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Office of the Press Secretary

For Immediate Release March 19, 1996
                           PRESS BRIEFING
                    BY OMB DIRECTOR ALICE RIVLIN,
                           LARRY SUMMERS,
                        AND JOSEPH STIGLITZ                          
                              Room 450
                   Old Executive Office Building                     

2:17 P.M. EST

DR. TYSON: I'm Laura Tyson, and I've been given the task of coordinating this event today as I coordinate many aspects of economic policy. I want to move quickly through our distinguished line-up of the members of the economic team. And I will start with Alice Rivlin, the Director of OMB, who will give us an overview of the budget.

DIRECTOR RIVLIN: Thank you, Laura.

Three words describe this budget: balance, reform, investment. With respect to balance, the Clinton administration has a strong record on deficit reduction already. The deficit, as you all remember, was $290 billion in 1992, the year before we came on board. It was down in the last fiscal year to $164 billion, 1995. Our estimate for this year, 1996, is $146 billion.

That's a pretty good estimate because the year is half over, even though the final numbers have not been put together by the Congress. Our budget estimate for 1996 assumes that we are successful in restoring the $8 billion that Congress wants to cut in education, the environment, and technology.

This budget lays out a plan for finishing the job -- balancing the budget by 2002. We believe that our plan would reach balance in 2002, using the economic and other assumptions of the Congressional Budget Office. But we can't be absolutely sure of that, so we have put in an insurance policy. If the Congressional Budget Office revises its economic outlook and its estimates in such a way that our budget does not reach balance in 2002, we propose additional discretionary spending, lowering of the discretionary caps sufficient to close three-fourths gap, whatever it is. Our budget will reach balance in 2002, even if the Congressional Budget Office changes the estimates.

Now the administration, as Joe Stiglitz will tell you in a minute, is slightly more optimistic about the economic outlook than the Congressional Budget Office, and we're not shy about saying so because in the last three years the economy has performed better and the deficit has come down faster than the CBO thought and even than we thought.

Under administration economic assumptions this budget would actually balance in 2001, and run a considerable surplus in 2002. If that surplus, or the fiscal dividend, as we call it, materializes, we propose to use it to extend the tax cuts that are proposed in this budget and to reduce the cuts in discretionary spending.

This budget does not just balance, however. It does it in the right way by reforming entitlement programs and investing in the future. About half of the spending savings in this budget are in mandatory or entitlement programs. We don't gut Medicare or Medicaid or welfare. We propose changes that will make those programs work better and cost less.

For Medicare, our budget saves $124 billion over seven years, while strengthening the program. It extends the solvency of the hospital trust fund for another 10 years. It gives seniors more choices among private health plans. And it mounts a vigorous attack on fraud and abuse in Medicare. It reduces the rate of growth of provider payments, but it holds the Part B premium at 25 percent of the cost.

For Medicaid, our program gives the states much more flexibility. They could move the Medicaid population into managed care without a waiver. The program limits per capita spending, but it preserves the guarantee that ensures that money continues to flow to the states and to the most needy people.

Welfare reform -- our program makes the assistance time-limited and conditional on work. But it protects children and it provides more money for child care.

The Vice President has talked about investing in the future. Our overriding objective here is to raise the living standards of average Americans. The budget continues the emphasis on education, on training, on technology, and on the environment. It continues to expand Head Start -- 800,000 Head Start opportunities this year on a track to one million by 2002. It increases the help for dislocated workers who have been buffeted by changes in the economy. The budget would assist twice as many workers as were helped in 1993.

The Vice President has talked about the environment. I just want to mention a singularly important program, the program to restore Florida's Everglades, a major project to protect a natural resource and a national treasure.

We reform and we invest on both sides of the budget -- spending and taxing. Larry will talk about the taxes. But the main point is the one that the President made so clearly. The President has a plan to balance the budget. He wants to work with the congressional leadership to do it and he wants to do it now.

Q How far apart are you with the congressional Republicans?

