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Office of the Press Secretary

For Immediate Release July 12, 1999
                           PRESS BRIEFING BY
                       AND OMB DIRECTOR JACK LEW

                           The Briefing Room

2:00 P.M. EDT

MR. SIEWERT: Today is kind of a critical week in the budget, and especially as the Hill begins to mark up a tax package this week, and here to tell you a little bit about our views of that process are National Economic Director Gene Sperling, newly minted Treasury Secretary Larry Summers, and our OMB Director, Mr. Jack Lew.


MR. SPERLING: In the President's mid-session review and as he has done throughout this year, the President laid out a very clear, specific, detailed plan of how he would deal with our fiscal path, with our key priorities of Social Security, Medicare, military readiness, education and other priorities over the next decade.

The President has stressed repeatedly that the test of fiscal responsibility is dealing with first things first -- is dealing first with our existing unfunded liabilities, our existing unmet promises of long-term solvency for Medicare and Social Security. The Republican plans that have been put forward at this point completely fail that fiscal responsibility test.

I will talk about Medicare. Larry Summers will follow, talking about both taxes and some of the economic implications, and Jack Lew will discuss the discretionary aspects, and we'll take your questions.

I think there is no case where Republicans fail the fiscal responsibility test more than on Medicare. It was only last year, when several prominent Republican senators responded to the President's Social Security first case in the State of the Union with it should be Medicare first. Their argument was that Medicare solvency was as, or more important, because Medicare was going to become insolvent earlier. I think of all the things we heard, I think the notion that we should be stressing Social Security and Medicare together -- Social Security and Medicare both first -- was a right call, and it's one that we have stressed and continued to stress. That's why it's puzzling, disturbing and disappointing that the Republicans now put forward a tax plan that leaves zero -- zero -- for Medicare over a 10-year period.

Now, one has to pause and reflect on this a bit. Medicare is now supposed to become insolvent in 2015. Only months ago it was projected to be insolvent in 2008. Despite this, they have now budgeted for the entire next decade and not left a single penny for Medicare. Remember, the Social Security surplus is all designated for a Social Security lock box. The on-budget surplus, as John Podesta showed yesterday, is about $996 billion in their calculations. By the time you take their tax cut and the interest, it's gone.

As Jack Lew will go through, this will leave them in a world of hurt when it comes to funding our military and our basic priorities of education, science and health, but certainly does not leave anything for Medicare. Now, four times in the last 12 or 13 years, the Medicare projections have gone backwards. In other words, rather than being projected to improve, the projections often come in the other way. So in other words, that 2015 projection is only several months old. There's no reason that 2015 could not go back to 2008 or 2010.

So, again, it's important to understand -- they have laid out a budget that takes account of all of the available revenues and funds in the federal government for the next 10 years and not left anything for Medicare, even though it's going insolvent, at best, in 2015.

Now, as many people have stated, what we're dealing with are projections, we're dealing with projected surpluses. And one of the questions is how you should deal with surpluses that are, in fact, just projections. If a family knew nine years from now they were going to have serious health care bills and they thought they were going to get raises -- bonuses every year -- if they saved that money the first four years for the projected health care bills of their parents, and the raises don't come through in the bottom five years, they're not going to regret that they saved money for a health care bill they knew was coming due. They're going to be glad that they put away and saved that money.

On the other hand, if they take those projections and they simply spend it all, or simply use it on something that may be nice but is not a necessity, then that money is gone. And when that time comes later, they are in a tougher and tighter squeeze than they would have been.

That's the exact same situation with the federal government right now. Medicare is liability -- an unfunded liability we have. We have a promise to people who pay Medicare taxes every year that Medicare will be there for them even after 2015, long after 2015. This is an obligation we have. So what the President does is we take $374 billion over that 10 years and we save that for Medicare, for a promise we have to have. Of that, $328 billion is for strengthening the solvency of Medicare so that it goes to 2027, it's extended 12 years.

