8:37 A.M. EDT

MR. FRIEDLANDER:  Good morning, everyone.  Thanks for joining us for this on-the-record call about the President’s Fiscal Year 2023 Budget.  We’re joined by OMB Director Shalanda Young and Chair of the Council of Economic Advisers Cecilia Rouse.  They will each offer a few brief comments at the top, and then we’ll hold time for some questions at the end.

Again, this call will be on the record, and it’s embargoed until 11:00 a.m. Eastern time today.

You all should have received embargoed materials from our team a short while ago.  If, for some reason, you haven’t, please reach out to us and we’ll make sure you get what you need.

With that, I will turn it over to Director Young.

DIRECTOR YOUNG:  Thank you, Rob.  Thank you all for joining.  And Happy Budget Day, as I like to call today. 

You’ve heard the President say that budgets are about values, and his budget for fiscal year 2023 makes our values clear in three important ways. 

First, this budget is fiscally responsible.  It shows that we’re on track to reduce the deficit by more than $1.3 trillion this year.  That’s the largest-ever one-year decline and less than half of the 2020 deficit the President inherited. 

This progress was not an accident.  It was a direct result of the President’s strategy to combat the pandemic and grow our economy from the bottom up and the middle out — a strategy that was built on smart, fiscally prudent investments that helped jumpstart our recovery. 

And we’ve seen that strategy pay off.  In 2021, we created more than 6.5 million jobs — the most our country has ever recorded in a single year.  Our economy grew at 5.7 percent — the strongest growth in nearly 40 years.  And the unemployment rate has fallen to 3.8 percent — the fastest decline in recorded history. 

The budget outlines the President’s vision to expand this progress.  Its investments are more than fully paid for through the tax reforms that ensure corporations and the wealthiest Americans pay their fair share, including a new billionaire minimum income tax.  It achieves significant deficit reduction over the next decade, and it ensures that no one earning less than $400,000 a year will pay an additional penny in new taxes.  

Second, the budget invests in security both at home and abroad.  Here at home, it includes critical investments to keep our communities safe, fund crime prevention and community violence intervention, put more cops on the beat for community policing, fight gun violence, and advance criminal justice reform. 

And during what will be a decisive decade for the world, the budget makes one of the largest investments in national security in U.S. history, strengthening our military and leveraging our renewed strength at home to meet pressing global challenges. 

And third, the budget delivers on the agenda the President laid out in his State of the Union Address to help build a better America.  It advances a bipartisan Unity Agenda through proposals to take on the mental health crisis, combat the opioid epidemic, support our veterans, and accelerate progress against cancer. 

And it makes other key investments in the American people, building a stronger economy and promoting job creation, improving our country’s public health infrastructure, combating the climate crisis, and advancing equity and opportunity across our economy and our country. 

As the President made clear in his State of the Union, he’s also committed to working with Congress to pass legislation that reduces the deficit; cuts healthcare, energy, childcare, and other costs for families; and reforms the tax system.  

Because those discussions with Congress are ongoing, the budget does not include specific line items for the investments associated with that future legislation, nor does it count any of the savings from the prescription drugs or tax reforms that the House advanced as part of its Build Back Better Act. 

Instead, the budget incorporates a reserve for the legislation and lays out the President’s three principles:  Legislation must cut costs for families, cut the deficit, and expand the productive capacity of the economy.  

We’ve been clear that the President wants to sign legislation that cuts costs for families and reduces the deficit.  But to be conservative, the budget reflects this reserve fund as deficit neutral.  

So, stepping back, what this budget shows is that we can grow the economy from the bottom up and middle out, and invest in the American people, and that we can do it in a smart, fiscally responsible way.  

With that, let me turn it over to Chair Rouse to talk about the budget’s economic outlook and forecast.

CHAIR ROUSE:  Thank you, Director Young.  And thank you for your time today.  I want to use this opportunity to cover two important elements of the budget: the economic motivation and the economic forecast behind this policy.  This budget builds on the solid economic gains of the first year of this administration. 

Remember where we were when President Biden took office.  The pandemic still had a strong grip on the economy, and recovery was uneven and anemic.  We actually lost 115,000 jobs in December of 2020 alone, and roughly 4 million workers had been unemployed for more than six months.  Unemployment was forecast to come down but slowly.

Today, the country looks very different.  The recovery over the last year has been extraordinary; quicker than independent forecasters projected.  With over three quarters of the adult population fully vaccinated, the economy has been able to reopen and rebound.

Over 2021, real output grew by 5.6 percent — the fastest since 1984.  The unemployment rate fell at its fastest pace since modern data began in 1948.  The labor force participation rates of Americans 25 to 54 years old grew by the most since 1979.

This robust recovery has put us in a strong position today.  The U.S. economy is more than 3 percent larger in inflation-adjusted terms than it was before the pandemic — the fastest recovery in the G7.  

Healthy household balance sheets and a strong labor market make us more resilient to external shocks.

The strong recovery has also put us in a better fiscal position as faster growth helps lower the deficit. 

