Office of Management and Budget Director Peter Orszag is speaking right now to introduce the budget in the Executive Office Building next door to the White House. He and Council of Economic Advisers Chair Christina Romer will be taking questions momentarily. The White House posted the budget here at the top of the hour.
Energy, health care, and education are our primary budget goals, but it's difficult because we inherited two different trillion dollar deficits. The first trillion dollar deficit is the difference between what the economy could produce each year and what it is producing. That's why we passed the stimulus, to jump start the economy and close that gap.
The second deficit is the budget deficit. Under current policies and without shifting, we'd face $9 trillion in budget deficits over the next decade. First step in addressing this problem is honesty. We know there will be emergencies like hurricanes, we know the AMT system exists and has to be accounted for in the budget, Iraq and Afghanistan really do exist.
After honesty, reorienting the federal budget is the next step. We've had six weeks to do six months of work. This is an overview, so more detail available in April.
By the end of the president's first term, the budget deficit will be reduced in half. Unlike what you saw in the papers this morning, we aren't raising the price before the sale. This is deficit reduction relative to the deficit we inherited before the stimulus and before any policy interventions.
How do we get there? Four main categories. First, the stimulus and normal business cycle, eventually the economy will recover. That helps. Second, as the president campaigned, the high income tax provisions expire when they are scheduled to expire at the end of 2010. Families making more than $250,000 will have to pay more in 2011. Also, we're closing corporate tax loopholes, especially in international transactions. Third, we are winding down the war. Fourth, we're making government more efficient.
Under efficiency of government, solid evidence suggests that each dollar spent in program integrity results in $1.60 savings. For example, erroneous Medicare payments. All told, $50 billion in ten years in reduced errors and improper payments both on the benefit side and revenue side.
Also we're ditching stuff that doesn't work. For example, we like the earned income tax credit, but there's an advanced form of the credit that only 1% of eligible people actually use and there's a very high error rate with this program, so it's over. On agricultural side, an example would be there are direct payments to farmers based on land rather than based on what they actually farm. 36% of farmers actually get these payments, and for farms with revenue of more than $500,000 per year those payments are ending. That saves $10 billion a year.
All told, $2 trillion of deficit reduction in this budget, roughly $1 trillion in reduced spending compared to current policies and path and $1 trillion in additional revenue compared to current path.
Three key areas to promote long term economic health. Energy, health care and education, as noted in the president's speech the other night, are the investment priorities in the budget.
In addition to stimulus spending on early education, the budget has more because evidence suggests high quality early ed programs pay off over time. Higher education through expansion of PELL grant system and more reliable funding for it and simplification of application process, which is more complicated than the tax code right now.
In energy, reduce dependency on foreign oil and improve operational efficiency of gov't by 25% by 2013. $15 billion/year in energy efficiency investments, including creating an electricity superhighway that would allow transportation of wind energy from the Dakotas to the population centers that need the energy. This expenditure would be financed through cap-and-trade, in a "market-friendly" way.
Health care is the most important driving force in our long term economic health. It's underappreciated how much health care costs are hurting worker pay right now. It's killing higher education priorities at the state level, for example. We have to bend the curve on long-term costs this year because it's the lynchpin to everything.
Yesterday, new Dartmouth College research showed substantial variation in health care costs in various parts of the country without corresponding outcome variation. $634 billion as a "down payment" toward health care efficiency, including reducing overpayments to private insurance firms that cover beneficiaries under Medicare. We'll introduce a competitive bidding process where those firms will bid for covering those beneficiaries and then pay them the average of those bids. We estimate this to save over $170 billion over those years.
The economic assumptions underlying these projections. Starting with total production, we're projecting year over year growth of -1.2%. Real GDP will "fall significantly" in the first quarter and will bottom out mid-year. It'll begin growing again by the end of the year, and 3.2% GDP growth in 2010. More robust growth in 2011, 2012, and 2013. Long run growth rate of 2.6% after 2013, roughly the average f past decade.