Now, one can say, well -- the Republicans could say, well, you know, sure, we didn't set aside any money, but we're going to have savings, we're going to come up with a plan. Well, let's see that plan. Right now if you look at our plan, we have about $72 billion in savings over 10 years -- tough to get $72 billion in savings over 10 years. The Breaux-Thomas plan -- I want to make clear on this -- has $66 billion in savings over 10 years. And not all of those are in Part A, that help the trust fund. So they probably have about $50 billion in actual savings that actually would help the trust fund.

Who is it that can say we don't need $328 billion for Medicare? And I think it's reasonable to ask the Republicans how would they extend the solvency of Medicare. If they're telling the country that we can afford to take our entire on-budget surplus for the next 10 years and use it for a tax cut and that we don't need to worry about the fact that Medicare could be insolvent within a decade or a little after, then let's see what your plan is. Because, if not, I think it not only fails the President's first things first test, I think it fails basic common prudence, common sense on budgeting.

So what will happen? What will happen is that six or seven years from now -- or maybe two or three years from now -- we will have to deal with Medicare. And if we have used all the money that was available for a tax cut, if we have saved nothing, how are we then going to take care of Medicare? One, you're going to have to have very severe savings. Two, you have to raise premiums. Three, you have to squeeze down discretionary spending, domestic spending on education, health and other priorities, or four, you'd have to borrow and run deficits again.

So when you want to talk about some of the squeeze on discretionary spending, it's not just the cuts that are in their plan, it is what will have to be cut down the road to solve with Medicare because we didn't set aside and save this money now for an existing promise on Medicare we knew we had. And I think this needs to be something that needs to be debated nationally in the country before any $800 billion tax cut is passed.

SECRETARY SUMMERS: Thank you, Gene. I want to talk about the budget debate and what is at stake for our national economy in that debate. We're enjoying very fortunate times right now, with low inflation, low unemployment, rapid growth in real wages. There are many reasons, but none more important than the fact that there's $1.7 trillion in debt that was forecast in 1993 that does not exist today. That is $1.7 trillion that would have gone into sterile paper assets that has instead been invested in plant and equipment for workers, in lower interest rates for American consumers, and in reduced borrowing.

That is the right economic strategy for growing our country. And that is what is put at risk by the dangerous reversal of course that would be represented by huge tax cuts. Why would it be a dangerous reversal of course to have huge tax cuts at this point? For three reasons: first, it would mean more debt all through the next 15 years. The President's framework would eliminate the national debt by 2015. It would rapidly bring down debt over the next 15 years. It would do that by using the surpluses to prefund obligations that we already have. In contrast, the huge tax cuts approach would dissipate the surpluses while taking no new steps to meet existing obligations.

Second, the tax cuts are potentially explosive, out beyond the 10-years window, and involve very great risks if the projections that we have made do not materialize. If you look at those tax cuts within the 10 years, they are on an explosive takeoff path which would threaten our fiscal health after 10 years. And in the event that the forecasts do not materialize, and obviously uncertainties increase, the longer forward you look, the risks would be that much greater.

Third, foregoing the historic opportunity to pay down debt is tantamount to increasing taxes. It's tantamount to increasing taxes because each one percentage point increase in interest rates would mean an extra $200 to $250 billion in mortgage costs on American consumers over the next 10 years. It's tantamount to increasing taxes because more debt in the future, at higher interest costs in the future, means more need for citizens to pay taxes in the future. A dollar of debt foregone is more than a dollar of tax increase in the future, because you have to pay taxes on that dollar and on the interest that that dollar accrues going forward. So huge tax cuts are the wrong way forward because they mean more debt, because they mean more risk and because they are tantamount to future tax increases.

We can cut taxes the right way. The right targeted tax cuts can help middle-income families meet what are their crucial needs -- savings for retirement at a time when our personal savings rate is negative, child care, long-term care for an aging relative. Targeting tax cuts on the crucial needs of the vast majority of our population is the right tax strategy -- but first things first: pay down the debt, ensure the solvency of Medicare and Social Security, provide for prescription drugs, assure that base government can continue to function. That's the right economic strategy and it includes a tax cut, as well.

