FROM THE OFFICE OF PUBLIC AFFAIRS

November 17, 2004
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The Honorable John W. Snow
Prepared Remarks at Chatham House
The Royal Institute of International Affairs
London, England

Good morning. It is a great pleasure to be here in London, and to be here with all of you. The relationship between our countries is a special one; it is a friendship that is cherished by leaders and citizens alike. My own friendship with Chancellor Gordon Brown has been one of the highlights so far of my tenure as Treasury Secretary, and I believe that our alliance exemplifies international ties that are both genial and productive.

This is a significant time for me to be visiting Europe. As you know, two weeks ago the people of the United States voted to return President Bush to office for another four-year term. His agenda for this second term is already underway, and it is an agenda that holds great promise for the people of our country and for others as well. We want to continue our relationship with Europe and believe there are terrific economic examples to be followed and expanded upon this side of the Atlantic.

For example, I was in Dublin on Sunday and Monday of this week, and had a chance to talk with financial, business and academic leaders there about the creation of "Celtic Tiger" economy and the outstanding economic success they have had in recent years. We talked about the specific economic reforms that have been so successful in Ireland and how the political consensus that made them possible came about.  I was particularly delighted to visit with so many of the architects of the new Ireland and get their first-hand sense of how the reforms were put in place.  As one of them said to me, "Developing policy was relatively straightforward – something any first year grad student in economics could have done.  The hard part was getting the broad based consensus from labor, management, the public, and politicians to move forward.  That took courage, decisiveness, and planning."  That strikes me as the real story of economic reform – whether it is Ireland, the United States, Asia or Europe – it takes courage, it takes planning, and it takes action.

In Ireland, thoughtful political leadership carried the day.  Good fiscal policies including income tax rate cuts, government spending restraint and education reforms led to terrific economic growth in that country. They've had nearly eight percent growth a year for the past eleven years. They've cut tax rates and reduced expenditures and deficits.

Some say Ireland benefited from good fortune. I say they benefited from good policy. I applaud them and believe they ought to be emulated.

Ireland is proof-positive that pro-growth, free-market policies work. The U.S. has traditionally embraced these policies, and I was thrilled to see them implemented so successfully in Ireland.

Ireland's experience reminded me that economic growth and opportunity is much more than a by-product of freedom; economic opportunity is freedom's greatest catalyst as well as its most essential safeguard. Business growth, free trade and financial reforms lead to a better life for citizens of any country. And with that better life comes an increased esteem for fairness, liberty and equality, which is good for the human condition.

I look forward to discussing pro-growth policies like those that worked so well in Ireland with members of the G20 this weekend, and with finance ministers of four countries that are new members of the European Union: Poland, Hungary, Slovakia and the Czech Republic. I will be meeting with those ministers in Warsaw tomorrow.  Of course, the purpose of these discussions is to build a broad-based consensus to develop and implement pro-growth policies.

I know that the G20 ministers and central bank governors and I will also discuss principles for world trade and the global economy. There is broad agreement today that the world economy is best served by open, competitive currency markets, free capital flows and free trade – policies that promote growth and avoid imbalances. The world today embraces these policies more widely than ever before, and global growth is at historic levels because of it.

The results are evident: we are seeing the highest global growth rates in 30 years, with no major recessions or financial crises.  What a contrast to the picture of just a few years ago.

That said, economic expansion is not as balanced as it could be. Where countries are growing too slowly, they need to adopt pro-growth policies, as Ireland has done, and their success has demonstrated. In today's interconnected global economy where products and services, information and capital flow freely, stronger growth rates in those places are critical if we are to achieve economic prosperity for all.

I am proud to point out that much of the success of the U.S. economy comes from embracing the principles of growth, free markets and free trade. And we stand as a beacon of those ideas. But we have our challenges as well, of course. I'd like to address a few of those challenges here today, and describe to you the Bush Administration's strategy for tackling them.

Let me start with the U.S. fiscal deficit, which from my perspective, is our most pressing issue.  It is too large and needs to be brought down.  As a life-long deficit hawk, I want to make it clear that the budget deficit is unwelcome.  I also want to make it clear that it is being addressed.  The President's budget plan will cut the U.S. fiscal deficit in half over the four years, bringing the deficit to less than 2% of GDP – well below our historical average.

While unwelcome, the deficit is understandable given the extraordinary circumstances of recent history: the bursting of the tech bubble, the unthinkable acts of terror on 9/11, followed by the need to fight and protect ourselves from an enemy unlike any we've ever known.

When the President took office, government receipts were suffering because of a weakening economy and the steep stock market declines.  Just as invigorating fiscal policies were being put into place we were then hit with the terrorist assaults and faced with a need to make unprecedented and necessary expenditures that increased spending on the other side of the balance sheet.  Government revenues were declining while expenditures were rising – a clear recipe for fiscal imbalance.

At this time, the U.S. suffered a perfect storm of economic blows.  The bursting of the stock market bubble -- combined with the shock of 9/11 -- resulted in a market loss of $7 trillion in 2001.

