across the board in order to ensure that we stay at the cap level. It's a very important discipline.

The other discipline is, obviously, the Pay-Go requirement which says that if we are going to expand any benefits, if we're going to cut any taxes that impact on the deficit, we've got to pay for them. Those two disciplines have been extremely important, I think, in maintaining the track we're on with regards to deficit reduction.

With regards to the Appropriations Committee, I think they have to confront the issue of the cap. And so the question will be: if they don't particularly like the recommendations we have suggested with regards to the cuts we've recommended here, and the terminations we've recommended, they are going to have to look elsewhere. We think it's important for them to maintain the investments that are part of this budget.

And so we think that in the end, when they evaluate and fully evaluate the recommendations we've made here, and compare them to the important investments that we need to maintain, that in the end, I think a majority of these recommendations are going to be accepted by the Congress, largely because they don't really have anyplace else to go.

Q: Secretary Bentsen last week said he thought there would be blood on the floor. Do you think it's going to be that kind of a battle, or are you really not tinkering here with the margins, rather than the kind of battle you had last year?

DIRECTOR PANETTA: I feel pretty confident that this is a budget that we ought to be able to work with the committees on pretty quickly. I mean, we're prepared to sit down and work with them, as we always are. But I honestly think that because of the disciplines that are here, because of the cap, that while they might be tough decisions -- and they will be -- and while there may be some differences that we'll have to work out, that ultimately we're going to be able to move a resolution pretty quickly through both the House and the Senate.

Q: Mr. Rubin said at the outset that the budget you're presenting continues the President's powerful deficit reduction program. I'm curious, aside from things enacted last year and the spending cuts that are in place, and the taxes that will kick in and any other cuts, the budget that you're presenting today has some spending cuts and program terminations at least partially offset by increases. What is the net deficit reduction in this budget that is new and not as a result of last year's? What new deficit reduction that wasn't preordained by past legislation are you proposing?

DIRECTOR PANETTA: You sound like one of my old constituents -- "What did you do for me lately?" Let me just say, first of all, I don't just lightly accept the argument that last year's battle was just kind of something that was casually enacted, so why aren't you enacting another $500 billion.

Q: Are you going further this year than what you were required to do in last year's battle?

DIRECTOR PANETTA: Well, I think what we've basically done in the -- obviously the $500-billion package was the important step. It contained the disciplines I talked about. It also contains the entitlement savings that we've got to continue on track, plus the revenues that were part of that budget. And what we've done here in this budget is largely maintain that progress, but, in addition to that, on the discretionary side, forced ourselves to live within the caps.

Now, to do that, as I said, we are looking at roughly a $24-billion cut that had to be enacted on programs. And of that $24 billion, two-thirds basically goes for deficit reduction, a third goes for the investments. But to make room for the investments, you've got to cut other programs.

We are in a new era now, and it's not bad because it forces both the President and the Congress to make fundamental priority judgments, priority judgments about where we can achieve savings, where we can cut existing programs, where we can eliminate

programs that don't work, and where, as a consequence, we ought to be focussing our investments for the future.

That is, I believe, the kind of debate that we should have had for the last 12 years and we never had it. We have it now, and I honestly believe that that's a very healthy debate because it not only goes to what programs we're going to fund; it goes to the role of government and what we're about.

So I would not downplay the fact that $24 outside --only in Washington is $24 billion not a significant number. The fact is, it's a huge number and it involves a number of programs that we're going to have to deal with the Congress on, and I think it does represent an important step towards keeping us on track with the deficit.

Let me take you the next step, which I think I may be anticipating a question here. But the fact is that if you were to look at the Penny-Kasich recommendations, the Penny-Kasich amendment of last year, two-thirds of that is in this budget, either in the health care savings, the personnel cuts or in the discretionary cuts. Of the amendment that was offered last week, 50 percent of that is in this budget.

So while there will always be those who will say, "Gee, why can't we do more? Why can't we cut someplace else?" and, "We'll ultimately vote no because it's always the safe vote to vote no," the challenge to them is, "Where do you want to cut? Show us where those cuts are going to be."

And ultimately, I think you're going to find that if we can stay on track with the deficit we have established here, we will be doing a good job for the country and for our economy.

Q: To follow up on that, Penny and Kasich, if they come out with another proposal, as they might, they and others, is it anticipated the administration would again fight this year, as you did last year, proposals for large amounts of additional deficit reduction?

DIRECTOR PANETTA: I would recommend to both Congressman Penny and Kasich that they look at the budget, see where the proposals are that we've adopted here that reflect a lot of their proposals, and hopefully join with us in getting this budget passed.

Q: Leon, I'm still not clear on the relationship of your cuts to investment. On page 18, in the table of terminations and reductions, you come to a grand total of $22.2 billion in BA of cuts, okay?


