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Office of the Press Secretary

For Immediate Release February 6, 1997
                           PRESS BRIEFING BY 
                       OMB DIRECTOR FRANK RAINES,
                                Room 450
                          Old Executive Office 

12:12 P.M. EST

MR. SPERLING: I'm Gene Sperling. I'm just going to -- I'd just like to say a word or two and then we're going to proceed with rolling out the information that's in our budget.

This is our fifth budget. It's the fifth time that we've produced a budget with the President through a team nature -- the economic team, with the leadership of the Director of OMB -- this year Frank Raines who did an outstanding job in bringing this budget -- helping us bring this budget together.

The main point that I would just like to make before we start is simply this: When we came into office in '92, I think if you looked at fiscal debate in this country, it was pretty much divided between those who took a view that deficit reduction required almost blanket, across-the-board cutting of all programs regardless of their work merit versus, I believe, another group who was more intent on increasing public investments, but was not as focused on the problems of the deficit.

And I think that when you look at what Bill Clinton's special legacy is, his special fiscal legacy is that he has shown through his action and through our record that it is possible and indeed an imperative to be able to bring down the deficit to increase private sector investment at the same time that you are increasing the public sector investment in education, in children --

When we came into office in 1992, the projected deficit for the year 2002 was $587 billion. We had the highest nominal deficit. We trailed Japan, France and Germany as percentage -- on the deficit percentage of our economy. Today we are at $107 billion. And the lower interest rates that has brought has led to over 10 percent increase in annual investment in productive equipment, which is the best for any administration since the Kennedy administration.

Now, at the very same time that we have gone -- taken the deficit down and taken spending down, we have increased investments in key areas so that today 15 million more families -- hard-pressed families -- are getting up to an average of $1,000 more in their Earned Income Tax Credit.

Head Start -- $1.2 billion is spent more every year right now than when we came in -- a 43 percent increase and a 55 percent increase with our new budget; 1.7 million more people are in the Women, Infant and Children program -- a 38 percent increase. A billion more is spent in Title I spending every year. Dislocated workers spending has doubled so that 274,000 more dislocated workers get training every year. This is in addition to the brand new programs like school-to-work, national service; $2.4 billion increase. Increase in NIH and Ryan White funding, going from $386 million to $996 million.

It is worth mentioning this because I believe if we were back four years ago, the notion that you could so dramatically have this kind of impact on people's lives with these kind of increases at the same time that you went from $290 to $107 billion would have seemed virtually impossible. And our effort to do it reflects not an effort to balance priorities or balance constituencies, it reflects the balance that this President and this economic team thinks is necessary to have the kind of private sector investment and public investment you need to have a growing economy.

And when we look as the economic team at the education initiatives, we look at the specter of having the graduating class of Americans be, a decade earlier, a class that has access to the information technology, to the Internet, to being a class of which something was done about making sure all children can read -- these are not just social issues. If you have -- if we, through our efforts -- the President, through his mobilization, can speed up the day that every child is literate by third grade and is technologically literate by 6th grade -- we will be doing a tremendous thing for the productivity of the workplace.

And so we feel that this budget continues very much the economic philosophy and the theory that the President has put in place and has shown can be done. And I ask people to look at these numbers carefully when making their judgments.

We will proceed in the following order. Joe Stiglitz will speak first to go through the new economic forecast. I want to mention that Monday is Joe's last day. He is one of the nation's preeminent economists. We have been honored to have him on our economic team. We're very happy that we have been able to have a replacement who is also -- enjoys such a tremendous national reputation. But Joe's last day is on Monday, and he will then be becoming the chief economist at the World Bank.

Joe will be followed by Secretary Rubin, who has promised that he will try not to be hysterical. (Laughter.) Though he said perhaps slightly emotional -- (laughter) -- as he describes our revenue package and our tax cuts. And then Secretary Rubin will be followed by Frank Raines who, while he has not yet balanced the budget for us, he has disgraced all of us who have been here four years by in only two months coming up with what is by far the President's favorite economic chart ever. (Laughter.)

So we will proceed in the following order. We will take questions when Director Raines is done. We will take questions for a while. At some point, Larry Haas will cut it off and then many us will stay around here to answer more specific questions.


MR. STIGLITZ: Thank you. This budget document includes the administration's new economic forecast. Over the past four years, our economic performance has been excellent. This past year was no exception to the trend of solid GDP growth, combined with strong investment, robust employment increases and low inflation. Overall, we believe that this strong economic performance will continue.

Our forecast is based on the assumption that the President's proposal to balance the budget by the year 2002 will be enacted. Over the next two years, real GDP is projected to rise 2.0 percent annually. Starting in 1999, the pace of growth is expected to rise to 2.3 percent annually, the administration's estimate of the economy's potential growth rate.

