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THE WHITE HOUSE

Office of the Press Secretary


For Immediate Release February 2, 1998
                          PRESS BRIEFING BY
      GENE SPERLING, DIRECTOR OF THE NATIONAL ECONOMIC COUNCIL,
     JANET YELLEN, DIRECTOR OF THE COUNCIL OF ECONOMIC ADVISERS
                  TREASURY SECRETARY ROBERT RUBIN,

FRANKLIN RAINES, DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET

                              Room 450
                    Old Executive Office Building

1:15 P.M. EST

MR. SPERLING: Welcome. We will have four presentations, and we'll try to hold the questions until after that. And then we will be around here as long as necessary, either up here or informally, to answer your questions. After I speak, Janet Yellen, the CEA Director, will speak on our economic assumptions; followed by Secretary Rubin on our tax policy; and then the main presentation by the OMB Director, Frank Raines.

First let me say that, as the President designed in 1993, we have for the last five years worked together as one economic team. It has been a novel approach to economic policymaking here, but it has worked quite well. And despite predictions to the contrary, it's sustained itself.

I would just like to mention a couple of people who are very much part of the team who are not here right now but were very much part of our team. Certainly our Chief of Staff, Erskine Bowles. Certainly our exceptional Legislative Director over the last couple of years, John Hilley, who has done an exceptional job and now has helped us get an exceptional replacement in Larry Stein. Larry Summers, who is in Davos at the moment, but is a critical part of our team; as is Bruce Reed, the Domestic Policy Director, who is very much responsible for coordinating our policy on child care and tobacco and other issues. And finally, Jack Lew, who is the Deputy OMB Director, who is the glue on budget that keeps a lot of us together.

And just, finally, a few people who've been here from the start all five years, Alan Cohen, Joe Minarik, Martha Foley, Barbara Chow, Barry Anderson -- for all their work over this time.

There's much talk about how previous budget policies and previous economic policies prior to when the President came in might be responsible to some degree for the turnaround that we've had.

Let me tell you what we know. What we know is that in 1993, the Congressional Budget Office, in January of 1993, incorporating everything they knew about the economy at that moment in January '93, incorporating everything they knew about the 1990 Budget Act or any other previous policies, projected the following for the deficit: $357 billion for 1998; $454 billion for 2000; $579 billion for 2002; and $653 billion for 2003. That's what we know -- was the projection, knowing what the economy and the policies were, by the independent Congressional Budget Office when we took office, when the President took office in January of '93.

What we know is within 27 days of the President taking office, he presented an entire $500 billion deficit reduction plan that also kept his focus in investing in people. And that he fought his heart out through August 6th to pass that measure. And that in 1997, the President help lead a bipartisan plan that had over $1.2 trillion in savings over 10 years, and when you took out the tax cuts still had net deficit reduction of $988 billion, including a half a trillion in entitlement savings over 10 years.

Now, to get a sense of how dramatic the turn around is, consider the year 2002 alone. The Congressional Budget Office projected in that year that there would be a $579 billion deficit. Now, it is projected that there will be a $90 billion surplus near 2002. So, if you want to get a sense of why there is so much confidence in our economy, why long-term interest rates stay so low despite the strong growth we have, imagine in that one year alone, we now we now project the government to be borrowing $669 billion less in that year alone from the private sector. That is $669 billion that is available for private investment, for families buying homes, and that is why you are able to see the remarkable strength of the economy with interest rates staying low.

At the same time, the President stayed true to his view that you need public investment with private investment. During this same period we've seen Head Start go up over 50 percent. We spend $1.6 billion more every year on Head Start than we did when this deficit reduction started. We spend $1 billion more on the Women, Infant, and Children program; $6 billion to $7 billion more every year on the Earned Income Tax Credit. And I could go on and on, from the new programs like Americorps, to Pell Grants. The fact is that the President's strategy of focusing on both public and private investment together has worked.

Now, some people underestimate what the power of this deficit reduction plan has been by suggesting that, well, the economy is simply strong, and we are benefiting from a strong economy. Well, the whole point of deficit reduction was the belief that we were crowding out private investment, driving up interest rates, and preventing the economy from being at its full potential. It is extremely important that people understand that what we are seeing here is the positive cycle of deficit reduction.

In the 1980s we borrowed our way to prosperity, and that's not just a phrase or a slogan. If you borrow money and you spend it, you will have more demand in the economy and things can be good for a while, but eventually the money runs out and you're left with high debt and high interest rates. That's exactly what happened.

In this situation the positive cycle of deficit reduction meant that we had an investment-led recovery, not a binge-led recovery but an investment-led recovery. The strong deficit reduction drove down interest rates and it allowed the economy to grow at a sustainable pace.

If you consider that over the previous four years when we took office growth had been 1.4 percent, now it is over 3 percent growth over a five-year period. Unemployment was 7.5 percent; it is today 4.7 percent. And investment, which averaged 2 percent over the previous four years, has been over 10 percent five years in a row for the first time in record, a remarkable 11.2 percent. And if I had told any of you that growth could go up that much and investment could go up that much and unemployment could go down that much, you would certainly think there would be pressure for interest rates to be rising and rising. But instead, they have fallen from the 7.65 when we took office to under 6 percent today.