DIRECTOR RIVLIN: Let's wait until everybody's had a chance, and then we'll take all the questions we can.

Q It's not fair that we have to sit through all these speeches. (Laughter.)

DR. TYSON: These are meant to be informative overviews of facts, not speeches. Now we'll do a brief overview of revenue.

MR. STIGLITZ: I will try to be brief. The economic forecast contained in this budget document is identical to the forecast in the February budget. Overall, we believe that we will continue to see noninflationary growth with low unemployment. We project real GDP to grow at 2.2 percent to 2.3 percent over the forecast period -- a growth rate which is similar to projections from the CBO and private forecasters.

We expect that inflation will remain low and stable with the CPI increasing by 3.1 percent in 1996 and then edging down to 2.8 percent by 1998. This decline is largely due to technical corrections in the way the CPI is calculated.

We project the unemployment rate will remain low at about 5.7 percent throughout the entire forecast period. And we expect interest rates to drop slightly. Short rates are expected to fall, leveling off at four percent and the ten-year rate will fall, leveling off at five percent in 1998.

As I have said, these projections are the same as those included in the February budget. Given that we now have several months of data under our belts, we are more confident that our projections for 1996 are on target. In January of this year, we saw numbers that were somewhat weak. But since early February, the numbers have been particularly strong. The employment report shows 705,000 jobs created. Auto sales were brisk, durable good orders increased, and industrial production was help.

These reports suggest that our projections made two months ago remain on track. We believe that the outlook for the economy in 1996 is good. We expect continued steady growth with solid job creation and low inflation.

Let me conclude by saying for the past three years the economic projections for this administration have consistently been on target. Comparisons of our earlier projections with the economy's actual performance show only small differences. We believe that the economic assumptions presented in this budget are similarly sound and realistic.

Now let me turn to Deputy Secretary Summers, who will talk about the tax portion of this budget.

DEPUTY SECRETARY SUMMERS: I want to describe the tax provisions in the President's budget. Broadly, the tax provisions demonstrate that it is possible to balance the budget while cutting taxes for working families and promoting economic growth.

The President's tax provisions fall in three broad areas. First, the budget shows that we can provide real tax cuts for working families to promote economic security. It includes a $500 tax credit for every child under 13 in a working family. Second, for these same families, it provides a $10,000 tax deduction to help pay for the college education for children or training expenses for themselves. Also, expands IRAs with new flexibility to permit their use when people become unemployed, want to educate their children or buy a new home, or face catastrophic medical expenses. The budget includes for working Americans new provisions to expand the deductibility of health insurance for the self-employed and to make it possible for small businesses to offer in much easier ways than in the past, pension plans, a provision that potentially affects millions of Americans.

Second, the President's budget contains strategic incentives to drive the economy forward on a number of crucial dimensions. A second round of empowerment zones and enterprise communities, along with new tax incentives to encourage companies to clean up abandoned industrial sites, known as Brownfields, in economically distressed rural and urban areas. This provision is expected to leverage some $10 billion in investment, helping to revitalize communities. The budget also contains estate tax relief, targeted to cash flow problems that arise at the difficult time when the owner of a family business dies, and an increase for the amount of investment that small businesses can expense.

Third, the budget contains over 50 provisions to close tax loopholes, cut corporate subsidies, and improve compliance. These measures discourage transactions that are motivated not by making the economy better, but instead just for saving on taxes. They help to expand tax fairness for all Americans.

For example, the budget contains reforms to close loopholes that benefit Americans who renounce their citizenship in order to avoid taxes, and it reforms the taxation of income from foreign trusts. It also prevents corporations from benefiting from certain kinds of what are called tax arbitrage activities, or tax or financial products that are designed to facilitate tax avoidance. There are also curbs on manipulation of accounting rules.

To conclude, we balance the budget in seven years. We do so in a way that, as the Vice President says, does not unbalance the economy. The process, drive the economy forward and most important, we provide important relief for working American families.