Our real growth assumption is very close to the consensus of blue chip forecasters for 1997 and 1998, and to the Congressional Budget Office's January estimate for the 1997 to 2002 period. Consistent with our forecast of continued economic expansion near the economy's potential, we believe that inflation will remain low and stable.

Last year, the rate of CPI inflation was elevated by rapid increases in food and energy prices. These prices are not expected to increase any faster than other prices over the next year. And so the rate of increase in the CPI is expected to edge lower, an average of 2.7 percent a year over the forecast horizon. The decline from current inflation also reflects the likely effects of technical adjustments to the computation of the CPI that have been announced by the Bureau of Labor Statistics.

Given the outlook for mediocre -- for moderate inflation -- (laughter) -- for moderate inflation, we project the chain-weighted GDP price index to grow at 2.6 percent over the forecast period. Combining this with the real GDP growth figures, we expect to project nominal GDP growth, averaging 4.9 percent over the forecast horizon.

We project the unemployment rate will remain low. We've revised down our long-term projections to the unemployment rate to 5.5 percent, from 5.7 percent assumed in the mid-session review. This reflects the increasing evidence that the unemployment rate, consistent with stable inflation, has moved down a little. The combination of low inflation and the movement to a balanced budget by the year 2002 will create a very favorable environment for interest rates.

Short rates are expected to fall with a yield of 91-day Treasury bills, leveling off at 4.0 percent. We also see the 10-year rate falling to 5.1 percent over the forecast period. Thus, we are projecting that the term structure will flatten slightly to a shape that reflects the historical experience in periods of low and stable inflation.

In conclusion, let me say for the past four years the economic projections of this administration have consistently been closed to outcomes. Comparisons of our earlier projections with the economy's actual performance show only small differences. If anything, we have been too conservative. We have underestimated real GDP in every forecast and overstated -- overestimated inflation and the budget deficit.

We believe that the economic assumptions presented in this budget are similarly sound and realistic and they are in line with the forecast of the blue chip private forecasters and the Congressional Budget Office.

Finally, as I said at the beginning, we believe the outlook for the economy is good. We see some variations in growth from quarter to quarter. Some recent quarters have been extremely strong. The overall economic fundamentals of our economy are sound and conducive to steady growth with continuing job creation and low inflation.

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

SECRETARY RUBIN: Thank you, Joe. Next time Gene introduces me, I'm going to draft the introduction. (Laughter.)

In any event, let me start with a comment that reflects the four years that I've been here. I can remember when I was on Wall Street and we used to see budgets coming out of Washington and we would write up little research reports and we would deride the assumptions, and rightly so.

When we came here, the President -- well, then President-elect Clinton because it was during the transition -- said to us that he was willing to argue about policy, but he wanted to have realistic numbers. And that's exactly the strategy that we followed for four years, and is why, as the President, Joe and others have said, the deficit in each of those four years came in lower than we had projected at the beginning of the year. And it's exactly in that spirit that we have moved forward in the budget that we're presenting today.

In that budget, we have the President's tax proposals. You have them in your budget books, so I won't repeat them. Let me just very quickly go down the categories. There's a phase-in $500 tax credit for dependent children. There are expanded IRAs. There's a $1,500 tax credit for post-secondary school education or a $10,000 phased-in deduction for college tuition. There's elimination of capital gains taxes for home sales profits of less than $500,000. There is also a proposal -- and expanded work opportunity tax credit to help people move from welfare to work. And that's part of a larger program -- or series of programs, I should say -- that are directed toward helping move the residents of the inner cities into the economic mainstream.

There are $34 billion of loophole closures or elimination of outmoded subsidies. And there's $42 billion which consist primarily of extenders -- that is to say, extending current law. That's a tax raiser as well.

Let me mention one other item, if I may, because it's very important and it gets very little focus. This budget seeks a significant increase in overall funding with respect to this country's leadership in the international economy -- the global economy -- and the international arena more generally. That is to say, it seeks appropriate funding to meet U.N. arrears, and it seeks appropriate funding for the World Bank, for IDA, and for the sister development banks. We think that that funding is absolutely critical to our self-interest -- not charity, but our self-interest -- our national security self-interest and our economic self-interest.

Taken all together, this budget continues the strategy the President began the first day he walked into the Oval Office. And I am confident that if put in place it will contribute to continuing the kinds of economic conditions that we've had the last four years.

With that, Frank Raines.

MR. RAINES: The chart. Like that? Multicolored and balanced, too. (Laughter.)

The budget that we are presenting today is a budget that I think is historic in that, for the first time in 30 years we'll be able to tell the American people that we have brought fiscal sanity back to their government. And I'd like to make five points about this budget that we are presenting.