It is that notion of an investment-led recovery -- when interest rates are driving investment, you're getting more investment and the economy -- the capacity of the economy is expanding, and therefore the economy has the capacity to continue growing. We are now at 82 months and in striking distance of the 92 months mark that is the longest -- would make this the longest peacetime expansion.

So the answer as to whether deficit reduction leads to a stronger economy or a stronger economy leads to better deficit reduction, the answer is clearly both. It is a positive cycle, and it's important for people to understand why this has been positive and why it is important to keep our fiscal discipline.

Finally, I would just mention that when we presented our plan in 1993, the argument was that, because there was some tax increases on the top 1.5 percent, that despite the fact the President was courageously taking on deficit reduction, that he had over a quarter trillion in spending cuts, that this would so discourage the incentive to work and invest, that revenues would actually come in less. Well, that has unequivocally and emphatically been proven wrong.

We've in fact had a surge of revenues coming from a stronger economy, from a higher stock market. And as Frank Raines will go over later, for the average typical family of four, the tax rate will now be the lowest in 20 years. It will be the lowest in 20 years. So, when people want to talk to you about tax rates, I encourage you to do what so many of you do, don't go for how much revenues are in the economy overall, since that can just reflect the strength of the economy. Look at what it is for a typical family of four, and you will find that while the economy has been growing, there taxes have been going down as a percentage of their income.

So, with that, I am going to turn it over to Janet who is going to go through our economic assumptions, and then as I said, Secretary Rubin and then Frank Raines, and then we'll take questions.

Thank you.

MS. YELLEN: Well, as Gene indicated, my job this afternoon is to tell you about the budget's economic assumptions.

For the past five years this administration has built a record of conservative and credible economic assumptions. The administration's economic forecasting team was committed to ensuring that our budget balancing efforts would be based on realistic assumptions about the economy's performance. And the assumptions in this year's budget are similarly credible and are consistent with the views of a consensus of economic forecasters.

Over the past year our economy's performance has been simply exceptionally strong. Real GDP grew 3.8 percent for 1997 as a whole. That was the highest growth rate in nine years. And measures of income have been growing even faster. The unemployment rate has been below 5 percent for the last eight months. Over 3 million jobs were created just this past year. And all of that has been accomplished while inflation has declined to its lowest level since 1965.

Now, although growth has exceeded our expectations in recent years, we believe that for budgetary purposes we should not count on a continuation of growth at this recent extraordinary pace. For this reason, in this budget we're projecting that real GDP will continue to grow, but at a slower, 2 percent annual rate over the four quarters of 1998, and this 2 percent pace is projected to persist for another two years. At the same time, the unemployment rate is assumed to edge up about two-tenths of a percent per year. And inflation, as measured by the Consumer Price Index, is assumed to edge up just slightly over the next three years.

After 2000, real GDP growth is projected to resume our assumed trend growth rate of 2.4 percent. And the unemployment rate stabilizes in our projection at 5.4 percent. The shift to more moderate growth that's assumed in this budget recognizes that by conservative, mainstream assumptions, growth has recently exceeded the pace that can be maintained on a sustained basis without some eventual tendency for some upward inflationary pressure. But it's important to note that our assumed real growth rates are not the best that this administration believes the economy can achieve. Certainly, the outcome could be better.

Let me just conclude by reiterating something that Gene said, which is that the growth-oriented economic strategy adopted by this administration has clearly paid off. The administration's 1993 deficit reduction plan has created the conditions that are necessary for the vibrant economic performance we're now enjoying. I think our economy is the strongest in a generation, and we do have in place a solid foundation for continued sustained economic growth and rising living standards for all Americans.

SECRETARY RUBIN: Good afternoon. I was thinking of introducing myself since Janet didn't. I'm Bob Rubin. (Laughter).

Q Who are you with? (Laughter.)

SECRETARY RUBIN: Oh, I don't need this thing. Ok, what do I do with that? Ok, thank you Sam. Everybody has a role. (Laughter). Welcome back. You'll remember that? I retract it.

Well, let me start by saying that the President began intentionally focusing on the economy well before the first day that he entered the Oval Office in January of 1993. And this budget carries forward the successful economic strategy that has contributed so greatly to the strong economic conditions of the last 5 years. It is centered, as you know, on fiscal discipline, on investments in people, and on leadership of the issues of the global economy.

The overarching point, which I think you'll hear all of us mention, has been the focus over the past 5 years on fiscal discipline, which led almost to the total elimination of deficit, and of course to a balanced budget and surpluses going forward. And that has kept interest rates low, has boosted confidence, and I don't think there's any question but that that has been the indispensable factor in the strong economic conditions of the past 5 years. And it is the strategy that we must be committed to as we go forward.

Within the context of a balanced budget, we will this year be proposing for 1999 targeted tax cuts for working families, all of which are fully paid for. We do not believe that we should enact tax cuts that are not fully paid for. The President's budget includes tax incentives to make child care more affordable, build more schools, to improve education by helping to reduce classroom size, expand pension coverage, help people living in economically distressed areas by expanding low income housing tax credits, and increase energy efficiency and improve the environment.

These incentives are geared towards strengthening the standards of living for working families and increasing the productivity of our economy for the years and decades ahead. As I said a moment ago, all of the tax cuts and all investments in the President's budget are fully paid for in accordance with the Budget Enforcement Act.

