PRESS BRIEFING
BY
OMB DIRECTOR MITCH DANIELS
August 13, 2002
Baylor University
Waco, Texas

2:00 P.M. CDT

MS. BUCHAN: Good afternoon. If I can have your attention, please. We're about to begin our first briefing with OMB Director Mitch Daniels. To remind you, this is on the record, off camera.

Director Daniels.

DIRECTOR DANIELS: Claire, thanks. I'll give you a quick opening statement about our fiscal condition and take your questions on any and all subjects.

As those of you who follow these matters know that we have moved from a strong surplus position in fiscal 2001 -- about $124 billion in the black -- to a deficit position that six weeks ago we estimated at $165 billion in the red. A big reversal. We all know where it came from. Ninety percent of this difference directly attributable to the recession that was ongoing at the first of last year, ending in the fourth quarter; and to the cost of the war and recovery from the attacks of 9/11, 90 percent of that difference.

The real question facing us now is whether we can arrest our slide into the red and begin to move back in the direction of balance or whether there will be a continued progression into larger deficits. We don't know the answer. Our forecast six weeks ago does suggest that with the recovery and provided we have some spending control, we would begin to move back toward balance. And not all forecasts agree and I must say that in the six weeks since we did our mid-session review, there is some evidence of further revenue slippage -- a few billion dollars, but that's just in six weeks.

So the lesson I submit to you is very clear. We have to control what we can control, and that is spending. And we have to limit new spending to that which is absolutely necessitated by the moment of history we find ourselves in. I remind you that the President was forced to propose about 10 percent increase in discretionary spending this year, most of it directly related to the war and building a homeland defense, and then about 2 percent growth in the rest of the budget.

And the real question when Congress returns next month is can we agree to suspend, temporarily, business as usual in the rest of the budget while we do what we must to defend the lives of Americans. I think therein will lie the debate.

The President announced today one step for spending restraint and spending control, and that was the pocket veto, if you will, of $5 billion, which Congress had presented to him -- despite his repeated requests not to do this -- had presented to him in a all-or-nothing package. So that's a few billion of savings. We will need to find several more such opportunities. And we hope to work together with Congress in the 48 days remaining in this fiscal year to get that done.

Your questions are most welcome.

Q Would you be willing to walk through the factual situation on the supplemental? The President talked about
not spending any of the $5 billion. Is that $5 billion, is that out of the -- bill, right after 9/11, the $23.9 billion total? And how much of that was for homeland security? It was -- for homeland security in that bill?

DIRECTOR DANIELS: Thank you. Let me walk quickly through the chronology here, because a lot of time has passed.

First of all, you'll recall that the President requested and Congress supported last December $40 billion of emergency spending to respond to the events of September, to launch and conduct a war, and to begin building a homeland defense. One important data point for you is that we still have, at the end of June, over $14 billion of that money left. So 34 percent of that money was still on hand at the end of June. We're careful about how we spend it and, in fact, it had spent out somewhat more slowly than we had said. We had told Congress over and over that we thought the money would last a good while. In fact, it lasted a little longer than we had anticipated.

Now, the Defense Department has run through most of its money, as have one or two other Departments. But for most of the homeland defense functions, we have spent far less than half. Now, the President on March 21st asked for this supplemental, and Congress took a long time -- over four months -- to finally send it to him. And things changed in that period of time, too. For one thing, we saw we were not spending the earlier money very quickly. For another thing, our fiscal picture eroded a little further, as I was describing.

The President insisted that Congress stay within the limit of what he had originally requested and, ultimately they did. This, I think, accounted for much of the delay. And ultimately they did send him the package divided in two pieces, about $23.9 billion of things he had originally asked for, and then this $5.1 billion in a take-it-or-leave-it, all-or-nothing fashion -- which, by the way, was unprecedented. No President had been asked to swallow multiple spending items in one pill before.

In all but a couple cases we have far more than enough money to reach the end of the fiscal year which, as I say, is now only 47, 48 days away. And there are a couple things in that package amounting to about $1 in $5 that the President did not ask for, but did subsequently endorse. He endorsed the Helms-Frisk plan for AIDS money, additional AIDS prevention funds for Africa, and we will go seek that. I'm sure we'll be able to secure it.

Likewise, he did endorse some additional money for Israel and Palestine, which was offered in the House, I believe by Congressman DeLay initially. And, likewise, we will quickly go and seek those funds. We will also need some additional money for the Transportation Security Agency.

But as the President explained today, he would not be responsible, especially when we are fighting against them, to spend more unnecessary dollars in order to unlock the one dollar that is required. And so he exercised what might be thought of as a pocket veto, and I hope this signal will be read loudly and clearly around Washington.

Q -- how quickly -- of the amounts for each of those three, how much would that -- how much for Israel, Palestine and how much for transportation security agency?