The first point I would like to make is that we have already done much of the hard work necessary to balance the budget by the year 2002. You've often heard the numbers of reducing the budget deficit from $290 billion in 1972 before the President took office down to $107 billion in 1996.

What you may not have seen is that the impact of that is far greater as you look out over time, and that's what this chart really demonstrates. The green areas on this chart indicate the total savings already achieved by actions taken by the President and Congress since the President took office. That adds up to a total of $2.5 trillion of deficit reduction that is embedded in 2002 from the projections that the President faced when he took office.

What we have left to do, and what this budget is about, is the area in the far righthand corner -- roughly $250 billion remains to be done to actually bring the budget into balance by the year 2002, so that the most important point I think -- first point is that we have achieved an enormous amount, and in comparison to other countries what we have achieved is quite extraordinary.

We must remind ourselves that the United States has the smallest government of any industrialized nation. About 33 percent of GDP is devoted to government; about 21 percent of it in the United States and -- 21 percent in the national government and 12 percent in the states. That compares, for example, to a government of 50 percent of GDP in Germany, a government of 54 percent of GDP in France, and a government of 36 percent of GDP in Japan. So we have a smaller government than other industrialized countries.

We also have the smallest deficit of any of the other major industrialized nations. We've been able to reduce our deficit to 1.4 percent of GDP at the national level, so that our government, as a result of these policies, is neither growing at some rapid rate, is not out of control and, indeed, we have managed to lead the world in our fiscal policy.

My second point is that we have already reaped many of the benefits from pursuing this fiscal policy, and you've heard a number of them. I'd just like to stress a couple. We have seen dramatic growth in the private sector since the President's plan was put into effect, and such that we've seen business investment and equipment is seven times as fast as it was under President Reagan and five times as fast it was under President Bush.

Of the 11 million new jobs that were created, 93 percent are in the private sector. And if you compare interest rates today to the last time we had unemployment at the current level, the interest rates today are 1.5 percent lower than the last time we had unemployment at this level. So we are receiving the benefits from the pursuit of this fiscal policy.

My third point is that the budget the President is proposing is a credible budget with real savings based on conservative assumptions. As Joe mentioned to you, we've had a pretty good record in estimating on what our budgets will be, what our budget deficits will be. And this is somewhat new. Many of you remember the days of rosy scenarios. Indeed, in the 12 years prior to the President taking office, the deficit came in higher than forecast 10 times. In this administration, every estimate of the actual deficit was lower than forecast, indeed, lower by an average of $50 billion a year -- so that we have been very conservative in our estimates, and the President has broken this pattern of rosy scenarios.

We are proposing a total of $350 billion of deficit reductions in this budget; $137 billion in reductions in discretionary spending, $121 billion in reductions in mandatory spending; $34 billion by eliminating unwarranted corporate tax subsidies; $16 billion by reductions in interest costs, and $42 billion by extending tax provisions that the Congress has allowed to expire.

Now, from that $350 billion of savings, we're using $98 billion for tax cuts for American families. The overall impact of the President's proposal -- can you put the GDP chart, the results -- the overall impact of the President's proposal since he has taken office is to reduce the size of government as a percentage of GDP, and it's a dramatic reduction. Since 1960, the federal government has spent on average about 21 percent of GDP and we've taxed at about 8.5 percent of GDP for the familiar deficit of 2.5 percent of GDP.

In his first four years, he has brought down that number to 20.8 percent of GDP. The budget he is proposing today will reduce the size of the government to 19 percent of GDP, a reduction that's unprecedented in the postwar period. So that this budget, it not only balances the budget, balances revenues and expenditures, but continues a pattern of reducing the size of the government by a dramatic percentage, which will further reduce the size of government in the United States as compared to governments in other industrialized nations. And this is a singular achievement that will be even more the marvel of our competitors.

My fifth point is to emphasize that this budget also invests in the nation's priorities. And you have heard and you material on this, I will not all of them. But I would just point out that the extraordinary investment the President's making in education and training is of historic size. He gave you one measure -- 20 percent higher in those program from 1997 to 1998. It will be 40 percent higher in the year 2002. And if you take in constant dollars the same array of program during the height of the Great Society when Lyndon Johnson was President in 1968, this is twice as much as was being invested in constant dollars in these activities as was invested in that period.

So in the context of a balanced budget, the President has made tough choices and he has managed to invest significant dollars in what he considers to be the most important matters facing the nation, which is preparing our people to enter the 21st century successfully.

The last point that I would like to make is that we need bipartisan cooperation to reach a five-year agreement to balance a budget and to achieve our goals. We obviously think that the President's plan is the best plan for reaching balance in 2002. But we understand that we must join together with the Legislative Branch who have the responsibility for ultimately enacting a budget. The President's budget should be the starting point as Congress begins its discussions on adopting a balanced budget.