The measures to pay for the initiatives -- for the tax cuts include some reforms of real estate investment trusts, loophole closures, revenue from legislation designed to curb the use of tobacco among young people -- I apologize, that does not go to fund the tax cuts, but rather is used for other purposes -- and various other income raisers, which deal either with loopholes or with subsidies that are no longer warranted.

Let me mention, if I may, one other critical part of the President's budget. We are requesting $18 billion for the International Monetary Fund, and we are also requesting a payment of our U.N. arrears. The IMF funding will enable the International Monetary Fund to respond effectively if the current financial crisis in Asia were to spread and intensify, which we all want very much to avoid, and to deal with future crises that could similarly critically affect our economic and national security interests. The IMF funding does not result in a budget outlay and it does not add to the deficit. The U.N. arrears, too, are critically important with respect to promoting our economic and national security interests.

Let me conclude, if I may, on the same comment that I began with: the President's budget carries forward an economic strategy that we have followed consistently over the past five years that I believe has been central to the strong economic conditions of the past five years and that will position the country for strong economic conditions in the years and decades ahead.

And with that, I will introduce Frank Raines.

DIRECTOR RAINES: Thank you. This is my second time being able to join with you in the presentation of a budget. And as Gene indicated, this is an extraordinary time and probably the statistic that shows it most to me is that going back throughout U.S. history the most consecutive years of improvement in the bottom line of the federal budget in the past has been five times, five years --consecutive years of improvement. With the 1999 budget, we'll be talking about seven years of consecutive improvement, and looking forward to balanced budgets improving as far as the eye can see makes it rather extraordinary.

I'd like to very quickly make just a few points for you and then we'll open up to questions. Let me begin by just pointing out where we are with this budget and then what it means. We had a $290 billion deficit in fiscal 1992. We just finished the 1997 with a $22 billion deficit. And we're projecting a $10 billion deficit in 1998, and the first balanced budget in 1999, with a surplus of $9.5 billion. But if we maintain our fiscal discipline, we may well see the budget balanced in 1998, four years ahead of the schedule agreed to in the balanced budget agreement last year.

As usual, I'd like to show you a couple charts that make several of the points that, I think, are important. We are clearly finishing the job that began in 1993. And the impact is so great that the savings between 1993 and 2003 will exceed all of the deficits that were incurred since 1980, so that we would otherwise have added that $4 trillion to the debt. Instead that has been saved, and we're now going into a surplus position within the budget.

If you look at what we will have achieved by the end of 1999, you'll see that since 1993, we will have achieved $1.6 trillion of savings through the fiscal year budget that is being presented today. And you see the deficit drops like a rock practically from 1993. The administration is also producing a small government by reductions in the civilian work force. We will have the smallest work force in 35 years. And as a percentage of the civilian employment, it will be the smallest since 1931. And when you're measuring is the era of big government over, this is one of the more dramatic measures that big government is indeed over.

If we go on, we can see that government is declining as a percentage of the economy overall. And in this administration we are seeing total outlays of the government, including discretionary mandatory spending, is declining to approximately 20 percent of GDP, from over 24 percent -- over 22 percent when the administration took office, and from a peak during the Reagan administration of almost 24 percent of GDP.

Discretionary spending, the part that people spend a lot of time thinking about, has continued its plunge from over 13 percent during the height of the Great Society; it's now down below 7 percent of GDP. And if you look at non-defense discretionary, so-called domestic spending, we also see that we continue the trending down that has occurred from the peak years during the Carter administration.

Now, we've balanced this budget the old-fashioned way, through a combination of reducing outlays and seeing receipts rise as a result of the recovering economy. Outlays have come down below the historical average and receipts have risen, so that we're now balancing the budget at approximately 20 percent of GDP. If you look to, well, how much of the improvement came from what, about 52 percent came from spending reductions and about 48 percent came from improving revenues as the result of the economic expansion.

But if we look more closely on the revenue side, this has occurred because of increases in revenue from corporations and from high-income individuals. If you look at what's happened to the tax burden on the median income family of four -- median income family of four -- and we're comparing 1984 to 1999, because 1984 was when the tax cuts during the Reagan years were fully effective -- if you look at income tax burden alone, it has dropped from 10.3 percent to 7.5 percent in 1999. If you combine the payroll tax burden, you will see that it has dropped from 17 percent to 15 percent. The results are even better if you look at people who are half of the median income, where in fact the rates go negative for those benefitting from the Earned Income Tax Credit.

So that we have seen a dramatic improvement in this period, and we've seen that by all the measures of big government --whether you're talking about tax burden, government spending, increases in the deficit, debt -- that the era of big government is indeed over.

We will have $4 trillion lower deficits during this period. That means $4 trillion of debt that we will not incur. That means $4 trillion of debt that we will not be leaving for our children and our grandchildren. In 1999, for the fifth straight, we'll reduce the ratio of debt held by the public to GDP, a ratio that almost doubled between 1981 and 1993. And this means that federal interest costs will drop dramatically.

Of course, the ultimate test of whether government is growing or shrinking is to look to see where the growth is in the economy. And I think this is perhaps the most important of all these charts. It shows you the rate of growth on an annual average basis in the private sector or in the federal government. Under the Reagan administration, the federal government actually grew at a faster rate as a percentage of GDP than the private sector. Under President Bush, the government shrank slightly and we had a slight growth in the private sector.

Under President Clinton, we've had a dramatic reduction in the growth of government. The government is shrinking as a percentage. And the private sector is having extraordinary growth. So that if there's any question about what is growing and what is not, I think this is the best expression of it.