Q: Then, if you go to page 28, on your investments, the grand total is $14.8 billion. That would be more two-thirds investment, rather than two-thirds deficit. How does that --

DIRECTOR PANETTA: I think the difference is budget authority compared to outlays, Leo. We went through this debate the other day ourselves, as a matter of fact. The budget authority number would be higher just be virtue of being budget authority. The outlay number I gave you on the $24 billion and the amount that then goes to investments is on the outlay side and not the BA side, and the numbers there are BA.

Q: Let me just follow up here. Your outlay number is only $4.8 billion on page 18 in terms of cuts. You change '94 to '95, outlays, minus $4.8 billion.

Q: The number on page 18 in outlays is $5.5 billion. There is an additional $10 billion of outlay costs that is not listed on Table 1-4.

DIRECTOR PANETTA: Yeah, these are illustrative, if you'll see at the top. This is not a complete list.

Q: Where do we get --

DIRECTOR PANETTA: Where do we get a complete list? (Laughter.) We can direct you to the right page in that damn thing. (Laughter.)

Q: Could you talk some more on -- about user fees? Could you give us the total amount of user fees for '95 and then the five-year, and then talk about where some of those are besides the gun dealer fee?

DIRECTOR PANETTA: On the user fee area I can tell you where some of the additional user fees are. The firearms dealer fees, we have some fees -- pesticide registration fees, --

Q: somewhere?

Q: Page 48.

DIRECTOR PANETTA: Page 48 of the analytical perspectives gives you a complete breakdown. But let me just summarize here for others. We have pesticide registration fees, National Park Service fees, FDA fees, and the SEC fees are the highlights of that. I think the sum is somewhere below about $1 billion for the fees. I should say that they are comparable -- actually, they're probably less than what the Republican budgets have included with regards to user fees if you look at both the Kasich proposal and the Dole proposal last year.

Q: How important were low interest rates in this improved picture this year? And how confident are you that these interest rates are going to continue low in light of the nervousness on Wall Street?

DIRECTOR PANETTA: Of that $126 billion that I mentioned in terms of what we reduced the deficit projection by, as I said, about $83 billion is due directly to the economic plan. About $22 billion is due to basically interest-sensitive areas; either interest on the federal debt or, for example, interest savings on RTC and some of the other areas like that as well, as the economic revenues or the return on revenues that we've had as a result of savings in the interest area. So it is important -- it's extremely important. The two work together, obviously.

Our hope is that if, in fact, we can continue to show the country that we're serious about sticking to a deficit reduction track, that there is no reason why the long-term interest rates ought to be affected in any way; that as a matter of fact, it ought to serve as an encouragement to the markets that we are serious about keeping the deficit down. And in fact, you can see that -- even though there's been a short up-tick in the short term, the fact is that there's a consensus that in the long-term interest area, we're going to be able to maintain that at a stable level.

Q: At a previous briefing, you said that most of the money for a crime initiative was going to come from the savings in reinventing government. Is that still how that would budget it all?

DIRECTOR PANETTA: Well, the way the amendment was framed on the Senate side, it basically took the savings from the reduction in personnel and basically put that into the crime area. And one way or the other, obviously those savings can -- you know, will be used. We have obviously incorporated those savings in our

overall budget, and we're using them and they have specifically defined that as the method they wanted to use. It's not contradictory.

Q: Have you reached the dollar goal? Have you reached the dollar goals on Reinventing Government that you thought you would?

DIRECTOR PANETTA: On Reinventing Government, of the recommendations that came to us from Reinventing Government, we had implemented about 85 percent of those recommendations, either in the budget or implementing them through executive order. I think Elaine Kamarck is here, if I'm not mistaken. Did she leave? Okay. But we have, frankly, the National Performance Review and the recommendations contained therein have been very helpful to us in terms of finding the kind of additional savings we needed to meet our target.

But more importantly, we haven't just put another report on the shelf. The fact is that almost 85 percent of those recommendations are being implemented.

Q: On targeted investment, as I understand, you've got $14 billion in budget authority for targeted investments. That's even less than the administration started off with, the $16 billion investment package. What is the rationale for having less than the administration insisted initially was necessary to get things rolling?

DIRECTOR PANETTA: We had to make tough decisions, as well, not only on the spending side and the spending cut side, but on the investment side, as well. And so the consequence was that we had to more specifically target the investments that the President felt were important for the future.

And so, as a consequence, we have tightened up on that, as well. We felt we had to implement the discipline not only on the cut side, but we had to implement that discipline on the spending side, as well.

Thank you.

THE PRESS: Thank you.

END 11:50 A.M. EST

William J. Clinton, Press Briefing by Assistant to the President for Economic Policy Bob Rubin, Chairman of the Council of Economic Advisors Laura Tyson, and Office of Management and Budget Director Leon Panetta Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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