The time to balance the budget is now. Our economy is strong so we can absorb the kinds of cuts that are going to be necessary to bring the budget into balance. It appears that at least for the moment, the political stars may be in alignment, where it's in the political interest of both parties to deliver to the American people the balanced budget that they have asked for.

And again, so far, everyone seems to have learned the lessons of the budget battles of the last two years, that the American people will not reward stalemate and will not reward conflict, but, indeed, is looking for real progress. The President has voiced his commitment to reach an agreement. The leaders of Congress have voiced their commitment to reach an agreement. So I'm cautiously optimistic that we can get it done. But I'm also realistic about it. Agreements that have seemed inevitable have eluded our grasp in the past. And if we're to avoid that fate today, we're going to have to work together in good faith. And this administration led by the President is prepared to do just that.

We'll be happy to answer any questions.

Q It sounds like you're very open to compromise. But where do you think will be the biggest stumbling block? Where will the President fight to hold the line?

MR. RAINES: As the President pointed out, there are a number of matters in which we may simply have disagreements -- in terms of discretionary spending -- in much of what he has proposed as his investments in discretionary spending; with regard to Medicaid, in the past, there have been big disagreements. We don't know the extent to which they may exist today. On the size of a tax cut, there may be disagreements. We don't know.

In fact, we -- I'm looking forward to going and testifying before Congress to hear some of both their criticism, but also their ideas of how they might modify the President's plan and make it better. And if they put their ideas on the table, we'll respond and give them our response to their ideas. But in the absence of new ideas, they can with confidence enact the President's plan because the President's plan is a five-year plan that will, in fact, balance the budget and deal with our nation's major priorities.

Q Do you think they'll go for the U.N. -- paying the U.N. debt?

MR. RAINES: I believe that the -- what we have been able to do in seeking reforms in the United Nations and the change of leadership that has occurred in the United Nations has provided a unique opportunity for us to complete the job, get the remaining financial reforms in the United Nations and then for us to pay our debt. So I'm encouraged based on my conversations that we do have an atmosphere in which we can make progress and achieve both of our goals -- financial reforms as well as paying up what we rightfully owe.

Q The President's budget talks about the difference of scoring and what the question of scoring may mean for the future. But he's already agreed to abide by CBO scores. Can you describe the gap that you anticipate already between the baselines of CBO and OMB, and what the reference to, "if the economy doesn't perform as we think, we will either rescind the tax cuts or cut spending" means in terms of accepting CBO scoring?

MR. RAINES: Sure. We are committed to having this budget scored as being balanced by OMB estimates as well as using CBO's estimates. And we will, indeed, submit the budget to CBO to be scored as balanced.

As many of you know, for the last several months I've been asking to get the CBO numbers so we could actually show you in the budget document how we would do that. We didn't get their numbers until after the budget was printed, and so we're going to have to show you today how we are reaching balance using CBO's numbers. And the way we're doing it is quite simple. If our estimates for the first time prove to be inaccurate and the economic pattern is different than we expect -- and we don't believe it will be inaccurate and we've got a good track record of accuracy -- we will first go to a fast track process in working with Congress to make the additional changes that are necessary in our path in the out-years to ensure that our estimates do come true. And if that doesn't work, we are proposing sunsetting $22 billion of tax cuts, as well as proposing an across-the-board reduction in spending, applying to all programs other than Social Security of 2.25 percent.

As you can see in the small size of that across-the-board reduction, there is not a fundamental difference between the two of us that should drive policy. We expect to have our budget scored as balanced by CBO so that we can then begin the tough work of not having simply proposals, but actually adopting a real balanced budget plan.

Q The President talked a lot about the tax cuts in the programs that he wants to expand, but both he and Mr. Rubin kind of glossed over specifics on the programs that are being cut and where these cuts are coming from. I wonder if you could give us a little bit more of a rundown on exactly where you're going to get the money to pay for these things you're offering.

MR. RAINES: Well, as I mentioned, we have $350 billion of cuts prior to our tax cut; $137 billion are in discretionary programs. That results from us looking program by program and scrubbing program by program --

Q And give us an example of scrubbing a program. What does that mean?

MR. RAINES: It's all boring. They're all boring. They are --

Q Give us a sense -- it may be as interesting as you're going to have a HOPE Scholarship. Give us an idea of where people that are not going to get things that they used to get under this plan, or where the money is coming from.

MR. RAINES: We'll give you some of the real interesting ones. Bob will do some of the tax ones for you and then I'll come back and I'll do some of the others for you.