But not only is the era of big government over, but we are making dramatic investments in the areas the President outlined in his State of the Union. For families and children, we're going to be investing in child care. The Child Care Initiative -- providing tax breaks to help families pay for child care; tax incentives to help businesses create or expand facilities; direct subsidies for 2 million poor or near-poor children; and increased and improved after-school programs.

In health care, the President has worked hard to expand health care coverage and improve the nation's health. And this budget provides new options to hundreds of thousands of Americans aged 55 to 65, and proposes initiatives to ensure coverage for children.

There's unprecedented investments in biomedical research and other basic research, expanded funding for AIDS therapies through the Ryan White program, and provision for a demonstration of clinical trials participation by Medicare -- paid for by Medicare.

Education and training, the President has continued his investments in education, with new initiatives to reduce class size, creating new education opportunity zones, and expansion of Head Start to meet our goal of 1 million children, as well as a 20 percent increase in the GI Bill benefits for veterans.

And with the environment, the administration is helping to engineer a worldwide response to global warming, and includes in this budget tax incentives and direct spending -- appropriated spending for incentives for energy efficiency, as well as other investments, including additional investments in environmental cleanup and protection of our water.

In research, we are proposing a dramatic increase in overall funding for research to take advantage of the explosion of knowledge that we have been benefitting from.

And we're doing these in part through the creation of three new funds for America: the Research Fund for America, the Environmental Resources Fund for America, and the Transportation Fund for America.

All of these investments are fully paid for. The President's budget continues the discipline that he has shown from the beginning, and we comply with all of the requirements of the budget agreement that we entered into last year. In fact, the only part of the budget agreement that we do not comply with is that we are balancing the budget three years earlier than the budget agreement called for.

We would ask everyone, everyone on the Hill, that they agree with the President that we should not pursue any tax cuts or new spending unless the proposals meet a very simple test -- and that is that they are paid for and do not add a dime to the deficit. And we think that that is an important discipline because it is necessary for us to be able to reserve any surpluses in the future until we are able to deal with the long-term problems of Social Security, which is a fundamental part of this budget.

Now, we have an economy, as you've heard, that is working for all Americans. It is an economy that is not only helping to balance the budget of the federal government; it's balancing the budget of ordinary Americans throughout the nation. We fully expect that we will see this expansion continue through this year and into the future, and that we will continue to benefit from the fiscal discipline that the President has proposed and put into law.

Let me stop there and, if we haven't answered every question, answer any questions for me and any of my colleagues.

Q Can you tell us how much new spending we have in the budget?

DIRECTOR RAINES: Sam, I think if you open your budget you'll see that the actual spending that we expect in 1998 is $1.6 billion, and we're proposing $1.7 billion in 1999.

Q Maybe I didn't phrase my question correctly. Are you telling me that $100 billion is the new spending number for fiscal '99?

DIRECTOR RAINES: Our estimate of spending is $1.66 billion in 1998, and it's $1.73 billion in 1999.

Q Could you give us an aggregate five-year figure for the total cost of the President's new initiatives -- his new spending initiatives, his new tax incentive initiatives?

DIRECTOR RAINES: The President's proposals -- you know, actually, to tell you the truth, I have never added up the five-year totals for all of the initiatives that we have.

Q Do you have a one-year total for '99?

DIRECTOR RAINES: We are proposing approximately -- I would say approximately $12 billion in offset spending in 1999, together with the tax cuts that we're proposing that are also offset. So that the -- when you look at these totals, we propose spending but we also have offsets, and therefore you don't see the totals rising.

Q Give us new figures for the offset.

Q Yes, the new spending. Of course you say off-set it. We understand it's balanced. But what is the new spending?

Q What's the gross?

DIRECTOR RAINES: Well, I think I just gave that to you.

Q What is the tax incentive total?

Q Yes, $12 billion is for the spending, and tax cuts equal how much?

DIRECTOR RAINES: The tax total is $24 billion over five years, and in the first year -- it's about three? It's about $3 billion in the first year.

Q So you have $3 billion plus $12 billion, $15 billion first year?

DIRECTOR RAINES: Yes.

Q That's not the total new spending, is it? I read these stories, $42 billion --

DIRECTOR RAINES: Sam, you can't believe everything you read in the paper. (Laughter.) To be fair, people sometimes are mixing up one-year numbers and five-year numbers.

Q Well, I'm talking about a one-year number.

DIRECTOR RAINES: That's the one-year number.

Q What am I mixing up? I count over five years new taxes totaling $106 billion. Is that correct?

DIRECTOR RAINES: No.

Q On page 74 and 75 of the analytical perspective, it looks like --

DIRECTOR RAINES: The distinction is that I believe -- and this is where we have to be very careful -- the distinction between revenue and taxes. We have a number of things of revenue that are not taxes; we have user fees and other things. But the largest one I think is probably the tobacco legislation.

With the tobacco legislation, which we expect to be an exactation from the tobacco industry, meaning we want to raise the cost of cigarettes to reduce usage, particularly among teenagers. We want to see the cost of cigarettes go up. We do not want to see that revenue go to the benefit of tobacco companies. We believe that money should go to the benefit of the federal government and state governments. And so that will come through the federal government as a receipt to the federal government, some of which the federal government will keep and some of which will go directly to states.

Q How much?