Q Will it include a tax simplification plan? Any effort to move towards a flat tax, for example?

MR. SUMMERS: There are tax simplification proposals in several areas; most notably in the pension area where the rules affecting small businesses will be changed to make it much easier for small businesses to offer 401K-type provisions. The measures that are taken to close certain loopholes will, in the process, avoid the large amounts of complexity that goes into people trying to find their way into those tax-favored -- those kinds of tax-favored transactions.

Q But no capital gains tax cuts?

DEPUTY SECRETARY SUMMERS: The budget does not contain capital gains tax cuts.

Q Is the administration flexible on that?

DEPUTY SECRETARY SUMMERS: The administration has presented its budget which describes what we see as the right way forward to drive the economy forward. Obviously, we're prepared -- obviously, there are going to be discussions with congressional leaders, but this is the way we regard as right to help the economy go forward.

Q Dr. Rivlin referred to Medicare reform to allow more Medicare people -- more people on Medicare -- and that's done by the President by executive order?

DIRECTOR RIVLIN: I don't think so. I think we need legislation to do that because the current law requires the waiver process. We've granted a lot of waivers, but we would like to be able to give the governors flexibility so they don't have to go through this complicated waiver process.

Q I'll come at capital gains a different way. Does what you've done with capital gains preclude a possibility of some sort of compromise on rates?

DEPUTY SECRETARY SUMMERS: There are two provisions affecting capital gains contained in the President's budget. One goes against so-called short against the box transactions. These are transactions carried out by highly sophisticated, large investors which permit them, in effect, to realize the money from stocks that they hold without paying the capital gains tax. And we basically restrict those transactions.

We've also shifted to -- we also call for what is called average cost basis in capital gains. This will prevent manipulation by sophisticated investors, while, at the same time, protecting less experienced investors by applying the same rule for determining what the basis that an individual has when they sell an asset is to all classes of investors, using the rule that is now applied to mutual funds.

These are technical changes to correct evasions and which prevent the unwary from falling into a trap that's possible under current law. We do not address in the budget the broader capital -- the broader structure of capital gains questions.

Q I'd like to ask Dr. Rivlin, you have lots and lots of details in this budget about this sweet things you're offering. I don't see much specificity about the pain in terms of reaching balance in 2002. Can you give us some specific examples of who would feel the sting of this budget and when?

DIRECTOR RIVLIN: Well, there are very large cuts in this budget and they are of all sorts. We cut out of discretionary spending over the whole period $297 billion -- almost $300 billion. That means that almost all programs will be cut. We have made clear in the budget that we think there are certain high priority programs which include education and the environment and some of the things we talk most about which should not be cut and, indeed, in some cases should be increased. But everything else will be cut. And the fraction of programs that actually go down is quite high. In terms of budget accounts, even in 1997, there are 230 budget accounts that go down.

Q Dr. Rivlin, in terms of dollars --

Q Can you mention some of the more prominent ones that will be cut?

DIRECTOR RIVLIN: Well, Medicare is a good example of a program that will be cut. Who will feel the pain? Not beneficiaries. We have held the premiums at 25 percent of the cost, and we have not passed on more of the cost to beneficiaries. Who is left? Providers, clearly. Hospitals and doctors and other providers will not get as much money from Medicare as they otherwise would have.

Q What about the discretionary --

Q -- programs you actually propose to terminate?

DIRECTOR RIVLIN: We have some terminations, but you know, we have terminated so many programs already that there were not a lot of programs left to terminate, so that mostly what you see in this budget is reductions, but not terminations.

Q Dr. Rivlin, Senator Dole said once again today that he would call for several departments to be eliminated. What's your reaction? I mean, they say that there needs to be more cutting and that's the one way is to eliminate several Cabinet departments.