Q Give us some of the corporate loopholes --

SECRETARY RUBIN: These are the things I always used to take advantage of. (Laughter.) It's what happens when you put the hen in the chicken coop. But in any event, first place, there is a document. I don't know if we've distributed it or not, but there is a document that has all of these in it, so you can get them. But there are certain ways of shorting against the box.

Q -- try understanding --

SECRETARY RUBIN: Rita, you asked the question. (Laughter.) Shorting against the box, which enables people to avoid realizations, but in effect, to accomplish the same purpose as if you've made a sale. We would eliminate that. There are bonds that have such long --

Q Can you give us the dollar figures on that?

SECRETARY RUBIN: Dollar figures on that? I probably could if I could find it -- short against the box -- this thing is $311 million -- we actually have a document on this, so you can get the document. Each one of these is very interesting and you can -- $311 million over five years.

There are bonds that have very long maturities which, in effect, in many respects are just the same as equity, and so we disallow the interest deduction for those bonds. We require an averaging of prices of shares that you buy over a period of time so when you sell them use the average price rather than cherry-picking and choosing the basis that minimizes your taxes. That raises $3 billion. And this list goes on and on and on, and they're basically --

Q The big one is corporate loopholes relating to multinationals --

SECRETARY RUBIN: There is a foreign sales source -- well, a number of these are big, actually, but there's a foreign sales source change that, if I remember correctly, raises about $7 billion or something like that.

Q What about the top of the cap on Medicaid? Could you talk about that specifically?

SECRETARY RUBIN: Frank would be delighted to address that. (Laughter.)

Q What do all these tax things add up to as a tax increase?

SECRETARY RUBIN: I don't know if I would call them a tax increase; what I would call them is an elimination of loopholes and unwarranted subsidies. And they -- (laughter) -- those loopholes and elimination of unwarranted subsidies -- that's to be distinguished from tax raises -- are $34 billion.

Q If you were on the other side of the fence, though, you would call it a tax increase --

SECRETARY RUBIN: Not if I was fair-minded. (Laughter.)

MR. RAINES: I think the important point Bob was making, then is that we looked at the tax code in the same way we looked at discretionary programs and mandatory programs in looking for things that we believed were either low priority or unfair and made reductions. With regard to the mandatories, the largest reductions we have are in Medicare, which is $100 billion over five years, $134 billion over six years. The Medicare reductions are primarily in reductions for providers, where we are making reductions for each type of provider in the -- within Medicare, we're introducing new market-based changes in our purchasing there, but that will add up to net reductions of $100 billion.

In Medicaid, there are reductions of $22 billion. We're reducing the disproportionate share payments to hospitals, for hospitals, and we're also having a per capita cap. The net savings there is $9 billion, because we're reinvesting $13 billion of those cuts into the program in part to expand coverage for children.

Q Could you describe the per capita cap --

MR. RAINES: I will, indeed. The per capita cap we had proposed last year, we're reproposing it again this year. The purpose of this per capita cap is not to produce dramatic savings in the short run, it is to avoid a major spike in Medicaid spending in the out-years. What happens about every three or four or five years is the states discover a new way to move parts of their budget into the Medicaid program and, therefore, into being matched by the federal government. And we have to then go after that and then put a -- stop that effort.

But we've already seen an explosion in the Medicaid program. What the cap does is it says on a per person basis, the amount by which costs can go up will be limited. We don't see savings in this until about the year 2000 because we're using it more as a safety valve than to generate big savings now. But if there was an explosion, this would save us a lot of money and ensure that we actually hit the path that we are looking for.

The important thing is that we maintain the entitlement so that new people can come on, it's just the cost per person will have a cap and will only be able to rise by a certain percentage.

There must be a question on the District of Columbia.

Q -- discretionary and what have you eliminated, if you can tell us that? You didn't say what you've eliminated in terms of domestic discretionary spending. And could you also explain what year you eliminate it, when do the domestic cuts start?

MR. RAINES: Well, I think you're going to want to go down program by program. There is -- you will not find an across-the-board approach to this. We really went program by program in making detailed decisions. But we have -- this administration has eliminated over 200 programs in this budget, 250 programs or projects are proposed for termination within the budget. We have looked at things that range from narrow categorical programs in education to funding for water projects that are not economically viable. We have reduced subsidies in some of our export promotion programs. We have reduced equipment that is being used in the Reserve program. We've eliminated projects related to clean coal technology. We've reduced the amount of building in federal buildings fund. We have made changes in our safety net in the farm programs.

We have a litany of changes that we have made across the government that are actually fairly well laid out for you in the budget itself and I think it will probably be easier for you to follow there than in my reciting them.

Q Could you go back to Medicare for one moment? Are you freezing payments to some HMOs, and if so, in what cities or states is that occurring?