Unemployment rate forecasted to rise in first half of 2009 because output continues to fall, predicted to average just over 8% in 2009. It will not come down all that much in 2010, but then will come down more rapidly in 2011 and 2012 as economy grows. Unemployment assume to settle down to 5% in the long run.
Forecast for inflation consistent with drop in output. Should be about 1.1% each of next two years. Then will return to 1.8% for the longer run.
All forecasts are subject to a substantial margin of error, and we're economists, not soothsayers. This is a once-in-a-century series of macroeconomic shocks, so usual patterns don't supply as much guidance, but this is our best estimate.
[Note: this is not an exact transcript; it's a summary of the questions and answers.]
First question is about those making over $250,000, how about charitable giving? About 1/3 of these organizations took a big nose dive (Salvation Army, Red Cross, etc.). Won't this incentive reduction hurt the those organizations and the economy?
Answer: The president put $100 million in the stimulus for non-profits and charities. In addition, the recovery itself will boost the economy and to individuals who contribute to those organizations. When a middle income family contributes $10,000, they save $150 in taxes, when Bill Gates makes that same contribution, he saves $3,500. We think Bill Gates should still get a tax break when he gives charitably, but a slightly smaller one ($2,800).
Followup: But won't the people who'd give start saving instead of giving?
Answer: What drives charitable giving is economic growth and other considerations such as benevolence.
Question: If $634 billion for health care as a "down payment," what's the total price tag? Same with future bailout monies. Did you guys come up with a formula for determining the size of that figure?
Answer: The president wanted to be responsible in this budget. There is a placeholder for potential additional financial stabilization efforts in the budget. We hope it won't be necessary, we don't plan to go to Congress to ask for additional money, but just in case it is we put it in there out of responsibility. On the health care reserve, there are different plans out there, this is a substantial down payment in any of those plans. We'll work with Congress and want to get it done this year.
Question: Where does boosting primary care physicians fit in the overall health care component?
Answer: Boosting primary care physicians seems to be effective based on the evidence. A lot of the variation across the country (referring to the Dartmouth report) without corresponding benefit is related to the ratio of primary care to specialists. One thing we could be doing, though we don't want to pretend we're going to reduce primary physician benefits by 20% this year which is what the previous budget assumed, we are looking to reform the payment system to encourage quality.
Question: Do you want to see more primary care physicians?
Answer: The evidence suggests primary care physicians provide cost-effective, high quality care. In stimulus, there's significant funding for community health centers, which have also been a proven effective method of delivering health care.
Question: Can you walk us through cap and trade, can you explain why there won't be a pass-along to consumers from utilities where their rates will go up? And can you explain why the economic projections are more bullish over the first couple, three years than the CBO projections?
Answer: We're trying to address global climate change and reduce dependence on foreign oil and do it in a fiscally responsible way. It will have an impact on households but that's why we're linking cap-and-trade to "Making Work Pay," the tax credit for working families, to provide them relief in their budgets.
We're less pessimistic than some forecasts but we're very much in the same ballpark. The CBO forecast is pre-policy, and we had inside information because we knew a lot about what the policy would be, we knew what the stimulus package and financial rescue would look like, plus the housing plan.
Question: We've been hearing denunciations of Bush admin for dishonesty in the way they presented numbers and hid expenditures, isn't your optimism dishonest also, aren't you trying to gild the lily?
Answer: Reject the premise that we're noticeably rosier. We're certainly in the ballpark, and this is an honest forecast. We feel confident in the numbers.
Question: Does the assumption include the $250 billion placeholder for financial institutions, is that planned for in the assumption?
Answer: It's a contingency. We know what the overall plan is, the president has said "we will do what it takes," so we're planning a contingency. We want to err on the side of caution, since many things are uncertain.
Question: But the contingency assumes unemployment above 10% and none of your assumptions allow for that.