DIRECTOR RIVLIN: We don't think that's an effective way to cut the budget. It's a kind of trophy hunting that you can say, well, I eliminated the "X" department. But those departments have major missions that the American public wants carried out, so eliminating a department means moving the programs to other departments. And we examined this very carefully over a year ago and came to the conclusion that this was not an effective way to reduce the budget. We should make the departments work better and eliminate and downsize programs, but not cut out departments.

Q The President has said a number of times as he did today that there are fewer people working in the federal government than there were 30 years ago. The question is have you examined how many consultants, how many people are working on contracts for the federal government compared with 30 years ago? The estimates I've seen are a million people today and that's about triple the number that were working for the federal government 30 years ago. Have you looked into that?

DIRECTOR RIVLIN: No, I don't have any numbers on that. I don't think there's been any recent increase in the number of contract employees, but probably over 30 years they have increased.

Q How far apart are you, Dr. Rivlin, with the Republicans, dollar-wise, using CBO estimates, in reaching a deal on a seven-year? They want savings of how much more than you're willing to accept right now?

DIRECTOR RIVLIN: Well, they want a tax cut which is considerably larger than ours, and, therefore, have to have deeper spending cuts and their spending cuts are somewhat different. I don't have an exact number on that. It really depends on which Republican plan you're looking at.

Q But is it like $100 billion or $200 billion or --

DIRECTOR RIVLIN: Their tax cuts were originally a couple of hundred billion more than ours, and, again, it depends on what you're talking about in terms of where you think they are.

Q Dr. Rivlin, even with the entire -- you have in this budget, entitlement spending seems to grow as a share of the federal budget over the time period that we're looking at here, and discretionary spending continues to shrink further and further down. I'm wondering if the President foresees any further entitlement reform to change the balance that has been recurring now year after year and we actually get more in balance --

DR. RIVLIN: I don't think there's any inherent magic about what the balance between entitlements and discretionary spending should be. You're quite right that the discretionary spending cuts in this budget continue the decline in discretionary spending as a percent of the budget and as a percent of the gross domestic product.

Entitlement programs have growth built into them because of demographics, and in the case of health, because of the rising cost of health care per capita. I don't think we think we can turn that around. We can mitigate that by reducing the rate of growth.

Q Dr. Rivlin, a couple of things have changed since you last had a bipartisan meeting down here at the White House. One is Dole is now a likely nominee, Gingrich seemed to be deferring to him. How do you think the dynamic will now change in your meetings tomorrow with these leaders?

DIRECTOR RIVLIN: Time will tell. We are hopeful that the dynamic will change positively. At the time that the talks broke up, they broke up in part because the participants wanted to go out and campaign -- the Republican participants. And now we hope that that part of the campaign is behind them and that both leaders will come back with a new sense of let's get on with the job, let's do the legislative agenda that is before this Congress and this President.

Q Do you have any indication at the staff level that that's now agreeable?

DIRECTOR RIVLIN: We remain hopeful.

Q Any further reaction to the governors' proposal?

DIRECTOR RIVLIN: No. We continue to work with the governors and they continue to work on their own proposal.

Q Dr. Rivlin, how do you answer the Republican charge that the spending cuts are back-loaded and the tax cuts are front-loaded and that one recession can throw this all off kilter?

DIRECTOR RIVLIN: Well, if that's a Republican charge it should be leveled at their own budgets. The spending cuts are about equally back-loaded in both budgets -- almost identically so -- the total cuts and the spending cuts. In part, that is necessary in any budget where you're cutting a rate of growth the cuts accumulate, the savings accumulate. And the interest savings that go with reducing the deficit also compound. So any budget plan is going to have more of the savings in the last years than they have in the first years.

But the Republicans have put not only a similar set of phasings on their spending cuts, but since they have a much larger tax cut and it's more up front, they have higher deficits in the early years than we do.

Q Dr. Rivlin, is there any advice you'd give to your successor who will shepherd through this '97 budget?

DIRECTOR RIVLIN: Work very hard. (Laughter.)

Q Dr. Rivlin, is it true that your own internal estimates show Medicare savings of much more than $124 billion over seven years?