The Fiscal Year ‘23 budget builds on this solid economic growth.  It is a continuation of President Biden’s commitment to address longstanding issues in the economy and make investments that will ensure strong, sustainable growth that benefits all Americans. 

First, the budget is fiscally responsible.  Thanks to the American Rescue Plan, the economy recovered faster in 2021 than expected.  Revenues are up, and the pandemic relief (inaudible).  

The result is that the expected deficit in Fiscal Year 2022 is $1.3 trillion smaller than it was in Fiscal Year ‘21.  And we believe the policies in this budget will further reduce the deficit by another trillion over the next decade.  

A lower deficit will help ease long-term inflationary pressures and make our fiscal trajectory more sustainable.

Second, the budget bolsters domestic and foreign security.  Increased security here and abroad not only protects lives, but it also reduces uncertainty, which allows economic activity the room it needs to renormalize and grow as the pandemic eases. 

Third, the budget makes important investments in the American people.  A healthy, cared-for workforce is a productive workforce.  Moreover, the budget lowers costs for families such as healthcare, childcare, and energy — measures that will ease price pressures over the longer term. 

I’d like to close with a word about our forecast.  In many ways, the economy looks healthier today than it did when we locked our forecast all the way back in last November.  The economy has created an average of 600,000 jobs per month since then, including through the Omicron wave.  And the unemployment rate has fallen an additional 0.8 percentage points since then.

Indeed, private forecasters now project the unemployment rate to be lower than the 3.9 and 3.6 percent we projected for 2022 and 2023, respectively.

But challenges have arisen since last November as well.  The most obvious is the Russian invasion of Ukraine, which will have ramifications that are not reflected in our forecast.  For example, the inflation [sic] will li- — the invasion will likely put upward pressure on energy and food prices.  That, in turn, could reinforce inflation that was already an issue prior to the invasion due to the pandemic, supply chain constraints, and a strong demand for goods. 

Independent forecasters therefore expect somewhat slower GDP growth but still anticipate that inflation will come down. 

As I said earlier, the strength of our recovery has put us on solid ground to weather economic shocks.  Americans are back to work, and the economy is stronger than anyone, including the federal government and private forecasters, imagined when President Biden took office. 

The President’s 2023 budget presents a fiscally fair and responsible approach to build on the progress we’ve made so far to invest in America and meet our future challenges. 

MR. FRIEDLANDER:  Great. Thank you very much.  Moderator, we’ll take a few questions now. 

Q    Happy Monday to everyone.  Thank you so much for doing this.  I was hoping to get more sense of how you’re looking at inflation, given that from 2023 onward there’s the expectation that CPI goes to 2.3 percent.  Is the idea that we just need another year of adjustment?  Or what’s kind of underlying that forecast?

CHAIR ROUSE:  I’m sorry, the question about the forecast itself?  Or is it — is the question about how we’re seeing inflation now, going forward?

Q    The economic assumptions have inflation CPI at 2.3 percent in table S-9.  And I’m curious for — is the implication there that — that, in a sense, like, we just have another year of rough inflation in that assumption, or kind of what you’re forward thinking on that is?

CHAIR ROUSE:  Okay.  So we an- — so the — first of all, let’s remember that the forecast was locked on November 10th of 2021.  So that was quite a while ago.  So this — this economic forecast, if we were updating today, we would look at it somewhat differently.

But let’s understand where the inflation forecast comes from.  We were living through a pandemic where we supported households, as we needed to do, to get through this health crisis, and at the same time, the supply chains crumbled beneath us.

As a result, we had a mismatch between supply and demand, which generated some inflation.  We are not alone.  This — we see this inflation across the developed world with other countries that were supporting their households, their workers, their businesses through the pandemic.

Nonetheless, we expected, back in November, that inflationary pressures would ease as the economy started to renormalize; as we learned to keep our economic activity going, supporting us through the pandemic, and as supply chain challenges started to renormalize.  And as the extraordinary support both by the monetary policy — so, in our case, the Federal Reserve — and fiscal policy, which was no longer needed, could be eased, we expected these inflationary pressures to ease over the coming year.

Then Russia invaded Ukraine.  That has created additional upward pressure on prices.  That happened in February, well after our forecast was already completed.  We do expect that that is going to create additional price pressures over the coming year.  

But again, the fundamentals are that we expect that as we learn to keep economic activity going through additional waves of the pandemic — we hope there won’t be many — but as we continue to work through the challenge of the pandemic, that we will keep economic activity going, supply chain pressures will ease, the extraordinary measures will start to roll off as well, and we expect the economy to normalize.

But there’s tremendous uncertainty.  But we and other external forecasters expect that inflation will ease over the coming year (inaudible).

Q    Hi, thank you so much for doing this.  I have a couple of questions.  The first is: If you could explain the Reserve fund a little bit more, because it looks like, from the — from the S-2 table, that the deficit reduction is including the tax proposals that you guys are putting forward.  So I’m trying to understand how the reserve fund would work but also not impede the deficit reduction you guys are hoping to achieve over the next decade.

And then, just quickly, I was wondering if there are any changes to the top individual income rate in this and then also the provision on stock buyback.  I didn’t see that listed here just yet.