MR. LEW: This week as the Congress begins to work on the details of a tax bill is really the moment when it's incumbent on all of us to ask the very tough question -- do the numbers add up. And I think that the conclusion that one almost has to reach, looking at the size of the tax cuts that are being discussed, is that the numbers simply don't add up.

If you look at the size of a tax cut, there are a lot of different numbers out there. If we look in the House, the number they've been looking at is $864 billion. If there were an $864 billion tax cut, that would also increase our borrowing costs. As Larry just described, we have a bigger tax cut, therefore, there's more national debt, more interest -- it would cost us $179 billion in interest.

So, if you look at the CBO projection of a surplus of $996 billion, and an $864 billion tax cut with $179 billion of interest, you start out $47 billion to the bad -- increasing deficits compared to the baseline by $47 billion. And that's just a starting point.

Gene went through at some length on the Medicare issue, which is very significant. And we do believe that it is a key to first things first that we fund our current obligations. But what is masked in these numbers, in the Republican budget and in all of the discussion of tax cuts of this magnitude, is the part of the story that's not being described. And that is what's left for everything else.

If you look at the Republican budget resolution -- the congressional budget resolution -- over 10 years, it is below our administration projections of defense spending by $198 billion in outlays. Now, we worked very hard in December, November and December, putting together a budget that we really believe meets the needs that we have in the area of national defense. You cannot meet those needs with $198 billion less in outlays.

There's been a lot of discussion in the last week or two about what is the right level of non-defense spending; what do we need in order to fund our commitments to education, in order to fund our commitments to environmental programs, all the other priorities that we and, frankly, many on the other side are talking about it. If you look at the comparison of where the Republican budget is compared to simply taking the 1999 level of spending, plus inflation -- it's $583 billion short over 10 years. These are huge, huge gaps -- $198 billion in defense and $583 in non-defense. What it means is the numbers don't work. I don't believe that you could put together budgets at those levels and meet either Republican or Democratic views of what the priorities of the country are.

We see this year that working within the caps is very difficult. Going below those caps is just not a credible path. Even our allocation of the surplus proposed that we put a significant amount back into discretionary spending so that we can meet our commitment on defense, education and other areas. We've put $328 billion of surplus dollars back into discretionary spending.

The Republican tax cut is already creating a deficit before they put a penny back into discretionary spending. If they were to start adding money back so that they could have the defense program that I think we agree on a bipartisan basis we need -- if they were to put minimum levels of funding in so that it was possible to put together education, environmental and other budgets on a year-to-year basis, I think you would see their shortfall go from $47 billion into the hundreds of billions of dollars over the next 10 years.

It's important to ask these questions now, before a tax cut is put into place. Unlike a budget resolution, which is a target, it's a blueprint for Congress for the year, a tax cut becomes permanent law. It means that unless Congress and the President come back and change the laws, we have put ourselves on a path where we just won't have the resources to address Medicare or discretionary spending.

If you look at the cuts that our suggested by the numbers in the area of discretionary spending, they almost boggle the mind in terms of the depth of the cuts that would be required when you get to the end of the 10 years. If you were to spread the pain between defense and non-defense, we're talking of cuts of more than 25 percent in non-defense spending. If you were to protect defense and say defense will be protected, all the cuts will come out of non-defense -- you're up in the area of 40 percent. These are not numbers that work.

So we think that before the tax cut is enacted is the time you have to ask the question, is it a shell game or do the numbers work. Unfortunately, it looks more like a shell game and we would hope that that debate happens quickly and that we can engage, putting all the pieces on the table and have a direct discussion about what our priorities are, not just the tax cut on the table.

Q You're not referring to cuts, per se, but you're referring to cuts and projected increase in the projected growth of these programs?

MR. LEW: I'm actually referring to cuts below the level of 1999 appropriations in the area of non-defense, plus inflation. So if you look at a program -- whether it is Head Start or any of the other programs with a number of people in it -- and the costs go up, you start having to reduce the number of people who participate in the program if for 10 years you don't let the program grow by any of the amount of inflation.

We're very lucky, we have low inflation now. But even with low inflation you can't go 10 years at hard freezes without reducing the number of people who are served.