DIRECTOR DANIELS: Yes, sir. Two hundred for AIDS, 250 for Palestine/Israel, and we have at this point not identified the exact amount for transportation security. The Congress cut the President's initial request by close to a billion dollars. At the same time, the Congress was expressing some -- in various ways, some reservations about the original TSA plan. For instance, they put a cap of 45,000 personnel on TSA, which is much -- many fewer than their plan had originally contemplated. Also, there is some new flexibility pending in the homeland security bill that may have a majority. So the folks at TSA are back to the drawing boards, trying to decide exactly how much more they'll need perhaps to suit a slightly modified plan.

Sir.

Q -- on the 90 percent figure, it comes out of the top? And, also, of the roughly $4 billion that you don't endorse, what are other ways that that money could be spent, that Congress could prove that? Obviously, we have a special interest in the D.C. funds. Is there any way -- is there any other way that money could wind up being spent?

DIRECTOR DANIELS: Mike, the -- Mike's first question is about the composition of the change between what was anticipated a year and a half ago -- this was before anyone knew we were in a recession -- I should say anyone, except the Vice President, who I recall in December of the year 2000 said, from his taking of the pulse of the economy he thought we might be on the cusp of a recession. Many people belittled those comments at the time. He turned out to be exactly right, but we did not know that.

We took the forecast we inherited from our predecessors and the distance between that forecast and the reality we measured in June of this year is about 88 percent, I guess it is, attributable to economic changes, which lowered revenue dramatically. We will this fiscal year take in the federal government less revenue in nominal dollars than the previous year for the second year in a row. That's not happened in decades in this country. So that was the biggest factor.

And then the additional costs of war fighting, the $40 billion supplemental and the cost of repair of New York and so forth make up the second largest piece.

With regard to those extra billions in the supplemental, the President has requested a very large increase for homeland security next year, essentially, a doubling year over year -- and you may recall this from the budget submission. In fact, more than a doubling of the functions we will now call homeland security, rising to about $37 billion total. So there's a very large increase for each and every component that was part of the supplemental. And, again, we look forward to buttoning that up with Congress, the new fiscal year in which those dollars will be available is just a month and a half away.

Q To button that down. Is what you're saying that you would urge Congress that if they want this money spent to allocate it out of the homeland security money you've designated in '03?

DIRECTOR DANIELS: Again, Mike, I think I got your question. Absolutely, in the main, the purposes for which those dollars were appropriated are worthy purposes, and they are things for which the President has asked for: for more money already in the supplemental and much more money for '03. And we will certainly work with the Congress to provide for them in '03, but to stack up extra billions of dollars that cannot possibly be spent in 48 days would not be responsible, in his judgment.

Q Are those three areas the only areas you're going to go back to Congress with to get the money? Israel, AIDS and TSA, that's it?

DIRECTOR DANIELS: That is -- I won't say for sure. There are a couple of other items we're going to look at. I can tell you that they would not be materially more than $1 billion total.

Q Which ones?

DIRECTOR DANIELS: One possibility would be -- which Congress did not provide -- would be fire fighting money. We've had a very severe fire season and there was a token amount -- not nearly enough to make any real difference -- in the contingent part. And we are certainly taking a look and monitoring the cost of suppressing basically western wildfires. And that would be a candidate for a subsequent request.

Q Are there any specific ideas that you heard today that the President and the administration is considering running with? And, specifically, Charles Schwab mentioned the idea of increasing the capital loss allowance to -- he mentioned $20,000. How do you stand on that idea or that notion, specifically?

DIRECTOR DANIELS: The question is did we hear any ideas today that might become policy. The answer is, I don't know yet. I do know we heard a lot of very substantive ideas. I honestly wish that an even wider audience had been here to hear the conversation. The session I was privileged to moderate was very substantive, very authentic from people who are dealing with the most tangible sorts of business problems and opportunities.

A purpose of today was really to listen to credible input about the current state of the economy and about measures that might become useful in the future. I know we're going to go back and digest that very quickly. The President is going to want to look at all the input that he heard directly or that occurred out of his hearing. And then we'll know.

Yes, sir.

Q So that you wish there had been a wider audience here to listen, plenty of people are saying that they wish there had been a wider group of participants. Do you think most of the stuff the President heard was a reiteration of his own policies, endorsements of things that were either law or that he supports? There wasn't a dissenting voice in any of the four sessions that he attended.

Do you think there would have been benefits to have some more give and take than we saw here today?

DIRECTOR DANIELS: There was a lot of give and take in the one session I attended; I can't speak for the rest. And in terms of the quality and the composition of the audience, I thought it was quite stellar. I don't know how people could reach a different conclusion.

The one criticism I guess we all heard most often was that there weren't a lot of politicians here or Democratic politicians here. Well, there weren't any Republican politicians here either, and it wasn't a time for that. The President and those of us who serve him can enjoy 11 months of vigorous input from folks in political office, and this was a rare opportunity, we thought, to balance and broaden that with face-to-face input of the kind that is, unfortunately, a little bit hard to get when you're strapped to the desk in Washington.

Any more? Thank you so much.

END
2:20 P.M. CDT