DIRECTOR RAINES: There's about $65 billion over five years. And of that, the federal government will directly be spending about $27.5 billion. The remainder will be spent through the states or through other --

Q Are you completely agnostic about what form it comes in?

Q Director Raines, can you talk about that $65 billion and how it's generated, the assumptions?

DIRECTOR RAINES: I'm sorry?

Q Can you say a little more about that $65 billion number and the assumptions on which it's predicated? I mean, how did you generate $65 billion in tax revenue?

DIRECTOR RAINES: Well, the President articulated a number of principles about the agreement and we also looked at what had been negotiated by the attorneys general and the companies. We made our own judgment. The major outline is that the President said he believed that the real cost of a pack of a cigarettes should go up by $1.50 in real terms over 10 years.

And so we have come in over this first five-year period below that level and equaling the amount of revenue that we thought was an appropriate amount of revenue to be included in a tobacco bill.

Q So it sounds like this is a relatively arbitrary -- I mean, you made a good guesstimate here, but nobody is certain exactly what the --

DIRECTOR RAINES: No, we can be certain what we're proposing. This is what we are proposing as being the level of revenue that should come from a tobacco bill.

Q Mr. Raines, are we looking at solely a baseline improvement in projecting an earlier surplus than anticipated? Or are we looking at a proposal for a net deficit reduction beyond what was called for in the balanced budget agreement?

DIRECTOR RAINES: We are looking at a deficit reduction beyond what's called for in the balanced budget agreement. Do you have the comparison between the balanced budget agreement and the budget? I think we can show that to you.

Q Do you have a number as to what the net deficit reduction beyond the balanced budget agreement is?

DIRECTOR RAINES: Yes, I think we'll be able to show it to you right here. If you can see any of these numbers, the budget agreement path is at the top, which showed us going to a $2 billion surplus in 2002. The mid-session review that came out in August showed that the path would be better than that, going to a $52 billion surplus, and showing that -- but we're still balancing in 2002, the first year.

Under the budget, as you can see, we're reaching balance in 1999, a full three years early. So all of that improvement is there and has been maintained as part of our balanced budget.

Q But is that programmatic changes?

DIRECTOR RAINES: If you want to measure against baseline. The budget agreement baseline -- I apologize that the scale has moved. Now, that we've moved into an era of balanced budgets, whether the deficit is at the top or the deficit is at the bottom is something we haven't gotten consistent. But the budget agreement baseline, you see, is this lower blue line, and you see that it doesn't balance until 2001 -- 2001 under this. The budget baseline you see as that dotted line in our proposals. And you can see that in the early years our proposal actually improve on the baseline. Over the five-year period it's about the same. It's slightly better than the baseline over the five-year period.

Q Can you give us, though, a five-year number for net new deficit reduction relative to the baseline from the budget deal?

DIRECTOR RAINES: For five years? It's about $700 million over five years.

Q $700 million?

DIRECTOR RAINES: Right.

Q Can we go back to tobacco for one minute? Can we go back tobacco for a second?

DIRECTOR RAINES: Sure.

Q Are you agnostic about what -- we used a fancy word for the revenue from the tobacco industry. But are you agnostic about what form it comes in, whether it's a tax increase on cigarettes or whether it's something that you would extract from the industry in another way?

DIRECTOR RAINES: We are open to working with Congress on the exact methodology of what would be the best way for this to work. We think that this is going to be a very complicated matter and that we are open to working with them. And there are several task forces on the Hill who are working on this.

Q The tobacco chart, you were about to show it to us.

DIRECTOR RAINES: Oh, if you want to. This is simply what I had mentioned to you before. I gave you the aggregate numbers over those periods. But the top ones are the federally operated programs -- this is in your budget -- the federally operated programs, the state-administered programs and other uses --

Q Mr. Raines, on the tobacco question --

Q Director Raines, back to tobacco. What happens if there is no tobacco legislation to the billions of dollars of new initiatives that are tied directly to a segment of revenues that you don't have.

DIRECTOR RAINES: It's the same thing that happens any time you have a proposal with offsets. If your offset is not available or is not available in the amount you expect, you look for an additional offset. If that is not available, then you have to trim your proposals.

The one thing, though, that has given us great heart is that over the last several weeks the prospects for tobacco legislation I think have improved dramatically. I think that you're beginning to see some stories in the press to that effect. And we are quite confident that the majority of the American people want to see this kind of legislation to raise the cost of cigarettes to cut teenage smoking. And we believe that, ultimately, the Congress is going to reflect the views of the American people in that regard.

Q It looks as though you're using -- well, at least from the summary, federal tax receipts to offset some of the discretionary spending, for example in the Environmental Resources Fund. Are there other areas where you use tax receipts to offset some of the discretionary spending increases that you're hoping for? And have you talked to Senator Domenici or Congressman Kasich about this being a legitimate way to do it?

DIRECTOR RAINES: We are using a series of offsets to offset additional discretionary spending, essentially using pay-as- you-go principles with discretionary spending. The single largest one is the tobacco revenue, but there are other mandatory reductions that we're using. And this is perfectly consistent with the budget agreement and perfectly consistent with the Budget Enforcement Act provisions. And we have had discussions with their staff and with the principles, explaining to them exactly how we are doing this.

Q What form will the Social Security reserve take?

DIRECTOR RAINES: It takes the form of not spending it.

Q What are the mechanics of not spending it. How do you not spend it? Where does it go?