Q -- about the philosophy as a part of the cuts. You talked about the House plan. What about the Roth plan? It would cut the lowest marginal rate by 1 percent, benefitting low income people, as well as everyone -- 401(k) plans would be liberalized, the marriage penalty would be done away with, no capital gains reduction, no estate reduction. What's wrong with that?

MR. LEW: I'll let Larry talk about the details of the tax plan, but let me just, before I turn it over to him -- we can't get lost in the trees and not see the forest. These numbers are all putting us in the same place, where there just is not enough to go around. We can't have a $750 billion or an $850 billion tax cut and still meet Medicare, defense, education and other needs. The contents of the tax cut are questions that Larry will discuss, but we have to separate the questions of how big it is from what's in it.

Q -- what acknowledge meet those other needs as projected by the President --

MR. LEW: I would actually say that the burden is on anyone who is not meeting the levels that we're describing to show us how would they meet a national defense with $198 billion less?

Q -- in your prescription drug plan proposal --

MR. LEW: The numbers, actually, with or without prescription drugs, are close to the same. We're talking about taking less than $50 billion over 10 years of the surplus for prescription drugs. We're talking about hundreds of billions of dollars of shortfall --

Q But $50 billion is $50 billion.

MR. LEW: But hundreds of billions of shortfall are not materially changed by that.

Q Jack, can you lay out --

Q Can I hear an answer to the Roth plan? I mean, what are your philosophical disputes with the Roth plan?

SECRETARY SUMMERS: Our problem is with huge tax cuts that put you in a situation where there is no money for Medicare, no money for Social Security, where you're either not funding defense at the level the President has requested, or you're talking about some of the largest cuts in discretionary spending and service levels that we've ever talked about in this city. That's the crucial issue, not the precise composition of any tax plan. Sure, there are some differences between the Roth plan and the Archer plan, but those differences are small compared to what is the common element -- precluding Social Security, precluding Medicare, putting debt pay-down at risk, and leaving base government starved of the capacity to meet basic needs.

Q But doesn't the lock box on Social Security take care of that program?

SECRETARY SUMMERS: No, The lock box on Social Security doesn't address that at all. The lock box on Social Security serves an important issue of assuring that Social Security surpluses all go to pay down debt. And that is an important feature of the President's plan; that is an important feature of other approaches. What's crucial is that that be done in a way that doesn't risk future debt limit crises. What's crucial is that that be done in a way that doesn't make it impossible for the government to respond if we ever have a recession. But that lock box doesn't make one penny available for Medicare solvency, doesn't make one penny available to protect base government, doesn't make one penny available for kids.

If we've chosen, as Congress has, to move to a framework where we focus on the on-budget budget, then we have to have an on-budget framework that can meet our basic needs. And the challenge is to those who propose huge tax cuts, tell us what you'll do about Medicare, tell us what you'll do about defense, and tell us what you'll do to assure that base government -- that national parks, the FBI, medical research -- can keep providing the level of services that people have come to rely on.

MR. SPERLING: Can I just add one thing, which is on the Social Security lock box -- our Social Security lock box locks in debt reduction and uses the savings for Social Security. There is a commitment in the structure of how we do it -- that it all go to debt reduction, and that the interest savings from that debt reduction go to extending solvency. That makes a commitment that will be very difficult for something to renege on that in the future, because everybody knows if they renege on the debt reduction they'll be hurting the solvency of Social Security -- something will be very politically difficult for future congresses to do.

The current lock box that the Republicans have doesn't offer a day in the life of Social Security, doesn't extend it a day in the life of Social Security, doesn't put a penny of it towards extending solvency. So there's a hope that their lock box would lead to debt reduction and helping Social Security, but it is much more a hope than the type of commitment the President has.

Q What about this idea that they've revived of an across-the-board tax cut? Putting aside -- I know you want to attack the size of their tax cut -- but putting that aside for a second, what about the idea of an across-the-board tax cut? Is that a non-starter, considering you're looking at a targeted approach?