MR. RAINES: Within managed care, we are achieving over $30 billion of savings. Those savings, though, are coming from a number of sources. One, we are moving away from managed care the need to help fund graduate medical education. So that's really not a cut to them. We're simply taking it out of the payments we make to them. We're going to make the payments directly to the teaching hospitals.

We also are changing the disparity in managed care payments. Today, managed care payments are based entirely on what the fee for service is in your local community. So a fee for service is low, then the managed care payment is low. In some areas, fee for service is very high, and so the managed care payment is very high. And not surprisingly, where it's very high, managed care is thriving and indeed has been enormously profitable. And where it's very low, managed care has not been able to take hold.

We're believers that managed care can help us hold down health costs. So the first thing we're going to do is we're going to bring up the payments in the low payment areas and begin to bring them down in the high payment areas. And once we have done that, we are also going to change our formula from 95 percent of the fee for service rate in that county down to 90 percent of the fee for service rate. So that in a jurisdiction that has very low payments for Medicare now for managed care, they'll see an increase. And in states that -- in counties that have a payment that's too high, they'll see a decrease.

Q Where around here can you find that, with the high, low payments are?

MR. RAINES: You mean, county by county?

Q Yes.

MR. RAINES: There are -- you won't it in there, but we will be able to have someone -- HHS will be able to go with you county by county to tell you. But it's -- there are a lot of counties and we don't have that in the budget.

Q Frank, I don't want to short-shrift the national interest, but I have an interest as well as my colleagues. But if my colleagues would indulge me for just a moment. The President did say at his press conference last week that he had a package of tax relief for the embattled District of Columbia, the Federal City. I wonder if you could go into that -- what that might be. I'm a little unclear on that and what the overall response might be.

MR. RUBIN: Yes. There is roughly -- there's an economic development corps and it will be roughly $260 billion of --what? Did I say billion? (Laughter.) You know you get used to these numbers --

Q Mayor Barry would love that.

MR. RUBIN: Yes, I'd like to move the decimal, if I may -- $260 million over five years. The content of that $260 million is something we are still working on, but we are very close to reaching conclusions, at which time we will announce them. But they will be incentives for economic activity in Washington, D.C.

Q So the tax cut of Mrs. Norton is one end, and the ability of the city to have a reciprocal -- critic say -- commuter tax, are they on the radar screen at all, any elements of that?

SECRETARY RUBIN: Those are separate issues. Those are not the kinds of tax incentives that we're looking at with respect to $260 million.

Q And the other stuff that you've outlined, the taking over of the certain operations, pensions -- that's still there, viable?

MR. RAINES: Absolutely. We believe that the plan is a fundamental change in the relationship of the federal government to the District, that it will have the effect of helping the financial authority in the District begin to deal with the city's problems. But the city is still going to have to make a lot of tough decisions within that context.

Q Are we confident the city will?

MR. RAINES: I'm confident that the city can.

Q Frank, the President said that you would elaborate on why this budget is going to set the foundations for 20 years of balanced budgets. I was looking back through the records and we've had balanced budgets or surpluses in only six of the last 55 years. What is it in this budget and the projected policies that you have that's going to give you a balance or surpluses for the next 20 years?

MR. RAINES: I'm glad you asked that question. Can you put the 2020 chart? As you all know, projecting budgets over many years is a precarious task, although if you were in the beginning of the 1980s and you simply projected, as a predecessor of mine did, deficits of $200 billion as far as the eye could see, that would have been a pretty accurate forecast, as you can see over here.

But what we have done in this budget is make fundamental changes in mandatory programs and in the tax code, as well as in discretionary programs that brings down the growth of government. I previously showed you a chart that showed us moving from 21 percent of GDP down to 19 percent of GDP. It's that path that makes the difference. And you can see in this chart going out to 2020 that that same red line that you see that's blue over here, that's what the President faced when he came into office.

The blue line in the middle is what we have achieved so far. And there's been a dramatic change in the path so far. What the green line says is, if we adopt this balanced budget that's balanced by 2002, the budget essentially stays in balance over that period, so that this is a budget that makes a fundamental difference in the trend line of budgets.

Now, what that shows is that there's a surplus. I describe it as in balance, because these numbers can move around, but the point is the difference between the red line and the green line. It's --

Q -- this supposes no recession, right?

MR. RAINES: No, the green line is actually not very affected by recessions over that long a period of time, because when you have a recession, revenues decline dramatically -- during the first part of a recovery, you recover much faster so that there is some effect, there is some effect in debt service, but it's swamped by what's going on here in general.

Q -- budget doesn't include any long-range changes to Medicare or Social Security. You're saying that you don't have to deal with the entitlement problem and you still can come out --

MR. RAINES: I'm glad you asked that question. Put up the next chart. (Laughter.)