DIRECTOR RAINES: You know, it's actually quite easy. To not spend means don't spend it. We don't have any fancy mechanism here that says if you put it in a lock box it will be protected forever because all of us know that if a majority of Congress wants to defeat one of those mechanisms they can. This is very simple. The President of the United States has said, do not spend the surplus until we have dealt with Social Security. It is going to be a very simple concept for people to understand because every time you hear a proposal, if you ask the question how are you paying for it, and if everyone is disciplined and only makes proposal they pay for, then it won't be a difficulty in preserving those reserves.

Q How much is owed Social Security now, and how much will be owed by the time it turns from surplus to deficit, which some people say is as soon as 2012.

DIRECTOR RAINES: When you say owed, I'm not sure what you mean.

Q Well, every year, Social Security has a surplus and that's been spent, right? How much is owed back out of the taxes taken from the payroll tax that's been spent on other things. How much of that is owed right now. And how much will be owed when that turns to deficit, which some people say will be as soon as 2012?

DIRECTOR RAINES: Well, I think to convert that -- it's a very complicated subject, but to convert that into a simple answer, the total corpus of the Social Security Trust Fund now is $600 billion, something around the area of $600 billion. So, in your terms, "owed," it would be -- they hold Treasury securities of about $600 billion.

Q At some point that does need to be repaid to Social Security, right?

DIRECTOR RAINES: They have to be able to redeem those when they need the money.

Q Which means borrowing the money, correct, or increasing taxes? It means you have to borrow the money at that point, right?

DIRECTOR RAINES: It depends -- that's part of the whole issue. If we can balance the non-Social Security budget, which in this proposal would happen in 2007 --

Q You're trying to get $600 billion to get to where you are today.

DIRECTOR RAINES: I think -- we may need to talk about this separately, but it is exactly right that when Social Security is no longer in surplus, bringing in more money than they're taking out, they will begin to redeem the securities. That is why it is so important for us to get our budget under control before then, so that when they redeem the securities we do not have to raise taxes in order to pay for them.

Q And by redeeming securities, do you not mean borrowing money?

DIRECTOR RAINES: Not if our budget -- not if our non-Social Security budget is in balance.

Q Because it's not like there's cash sitting there someplace, correct? So when you redeem securities, you've got to borrow the money, so you have a deficit for that.

DIRECTOR RAINES: I think we're going to need to do this on the side, but if we have the rest of the budget under control, we can afford to redeem the securities for Social Security. If we do not, then we can't. That's one of the reasons we've been working so hard to balance the budget.

Q Director Raines, can I just make sure that we understand clearly what you're saying when you say -- the President has stated that he's not going to have any of the surplus be spent until there's been some kind of resolution overall on Social Security. Does that mean that any legislation that is sent to him that would entail a net increase in the deficit he will veto? Is that essentially the mechanism that we're talking about?

DIRECTOR RAINES: Well, I don't want to get into talking about legislation that's yet to be introduced and yet to be passed, but I think both you and the American people heard the President say we should not spend this surplus until we've dealt with Social Security. And we will be working very hard to ensure that that does not happen in this Congress or in future Congresses.

Q Director Raines, isn't the discretionary --

Q Since so many of these programs are dependent on that revenue coming from the tobacco industry tax, whatever -- however it's coming in, is the administration willing to decouple that from the rest of the tobacco settlement, which involves liability issues and things like that, in order to ensure that at least we have those funds coming in? Would he propose the tax as a separate --

DIRECTOR RAINES: Well, what this budget does is propose the revenue parts of tobacco legislation. And we want Congress to move expeditiously on that. We expect that there will be other parts of tobacco legislation and we will be looking forward to working with task forces on the Hill to fashion a complete, comprehensive bill, as the President has talked about. But what we have now done is put forward the revenue part of that bill, which is obviously a major part of the bill. But we expect there will be other parts of the bill as well.

Q Director Raines, on discretionary caps, your budget lists the discretionary caps in the agreement as $561 billion, you propose spending $566 billion discretionary spending. Aren't you going past the discretionary caps, or am I misreading something?

DIRECTOR RAINES: Well, let me show you a simplified version. You mentioned the $562 billion in discretionary caps, and if you calculate our spending and take into account our offsets, which offset the amount that you talked about, you compare discretionary caps, the remaining under caps -- in fact, in budget authority, we exactly hit the caps from our spending minus the offsets. And if you look at it from an outlay basis, we actually underspend the caps in 1999 by about $3.5 billion. So there are two caps: there's an outlay cap and a budget authority cap. In some years -- we're controlled by both of them, so in some years we underspend in order to make sure that we stay below the caps. It's very important to take into account our offsets as a part of this as you're doing any calculations. This, I think, is the simplest one and we ought to -- if we haven't given it to you, we will.

Q The President has said, and you've just repeated, that he wants the surplus essentially fenced off until such time as there is a long-term solution to Social Security. Why are you not willing to say the surplus should be accumulated and then spent to shore up Social Security so that whatever fix is necessary is less austere or less dramatic than what would otherwise be involved?

DIRECTOR RAINES: Well, we think it may well be part of an ultimate agreement that some of the surplus might be part of a solution. But we don't want to prejudge that and we don't want to have a frenzy of, well, I want to spend so much of it on this and I want to spend so much of it on that. We're saying we won't produce a proposal on how to spend it and we don't think anyone else should have a proposal on how to spend it. Let's simply preserve it. Do Social Security -- after having had a year-long national dialogue on it, the President intends to have a White House conference at the end of the year to begin to culminate the building of the public education campaign. And then the first of next year, this time next year, sit down and do a hard negotiating to have a solution.