Answer: We have to realize we're in a period of significant uncertainty. We wanted to be responsible and err on the side of a placeholder. Part of the "rosiness" is the long-term projection. 2.6% long-term growth forecast is completely in the middle of the pack of estimates. A lot of it is public investment in the recent stimulus. So the forecast is sensible.
Question: The total hit on upper income taxpayers, is it right to say that you're raising over $10 trillion total in 10 years from upper income folks?
Answer: You can slice and dice a lot of ways. We face a structural deficit for the last two or three decades. The top 1% has gone from owning 10% to 20% of its share of national income, so we are asking them to pitch in a bit more, after we get out of this downturn. There has been a structural imbalance of monies going to the top 1%, that is going to change.
Question: You've got $500 billion deficits going right through the next 10 years, the accumulated size of the debt public and gross will be $23 trillion in that time. How do you justify that to Congress?
Answer: Let's be clear, we're starting with an inherited deficit of $9 trillion. We have to start working that down, this budget does that. Some may want more, some less. We're being simultaneously hit by people saying this is too painful, and others saying we're not doing enough. More important than what happens over the next 5-10 years with the buget is the rate at which health care costs grow. The health care situation is going to be the single most important thing we do for our nation's financial health, and when we get reform going, we will be saving money long term. But so much is tied to whether we're successful in reforming health care. It's the most important thing.
Question: Any estimates as to how much energy prices might rise through cap-and-trade?
Answer: We have principles on cap-and-trade outlined in this document, there are a whole bunch of paths to get there, we have to work together with Congress on the specifics.
Question: Follow up on cost of primary care physicians in Medicare.
Answer: Previous budgets would dishonestly assume that physician payments would be dramatically reduced in past budgets, and then Congress would actually never allow that to happen, so they'd go back and have to fill that hole back in, and we're just being honest in our budget. We're not playing that game.
Question: Walk us through Afghanistan costs. And is there historical precedent for swing in growth after a recession?
Answer: On the cost of the war, the budget shows the combined cost of Iraq, Afghanistan, and other overseas contingencies. This year $141 billion. Next fiscal year $130 billion, then purely as a placeholder contingency for future years, $50 billion per year thereafter.
Answer to second part: In normal history, the worse the contraction, the faster the recovery. Cites Great Depression, 10% per year growth during the 30s. The swinging growth we're predicting is in line with most estimates out there and not out of line with previous recessions.
Question: Are you concerned you're raising costs on businesses during a recession?
Answer: That is factually wrong. We're not doing that. The first time the rates revert is 2011. So it's not raising taxes during a recession. That's factually wrong. In fact we just cut taxes in the stimulus.
At the health summit next week you'll hear more from us about the down payment on health care. We're trying to correct the mistakes of the past. We're putting money on the table, we'll look forward to working with Congress members on both sides of the aisle.
Question: Are you concerned you're asking Congress to do too much? Cap-and-trade, health care reform. Giant things.
Answer: We put the country back on a fiscally sustainable course with this budget, it's an honest budget. The key to getting the budget under control after 10 years is health care. We can't wait to address health care.
Question: On the deficit forecast, it bottoms out in 2013 and then begins to rise again in nominal dollars, is that the growth of entitlements? Is the trendline concerning to you? And are you factoring any economic impact from the tax increases in 2011?
Answer: The way most economists look at deficits is as a share of the economy, and that's what we're trying to stabilize. As the economy becomes larger, it's natural for everything that we're dealing with to get bigger. So looking at it like a share of the overall economy is the best metric that professional economists use, and that's why it becomes stable.
Question: Can you explain some cuts in some of these farm programs, when they have had champions in Congress for decades, how will you be able to get this through Congress?
Answer: Every line in the budget has something that someone cares about very strongly. It is difficult to shift direction, but it's absolutely what we need to do, that's what the President wants.
[End of conference]