Q Set him up.

MR. RAINES: What happens after 2020 is what you all know about what happens when all of us retire. And that is when we go from 400,000 people a year turning 65 to 1.4 million people a year turning 65. So we still have that longer-term problem after 2020 that we have to deal with. We have to deal with Medicare as we move out into that period; indeed, Medicare will probably -- we have to begin to deal with it by 2007. And Social Security we have to deal with in that period, and again, we want to begin dealing with it earlier.

The major point here is that we have time. Small changes today make big differences in that outer period. So what this balanced budget does is, it sets the framework for us to begin to deal with this demographic problem, so that without the demographic problem, we have eliminated the structural budget deficit. We haven't dealt with the demographic problem, but the President has called for bipartisan cooperation in dealing with that out-year problem. But the key item is that we will have set a base in the budget from which to do that, and where we can then move to making those small changes that will have a big impact out there.

Q Medicare alone is projected under intermediate projections to be eight percent of GDP by 2050. I don't understand what it is about the presidential policy that would bring that down to where you have it there, let alone the rest of the federal budget.

MR. RAINES: One of the things I think I strongly encourage in each of you as you go through the battling numbers in the next few days is, you're going to see a lot of numbers that are without any policy changes. And those numbers are the numbers that constitute that blue line going up in the middle there. That's without any policy changes. The budget -- this budget is all about policy changes. That's what we are proposing, are major policy changes.

So in Medicare, for example, if you notice in our numbers, we said it saves $100 billion in the first five years -- $134 billion in six years. That number keeps rising. That's the importance of the wedge that we have created in our savings, is that the numbers, the improvement continues as we go forward year after year after year, and that's why we have done this in such a methodical way to start the reduction in deficits the first year and have it grow and grow and grow, rather than try to come in and do it all at once, which would be politically impossible to do and probably physically impossible to do. We've got a path that will continue to produce benefits for decades.

Q -- the deficit increase in the next two years were at $107 billion from '96 -- showed going up to I think about $125 billion next year and $120 billion the year after that. Why are you allowing the deficit to increase --

MR. RAINES: The deficit will increase between 1996 and 1997. It will go down from 1997 through 2002.

What's happening in 1997 is an anomaly. We had a fabulous year in 1996. We had tax revenue far beyond what we estimated would occur, and we are not including that additional -- those additional tax revenue in our estimates for the outgoing years. We also have some anomalies in how outlays are occurring in a number of programs. So it's an anomaly of one year.

It was in the Congressional Resolution last year. It's in ours. All of us recognize that anomaly, but in our budget, from 1997 to 2002, every year the budget deficit goes down.

Q You said that the President had to make some hard choices --

Q To follow on that, can you explain why the deficit goes down so sharply in 2000 and 2001? You have a $4 billion decline in '99 and a $30 billion decline in --

MR. RAINES: That's that wedge I was talking about. You start -- if you put in policies that start making reductions today, every year the reductions get bigger and bigger and bigger. If you looked at 2003, it would be bigger still. If you don't have that kind of a wedge, you don't have a serious budget-balancing plan. You have to have something that isn't just a one-time reduction. They have to be policies that say, spending will be going down over the long run. So that you will see, any year you go out, the numbers will get bigger and bigger.

Q You said that the President had to make some hard choices. Can you be specific about which choices he found hard to make?

MR. RAINES: Well, I think that probably the hardest choices were in discretionary programs. And the President has -- let me give you an example. He and all of his advisers would have liked to have been able to invest even more in infrastructure, because he believes that, next to human capital, that the infrastructure -- physical infrastructure is vital to our economic growth. We have a good package here. I think he would have liked to have had a much more substantial package, but we could not find a way to do that within the discretionary totals.

So that I think if there was a disappointment here for him, I would say he would have liked to have been able to do more in the infrastructure area.

Q It still remains true that in order to make those -- to realize those savings in the deficit in 2001 and 2002, you're going to have to make cuts in discretionary spending. That's going to involve program-by-program decisions by a president whose identity we do not now know. Why is that realistic to expect those kinds of cuts by politicians who are not now presently accountable?

MR RAINES: That's not are plan. Our plan is, and we have in this budget, actual spending totals by agency out to the year 2002. We will propose that Congress enact those this year, that they enact the entire five-year plan this year. So it is not dependent on future Congresses having to make tough decisions. We have laid out, agency by agency, what their budgets would be for every year between now and 2002. So that is the big difference in our approach and the approach that I think might have been debated about, and as various people talk about what they thought we would have, this budget is very detailed out to five years.

If Congress enacts this budget, this Executive Branch will manage the government within those totals for that five-year period. And we propose, within our plan, to reduce the discretionary caps to match exactly what we have in this budget.