MR. SPERLING: We believe that it makes sense if you're going to have tax relief to have it go to the working families that are struggling to make ends meet, who are in most need of help on long-term care, on child care, on health care and for savings. And it's very disappointing that after we put out a plan that was very strong on helping savings, helping deal with the negative personal savings rate that Secretary Summers mentioned, that helps the lower and moderate-income families of this country do something with that savings.

Almost all of the savings provisions in these plans are dedicated to the most upper-income people. They're committed to people who have maxed out on their IRAs and their 401(k)s. That is targeting new savings incentives away from the middle class; that's targeting them away from the people who are having the hardest time saving and putting aside something extra to save for their retirement.

Q Could you just briefly outline for us how the administration would spend the $996 billion that we're talking about?

MR. LEW: As you know, when we put the mid-session out, the President put a framework forward that allocated a surplus, which we estimated to be just a little bit larger -- $1.084 trillion. We haven't gone back and put together a plan at $996 billion. But I think that the shape of it is the same, it would just take a little bit of adjustment to make it fit the different surplus projection.

Q That's a surplus over your projected budgets?

MR. LEW: That is the surplus over the --

Q You have a budget that takes care of defense, you have a budget that takes care of some spending. This is a surplus above that.

MR. LEW: This is the surplus with our policy, that's correct.

Q So new spending would be -- that's what you're asking? How would you spend --

MR. LEW: The allocation of the additional surplus amount obviously began with Medicare in this period -- $374 billion to Medicare. We then looked at discretionary spending and we began with a defense path and looking at needs in the area of core government -- law enforcement, airline safety, education programs -- we allocated $328 billion to defense and non-defense spending.

Q How much of that in defense?

MR. LEW: In our budget what we presented was -- let me just look it up -- we proposed $127 billion over 10 years for defense.

Q So $200 billion in additional spending for non-defense?

MR. LEW: Though we didn't allocate it. We put at least that amount into defense. On the tax cut, we were $250 billion. Now, we add all that together -- we also had financing costs, but we added that in and we figured on spending the total including financing of $132 billion. Now, that put us at $183 billion, which was our surplus projection. Obviously, if we were working off of CBO numbers we would have to revise it slightly.

But what we've put in there is we put in Medicare solvency, we put in prescription drugs, and we've put in $328 billion to address the funding needs in defense and non-defense. If you were to take our budget and add to it the larger tax cut, we'd be in the same position that they're in. There's just not room for all of the priorities that we put forward and for a massive tax cut.

We size our at $250 billion in order to make everything fit. And the challenge is to keep all the pieces at the right size.

Q If you're looking at taxes in terms of the bottom line, is there a bottom line cost for a tax cut package that may be between the $250 billion that you propose and the $800 billion that they've proposed? I mean, is there room for negotiation between those two figures?

MR. LEW: I think it's a mistake to think of this as a conversation where you quickly get into can you split the difference. We've put forward a set of policies that have -- that are rooted in a number of very important concerns. The concern about Medicare is to get solvency and to modernize the program. The concern in discretionary spending is to be able to maintain the defense program that we've put into place without devastating education, law enforcement and other priorities.

I think the question has to be how can those numbers be fit in with a tax cut. We sized our tax cut at $250 billion because that's where we thought the right fit was. I think it would be a mistake to think you just look at these numbers and somehow say, well, can you just split the difference. You have to ask what do you want to get on defense; what do you want to get on Medicare. And you have to put first things first.

Q -- why are you having the Republican leaders come today? What's the point -- just to deliver the same message you've been delivering the last couple of weeks?

MR. LEW: We're emphasizing the differences here. I think if you take a step back and you think of the facts that we're starting with, that we have a trillion-dollar surplus, and the opportunity to put first things first, to take care of Medicare and Social Security solvency, to take care of our long-term needs in defense and non-defense, and to have a tax cut, within the surplus that we have based on conservative projections -- we think that's an enormous opportunity.

If one chooses to go and put all of the resources into a tax cut, then we're going to have a problem. I think we've acknowledged that, we said it very clearly. The challenge that we've put forward is, is there a way to meet all these priorities. And, obviously, you have to talk amongst yourselves, between sides to see if there's a willingness to try and put first things first, and to try and balance the priorities.