DIRECTOR RIVLIN: No, not at all. We used -- we wanted to have a set of Medicare cuts that would save $124 billion over the seven years. We put together a package that would do that, that were sensible cuts and that's how it came out, provider cuts.

We then discovered that the Congressional Budget Office probably wouldn't give us credit for the whole $124 billion, they would score it as something lower than that. So if you read the fine print carefully you will see that what we did about that was to say, if that's true, we have an additional policy, an additional reduction in the hospital reimbursement rate that will ensure that we get to $124 billion even on their scoring.

Q Dr. Rivlin, the President's budget would eliminate AFDC and replace it with a limited entitlement, a time-limited entitlement apparently. Would aid to children be cut off after two or five years?

DIRECTOR RIVLIN: No. Under the President's proposal, adults would have a time limit and would have to work to continue their benefits. But we do want to protect the children. So in the President's proposal we have a voucher for the children which would guarantee that they still got food stamps and Medicaid.

Q Dr. Rivlin, how frustrating is it to go forward with this with 1996 still at a stalemate? Do you think it looks a bit like a three-ring circus?

DIRECTOR RIVLIN: Oh, it does look like a three-ring circus -- And the fact there are really three rings, I think. There is 1996, where we are working very hard with the appropriations committees and with the leadership to find a set of proposals that the Congress can pass and the President can sign to keep from closing down the government and get on with the 1996 budget.

Second ring is the one we're talking about -- 1997. We have moved ahead with that today and the appropriations committees are already holding hearings on the 1997 budget.

And then there is the third ring, which is the larger seven-year deal. The best of all possible worlds is that we get the larger seven-year deal, and that the other two years are subsumed in that.

Q Dr. Rivlin, since the last time the Republicans and Democrats have gotten together to discuss the budget, long-term rates have backed up somewhat. Do you think that this adds any added impetus to the talks? I mean, the one thing everyone agrees will bring down long-term rates is a balanced budget agreement. Do you think the negotiators will feel any more pressure because of this backup in long-term rates?

DIRECTOR RIVLIN: Well, I think that may add one more reason, but there are lots of reasons why we ought to balance the budget and we ought to do it now. Some of them are economic reasons. Some of them, I think, are just good government reasons. We ought to be able to solve this problem.

Q Dr. Rivlin, a year ago the administration came forward with a budget that had $200 billion deficits -- as far as the eye could see, as the Republicans said. Now, a year later, it's a budget that goes to balance, deep cuts in Medicare and Medicaid, deep cuts in discretionary spending. Are you surprised how much of a change has come about? And do you see this kind of environment continuing?

DIRECTOR RIVLIN: Well, you have to remember what our budget of a year ago said. It contained cuts in discretionary spending. It contained the tax cut, which we are still talking about today. It hasn't been enacted yet. It did not contain entitlement savings. We said so at the time. We said, if we're going to get to balance, we have to rein in the entitlements and particularly we have to have a reform of Medicare and Medicaid.

We didn't put those in that budget. We didn't come forward with those until June, but I don't think it's been a major shift in what people thought had to happen in order to get to balance. But now we have a budget that puts it all together, that shows for everybody to see that it is possible to get to balance and to do it without the drastic cuts in programs that the Republicans propose.

Q Dr. Rivlin, I haven't heard much mentioned of the largest spending program of all, Social Security. It's been my impression that the administration is being quite vigorous in ensuring that in the private sector companies fully fund their pension programs and are restricted from easing those funds for other purposes. When will the administration apply equal vigor to the government-guaranteed pension rograms?

DR. RIVLIN: We've put a lot of proposals on the table today and at other times that take on some major battles to reduce the rate of growth of spending. I don't think anyone is in the political mood at the moment to talk about the long-term future of social security, although at some point, with the baby boom generation retiring, we will have to get into that conversation.

THE PRESS: Thank you.

END 2:48 P.M. EST