Q Frank, what is the growth rate that you assume?

Q You announced you're asking Congress to start off with the President's budget -- starting point in negotiations?

MR. RAINES: We believe that the Congress is going to have to look at the issue of a baseline and come up with its own judgment. We just simply put our record out there for them to judge. We've been -- on the deficit, we have been more accurate. And we think they ought to choose what has been the most accurate in terms of baselines. That's the decision they're going to have to make. But I think we have a pretty compelling case that they ought to at least consider the estimates that we've made, given our history.

Q Yes, I have a four-question question for you, Frank and Joe. (Laughter.) This is -- GDP is measured by real chained dollars -- the chain year over year. In 1997 you say it's going to be 2.2 percent, and then in 1998 you say it's going to be 2.0 percent. I'm wondering what you think is going to happen in the economy that will create that decline and why do we have that decline?

MR. STIGLITZ: Let me first make one comment. The -- some of this has to do with the way the quarter-to-quarter variations go and in particular, when you calculate year over year, the 1997 number is affected by the strong quarter that we've had in 1996 in the fourth quarter. So in terms of the actual pattern of quarter-by-quarter, which we don't release, the actual year over year for -- fourth quarter to fourth quarter is also 2.0. So the year over year is brought up by the -- as I said, by 1996.

Now, let me answer the question of why that number is lower in the next two years, then increases. The reason for that is that we wanted to come forward with a credible conservative forecast, and those numbers are basically in line with the blue-chip and the CBO. They're a little bit more conservative than either the blue-chip or the CBO, but when we did our forecast, we wanted to come in with a conservative number.

Q So you don't see anything happening in the economy that --

Q -- downturns. Is that what you're saying?

MR. STIGLITZ: My staff knew that I was leaving and said that that could have some adverse affect. (Laughter.) But -- no, that wasn't -- no, this is just technical details. When you construct a forecast, you have to put together all the various pieces of the economy -- what's happening to the unemployment rate, what's happening to all the various pieces. And when you construct the model, that's the kind of numbers that came out of the model. I think, personally, that they are on the conservative side, but for our budget purposes, I thought it was a good idea that we be on the conservative side as we have been in the last four years.

So, as I say, just to give you the numbers to put in perspective, the CBO January numbers for the year over year for 1997 is 2.3 compared to our 2.2. And the CBO's January for 1998 is 2.1 as opposed to our 2.0. They then also have a 1999 going up by .1. We have it going up by .2. These are really very small differences. The patterns are similar. And just to repeat what I said before, we wanted to be conservative in our numbers.

MR. SPERLING: Let me just give a couple of numbers before we go. And I'm sure that as the volley goes back and forth between here and the Hill, we'll be having more discussion as the day goes on. But in terms of nondefense discretionary spending, even with all of the serious increases that Frank spoke about in our top priorities, particularly education, over the life of the five years, there is an 8.8 percent real cut -- that's inflation-adjusted cut. But when you consider the increases that go within that budget, you can see that while we have, we feel, a much superior path on the nondefense discretionary line than we did in our budget last year. We do feel that was a legitimate concern about our budget last year and something that Frank and all of us worked hard to crack just to have a smooth path on nondefense discretionary. It is tough that it has an 8.8 percent real cut, and that includes within it significant increases.

Second of all, there was a lot of coverage on the corporate subsidy list that Chairman Kasich and others showed up on the Hill recently, but I do want to stress that that was $11.5 billion. And the loophole closers in the corporate subsidies, as Secretary Rubin was mentioning, were $34 billion. So that is an area where we are, so far, I believe, the only party in town that's really tried to go after where some of the real significant funds are that could contribute to deficit reduction in that area.

Third, the $138 billion over five, over six years in Medicare, the reason we gave the six years is because we wanted to see that this really was -- so people could understand the comparison with last year; $138 billion was where the coalition Medicare budget was last year -- $100 billion is slightly higher than their five-year number. This is a significant Medicare savings that we thought we could do without compromising our policy one bit because of the need for extra savings in managed care, where we feel the current payment is actually hurting the trust fund and therefore is unsustainable, and in home health care, where there is too much uncontrolled growth there and where there is a need to take measures to have reductions there.

Finally, if you were to look at the Departments since we came into office, every Department except Justice and Education, I believe, has less employees. Commerce will be a little funny as they get their census numbers up. But again, when you think about every Department over such a period of time actually bringing down the number of employees, you hear the large numbers, but it does reflect the degree that every single Department is, as Frank and the Vice President are asking them to do, do more with less.

And just as you're hearing the different numbers going back and forth, I just wanted to put these on the table. And as Larry said, we will all be here to answer more specific questions and try to be by our phones during the day.

Thank you.

END 1:07 P.M. EST