Q Secretary Summers, you're going to Brussels tomorrow -- or today for meetings tomorrow. The Euro hit a new low today. Do you expect that to come up in your meetings with the G-7, which I realize are primarily devoted to Kosovo reconstruction, or in any bilateral meetings before or after that?

SECRETARY SUMMERS: Could I just emphasize one point on the budget before coming to your question. We, too, believe that government spending has to be properly controlled. The $200 billion that Jack referred to that is additional discretionary spending would still leave discretionary spending over the next decade on domestic programs below -- and below by a significant margin -- the 1999 level.

Q What's that?

SECRETARY SUMMERS: The 1999 level of services after you've marked up for the rising salary costs and so forth. And so the approach here is not one -- we say more discretionary spending -- that is only more discretionary spending relative to some projection of very sharp declines in discretionary spending. Our plan is a bare minimum of what is necessary for discretionary spending, and it does make room for a tax cut.

Q I'm sorry -- if it's the size more than the composition of a tax cut that's at issue, then is the administration open to some of the Republican proposals on targeted tax cuts within that $250 billion range?

SECRETARY SUMMERS: Let me come back to your question, then I'll -- and then I'll touch on that. I'm going to go to -- I'm going to be going to Europe primarily for the high-level steering group meetings, where the focus will be on an effective economic implementation strategy for Kosovo, and on the broader challenge of economic development in Southeastern Europe, which is so important if there's going to be stability. I'm looking forward very much to having the first discussions that I'll have a chance to have as Secretary, with my counterparts from the various European countries, and with President-designate Prody of the European Union. And I'm sure that the economic conditions in the United States and in Europe will play a part in those discussions and in that context the exchange rate situation may come up.

But certainly that will not be the focus of our discussions, which as I say will be on the economic implementation issues and will be on the situations of our real economy.

Q Are you concerned by its weakness?

SECRETARY SUMMERS: Our policy on currencies has been clear for a long time. We believe that a strong dollar is very much in the United States' interest. We believe that what's most important for Europe is to focus on strengthening its fundamentals by laying a foundation for growth, working on producing with great productivity, high-quality products and strengthening domestic demand because the United States cannot be the single engine of world economic growth.

Just on the tax cuts, we believe the crucial issue before we talk about tax cuts -- you know, we use this phrase, first things first a lot because it's actually right -- is that before we have any tax cuts, we've got to agree on what our overall financial plan for America is, what our framework for the surpluses is, and to assure that that's a framework that meets one of our highest priorities.

The President has made very clear what his highest priorities are -- they are saving Social Security first, addressing the challenges of Medicare, providing the prescription drug benefit. Once we've done that we can talk about the composition of a tax cut, and I think there's very widespread agreement that the right tax cut protects our priorities and targets what are crucial issues for middle-income families. And that's what we'll be working to do.

And I'd like to say that in the area of savings and growth incentives which is an important area, that there are 70 million Americans who do not have a pension, who do not have a 401(k), and the vast, vast majority of whom do not have an IRA. And finding the right vehicles to help them save seems to us to be the highest priority.

Q So you won't go any higher than $250 billion? Is that your bottom line?

MR. SPERLING: We've told you what we think is the right plan and that's where we are.

Q Thanks.

Q How far do you think you'll get with the leaders tonight?

Q How far do you think you'll get with the leaders tonight?

Q Are you for free trade, Secretary Summers?

SECRETARY SUMMERS: Free and fair trade. The President led the fight against the steel quota bill because it's very important that we resist protectionist pressures, and successfully opening markets around the world is crucial to helping the American economy continue to grow in a sustainable way. At the same time, it is crucial -- and this is something we have always believed -- that we use the tools of the U.S. trade law that are there to protect American businesses and protect American workers against unfair or subsidized foreign competition to the full extent. That's what has been done in certain cases involving steel and lamb, and that's something we will do in the future.

Q The Australian Prime Minister says you're going to subsidize his lamb producers now.

Q Thank you.

END 2:37 P.M. EDT