And so it's very important that we not have competing proposals of, well, I'd spend it this way and I'd spend it that way. We think that we shouldn't have any proposals to spend it until we've dealt with Social Security.

Q The administration has proposed new taxes on security firms, banks, insurance companies, REITs, -- what is that total of new taxes being proposed by the administration?

SECRETARY RUBIN: The net new taxes proposed by the administration are zero. We have tax cuts of roughly $24.2 billion over five years. And then we fund that with loophole closers, ending unwarranted subsidies, and matters of that sort. If you take those in the aggregate and they also come to $24.2 billion.

Q Somebody is going to be paying taxes that they didn't pay before. How much are these people going to be paying?

SECRETARY RUBIN: Well, you'll have tax cuts of $24.2 billion and then you'll have elimination of loopholes, you'll have elimination of unwarranted subsidies and other similar matters, and that will be $24.2 billion.

Q What gives you confidence that Congress will pass some of those things, things like foreign source rules, they've been hesitant to touch in the past?

SECRETARY RUBIN: They were a touch reluctant last year. I think the answer is that last year they dealt with and adopted a number of the raisers that we suggested, and those were in many respects, I suppose, the easiest ones to deal with. We now have a very good set of proposals with respect to tax cuts that serve very important purposes. And so now what they're going to need to do is to deal with the next set of loopholes and subsidies and matters of that sort. And I think within that range I think this will have a different look to it. And we obviously are working very hard to accomplish that purpose.

Q Mr. Rubin, have you talked to Congressman Archer? I mean, does he think these are loophole closers or does he think these are tax cuts?

SECRETARY RUBIN: We will obviously be working with Congressman Archer and Chairman Roth and all others concerned. But we have not consulted with -- actually are briefing staffs today on the budget. But we'll be working with them going forward.

Q But no general tax cut this year?

SECRETARY RUBIN: There will be no net tax cut; that is correct.

Q Other than the targeted tax --

SECRETARY RUBIN: The targeted tax cuts, fully paid for --

Q Will you oppose any effort to create a new tax cut?

SECRETARY RUBIN: As Frank and others have said, any use of -- well, if you did it in this year --

Q I'm talking about fiscal '99.

SECRETARY RUBIN: Yes, if you did it fiscal '99, since we project a small deficit, that would add to the deficit and we are certainly opposed to that. But we're also opposed, as you know, to tax cuts going -- net tax cuts going forward pending resolution of -- pending addressing Social Security with respect to the surplus.

Q Secretary Rubin, do you think the tobacco payments will be deductible? Do you assume that in the budget? And also how much --

SECRETARY RUBIN: The numbers in the budget are a net proceeds to the federal government.

Q Net proceeds. And how much will per-pack costs go up by year? You have an amount you're expecting to get in in tobacco payments by year. Do you know what the --

SECRETARY RUBIN: Frank, correct me if I'm wrong, but my recollection -- do you know, Gene? It starts at 65 cents and goes to $1.50, doesn't it or something? Is that right? Yes, $1.10, I think that's correct.

Q When you say net proceeds, that didn't answer the question, at least not for me.

SECRETARY RUBIN: It does, Sam, because whatever the aggregate numbers --

Q Is it deductible or not deductible?

SECRETARY RUBIN: Well, if it's going to be deductible, it's going to have to be a higher number, because the net to the government has to be $65 billion.

Q So you don't have a --

Q So a number hasn't been set yet, but you --

SECRETARY RUBIN: However they get at it, whether it's a larger number that's deductible or it's the $65 billion that's not deductible, it has to result in $65 billion to the federal government; that's correct.

Q And annually, how much is it going up?

SECRETARY RUBIN: I think $1.10 was the top; is that right?

DIRECTOR RAINES: There are different methodologies for how you account for the impact of raising the costs and how much you'll lose in sales. If we were doing the estimating, it would go up to approximately $1.10 at the end of five years. Others might estimate the per-pack cost being higher. But the important point in our budget is the revenue; the net revenue to the government is the level that we are seeking.

Q Mr. Secretary, -- economy troubles in Asia is going to affect -- U.S. economy --

SECRETARY RUBIN: I'm sorry? Oh, the affect of Asia on this economy?

Q Yes, sir.

SECRETARY RUBIN: Well, as we testified last Friday, there are a lot of private sector forecasts around that seem to center somewhere around half a percent of GDP growth, though, you know, it's a hard judgment to make because on the one hand these events in Asia clearly are very important to our economy. And on the other hand, there are a lot of people who think interest rates would have gone up -- I'm talking market interest rates; I'm not talking about the Fed; I'm talking market interest rates -- which are what drive the economy -- would have gone up had it not been for events in Asia. And of course instead market interest rates are coming down -- have come down.

But the general projection seems to be somewhere around a half a percent. On the other hand, I think what we want to avoid is having that crisis deepen or broaden, which would then have greater effects. And so all of our efforts have been put towards reestablishing financial stability and preventing contagion.

Q Do you feel that the Asian economy -- the trouble, it will go globally, according to reports that Asian economy trouble may go globally?