DIRECTOR YOUNG:  So, let me be clear — and thank you for the question and the opportunity to explain.  The tax proposals we’re holding for the deficit-neutral reserve fund are different than the tax proposals we are accounting for our deficit reduction proposals.

We’re paying for our investments on top of what we’re holding in the deficit-neutral reserve fund.  We felt it was the responsible thing to do to not double-count those savings, so those things — those are two separate proposals.  So you don’t see a line item of those tax proposals in the deficit-neutral reserve fund, but they are separate and apart from the line items you do see included, as far as tax reforms in the budget.

As far as the individual rate, the top rate goes to 39.6 percent — the same as under President Obama and Biden administration.  And so those are, I believe, the two major questions you had.

Q    Hey, guys.  Thanks for doing — thanks for doing this.  I’m hearing a weird echo, but we’ll try anyway.

Basically, my core question is: A lot of the budget experts are saying, you know, look, the reason the deficit is falling is because the expiration of inherently temporary economic programs, and it’s kind of absurd for the administration to be taking credit for the decline from inherently temporary economic programs.  Can I get a response to that?  Is that (inaudible), or do you think that (inaudible)?

DIRECTOR YOUNG:  Three letters: ARP.  This was not by accident.  And had the President not had the wisdom and the fortitude, as some people were saying it was time to retract and stop doing pandemic spending, I don’t believe and many experts don’t believe we’d be here.  The growth we saw last year, the highest in 40 years, that added more jobs than ever recorded last year, we don’t believe was by accident.  And without the American Rescue Plan, we don’t believe we would be here. 

The scarring we’ve seen after past recessionary (inaudible) and after the last economic failure after Wall Street, we saw significant scarring that took years for the economy to come through.  So, we believe that was the right medicine at the time.  And everything that the President is rightfully taking credit for, you can find right back to the American Rescue Plan.

CHAIR ROUSE:  Hi, this is Cecilia Rouse.  And I would just add that if we go back to the Great Recession, it took about four years for us to return to this normal fiscal posture, and we’re doing it in two.

Q    Hi, guys.  Thanks so much for doing this question.  One question on the inflation assumption.  So, 2.3 percent this year and next year, and stable, is not realistic.  Under a more realistic inflation assumption, can you still claim $1 trillion in deficit reduction?  Would you still stand by that number? 

And then, also the fact that you have a placeholder for Build Back Better, does that mean that the talks are close?  Can you tell us how hopeful you are coming to a deal?  Thank you.

DIRECTOR YOUNG:  Eric, I’ll take the first one, the — your second question first, before turning it over to Chair Rouse on inflation. 

What we’re not going to do — and I think I mentioned in the opening remarks — is get ahead of congressional negotiations.  The deficit-neutral reserve fund is meant to leave the space, the revenue specifically, to allow congressional negotiators the room to do what President Biden has asked.  He has asked for legislation that reduce costs for Americans and reduces the deficit.  So that is what the budget is putting forth. 

CHAIR ROUSE:  And regarding the inflation: So, as I noted earlier, this budget was locked and our forecasts were locked before various factors, which have led forecasters, including the Fed, to raise their inflation expectations.  Of course, the most recent example is the Russian invasion of Ukraine and its impact on energy and food prices. 

We will have a chance to update our forecast for the next budget.  And those will — and that update will reflect recent events that were unknown at the time of the forecast. 

But regarding the impact of this inflation on deficit impacts, so what you see is that — this shows we have actually done analysis of the impact of unexpected changes in inflation on our budget.  And based on that analysis, inflation above the forecast raises both expenditures and revenues by similar amounts, such that it will have little impact on the deficit overall.

MR. FRIEDLANDER:  Great.  Thank you, Moderator.  I think we’ve got time for one more.

Q    Thanks.  This question is for Chair Rouse and it also relates to the inflation forecasts.  You also have a very low interest rate forecast, which I — you locked in last November.  But as we’ve all seen, the Federal Reserve has accelerated its plans to tighten (inaudible), and it’s already set in plans to get the funds rate to 2.8 percent next year, and now it’s assumed that it will get there this year — perhaps as soon as this year and perhaps even further. 

That’s quite a lot higher than the Treasury yield forecasts in your economic assumptions.  Can you tell me how a more up-to-date interest rate assumption might affect the budget outlook, the deficits and debts, et cetera? 

CHAIR ROUSE:  Sure.  So, it’s important to remember that our debt service line in our summary tables is based on real debt service and real interest rates.  So even as nominal rates have been rising, real rates remain negative and will very likely remain negative in the near term.

In the longer term, our interest rate assumptions remain in sync with the market and other forecasters’ expectations, leaving to the fact that under the President’s budget, real interest rate payments remain below their historical average throughout the coming decade.

MR. FRIEDLANDER:  Great.  Thank you so much.  And thank you all again for joining.  A reminder this call is on the record and embargoed until 11:00 a.m. Eastern time today, as are the materials that we provided to you earlier. 

If you have additional questions, feel free to be in touch with us by email or phone, and we will be happy to follow up.  Hope everyone has a great day.  Thanks very much. 

8:57 A.M. EDT

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