SECRETARY RUBIN: That this problem may go global?

Q Yes, sir.

SECRETARY RUBIN: When it first began, as you may remember in that period between Thailand and Korea, I think there was a lot of concern about that. And we were certainly very concerned about it. The IMF -- and I must say the United States was very strongly involved in this -- moved I think very quickly and very effectively. I personally think that that had a lot to do with the fact that this contagion did not in fact, after an initial burst, did not continue.

And, at least for now, it certainly seems to have been contained. And I think that's an extremely important accomplishment thus far, although there's a lot to do and a lot of work lies ahead to get financial stability reestablished in Asia.

Q How much of the $23 billion in loophole closers is actually new and not just revisited?

SECRETARY RUBIN: About $11 billion of it, if I remember correctly. Let's see, $11 billion is either new or old. Does anybody remember which it is? (Laughter).

It's in the neighborhood, since $11 billion -- Gene makes the point that $11 billion is, roughly speaking, half of $23 billion, which is a very useful observation. (Laughter). So it's roughly -- that's why he's running the NEC -- in any event, it is roughly 50/50 new and roughly 50/50 provisions that we brought to the Congress last year that we're giving them the opportunity to revisit.

Q I have a question about the fiscal dividend. You've argued very eloquently in the past that by cutting -- by having continued deficit reduction, that we would get a premium in terms of lower interest rates. And you've argued that again this morning. I wonder, though, if your view is that once you reach a world in which you're talking about surpluses rather than reducing the deficit, that in a market sense, that the pay-off from continued deficit reduction in terms of lower interest rates, begins to diminish. I mean, have we reached that point now where's there's not big interest rate reduction premiums from continued deficit reduction?

SECRETARY RUBIN: Well, we have projections --I think Janet Yellen discussed, Clay, about -- with respect to interest rates going forward, but I don't think there's any question in the world we live in today, even as compared to as recently as five years ago, that there is a big benefit from fiscal discipline. And conversely, as Asian nations have shown, there is a big penalty for lack of discipline. And I think that that reinforces all the more the President's emphasis -- that Frank mentioned a few moments ago -- on maintaining fiscal discipline.

How much more there is in terms of interest rates going down, I don't know. One thing I am, at least in my own mind, sure is that fiscal discipline -- you get an even heightened benefit in today's global economy -- global financial markets.

Q Secretary, quickly one last question from me on the budget. If for some reason the tobacco settlement doesn't go through, can you come up with $65.5 billion more in loophole closings?

SECRETARY RUBIN: Well, I agree with what Frank said. I think we -- I think that the tobacco -- let me identify with Frank's comment. I think the tobacco settlement serves an enormously important purpose in terms of deterring smoking. I think that it is really a -- and ought to be a critical national priority for all of us for the purposes just stated. It funds very important programs and what we're going to do is focus on trying to work with everybody concerned to get that done.

Q But if you can't get it done?

SECRETARY RUBIN: My view is -- this is mine, others may have different comments -- but my view is we shouldn't focus on the if you can't get it done, we ought to focus on getting it done.

Q Was that an answer?

SECRETARY RUBIN: Oh, absolutely. That's why I gave it. (Laughter.) I certainly wouldn't have given it otherwise, Sam.

Q But somebody might want to expand on it.

DIRECTOR RAINES: Let me just say this. When we were here a year ago and we were saying that we have a plan to balance the budget by 2002 and that we're going to encourage bipartisan budget negotiations and we want to get all of that adopted into law in 1997, there was a lot of skepticism that we'd get that done. But sure enough, in August, the President of the United States signed into law the balanced budget agreement, including the tax cut.

So, compared to that, tobacco is relatively minor exertion compared to what we had to go through last year to get that comprehensive agreement -- which is not to say it will be easy, but it is to say that if we focus our attention and the American people focus to Washington what it is they want, we can get things done.

Q Director Raines, the President has said publicly that if he doesn't get the tobacco legislation he'll either shrink the child care programs or he'll find other offsets -- other cuts. Do you have those in mind now or is he saying that if that happens we'll just go back to the drawing board?

DIRECTOR RAINES: What we have in mind is a budget that's only four hours old at the moment. But I would point out to you, last year we had a proposal to expand health coverage for kids and that got expanded when we had the balanced budget agreement to a $16 billion proposal. By the time it came out of Congress it was $24 billion. So that it is, I think, the wrong direction to be looking to say, how are we going to deal with not getting the tobacco legislation. I think we're on firm, solid, conservative ground on the amount of money that this budget depends on from tobacco legislation. And we're quite optimistic that not only will it happen, but that we will have bipartisan support for it.

Just so you know, we will have OMB people here who are experts in particular areas afterwards as long as you need them.

Q Do you need the tobacco money to get the surplus in 1999 because it looks like you've got a $9.5 billion surplus and you're talking about $10 billion in tobacco revenues. So don't you need that agreement?

DIRECTOR RAINES: No. Remember, we have paired up, in the special funds that I mentioned to you, the Research Fund for America, the Environmental Resources Fund for America and the Transportation Fund, spending and offsets in each of those funds. So each of those funds stands on its own as deficit neutral. Each one has to be -- if it doesn't have an offset, it can't have the spending. So that we do not depend on tobacco revenue in order to achieve the bottom line result for the budget.

Q For this year?

DIRECTOR RAINES: For any year. Every year it's offset.

END 2:15 P.M. EST