Since then, the United States has made important strides, putting our economy on the right track. We are now experiencing strong economic growth and we have excellent traction on the road to budget deficit reduction.

The President's tax cuts, combined with sound monetary policy set by our independent Federal Reserve Board, tapped into the most powerful elements of the American economy: our small-business owners and entrepreneurs, our outstanding workforce and the simple fact that we operate as a free market. The policies stimulated the most open, dynamic, adaptive and resilient economy in the world.

Make no mistake: our economic strength and ongoing growth is the primary key to reducing our country's budget deficit and keep it low on a sustained basis.

It's a simple truth that is too often overlooked: there are only two sensible ways to reduce a budget deficit: grow the economy and control spending.

First: growing the economy. An increase in economic growth and activity leads to an increase in tax revenue. Receipts at the U.S. Treasury are increasing smartly with our economic growth. U.S. gross domestic product continues to grow above the average of the 1970s, 80s and 90s, while the unemployment rate remains below the average for those decades.

In October, for the fourteenth consecutive month, jobs were added in America. With the addition of 337,000 jobs in October and upward revisions to August and September jobs numbers, roughly 2.4 million jobs have been created since August of 2003, with 2 million so far in 2004. 

Again, this type of economic growth reduces deficits. The numbers illustrate that fact: The 2004 deficit is $108 billion lower – that's 20.8 percent lower – than was projected less than a year ago. And projections for the 2005 deficit bring it below 3% of GDP -- a figure that has special significance for our EU friends.

Good strong growth is the key to deficit reduction. This is a point that is too often missed in economic discussions and commentary.  We have the growth and it is melting the deficit.

The other essential part of deficit reduction, as I mentioned, is spending restraint, and it is something that must be adhered to. It is beyond a promise or an idea; fiscal discipline is necessary, period. That's why President Bush has submitted such a strict budget to the Congress.

The President's budget calls for an increase of less than one percent on non-defense, non-homeland security, discretionary spending. With government receipts outpacing spending increases, the budget deficit will be cut in half over the next four years, bringing it well below historic norms. You will see quite soon, as we get into the budget process back home, a renewed and intensified effort on this front.

We're extremely serious about this. Deficits matter and we are committed to the President's plan to bring our budget deficit down.

Like so many other countries, the United States is also faced with a serious demographic problem in the near future.  Our "baby boom" generation will begin to retire, putting our Social Security System under financial stress that demands reform as soon as possible.

And that is the President's intention. He has shown real leadership on this issue – dating back to his election campaign four years ago. In his November 3rd acceptance speech earlier this month, strengthening Social Security for the next generation was one of the very first policy issues he pointed to.  Along with broad-based tax reform, it is one of the top two domestic policy issues for his second term.

The need to strengthen Social Security is not news. Academics and policy analysts have been writing about it and designing "fixes" for some time. And although proposals have differed in details, they are consistent in showing that if we give workers the opportunity to invest a portion of their wages in personal accounts, Social Security will be able to offer the opportunity for higher returns than would otherwise be the case.

That's why the President is committed to offering younger workers a chance to invest in retirement accounts that they will control and they will own. His plan speaks to the thing that has always brought economic success to the people everywhere: increased freedom and independence.

The President's plan to strengthen retirement security includes a number of core principles including expanding ownership of retirement assets, ensuring freedom of choice, creating a society of stakeholders, minimizing risk through diversification, strengthening women's retirement security, and spurring national savings and economic growth.

We believe this is a fiscally responsible path for the near future as well as for the long term. Giving Americans more control, more ownership over their own retirement will make this fix a long-lasting one.  Government does its citizens the greatest service when it empowers the people to determine their own future. The President believes that people make better choices than the government when it comes to retirement savings, education and health care.

Another economic benefit of what the President calls an "ownership society" is increased household savings. For example, we now have Health Savings Accounts (HSAs) which encourage individual savings while putting patients back in charge of their own health care. The President has also proposed to expand savings opportunities through the creation of Retirement Savings Accounts (RSAs) and Lifetime Savings Accounts (LSAs). RSAs would provide an easy, tax-preferred way to prepare for retirement. LSAs would create an opportunity to save -- tax free -- to pay for job training, college tuition, a down-payment on a first home, a car to drive to work, or for retirement.

Encouraging investment and savings through these means will also help America with another deficit situation -- our current account deficit.

I stated earlier that there are two essential parts to reducing budget deficits: growth and spending restraint.

Similarly, we see three key parts to addressing the issue of the current account deficit: increasing savings in the United States; increasing growth levels among our trading partners; and ensuring currency flexibility in large economies that do not have such flexibility.  Each has an important role to play. 

The current account deficit is a shared responsibility. I've already discussed our efforts at home to reduce our budget deficit and increase savings – the first part of the three-part equation. Part two is where our trading partners play a key role. Specifically, they need to grow more rapidly.

Let me take a minute to discuss this very important point.

Essentially, the current account deficit is a gap between U.S. investment and U.S. savings. Today we are in a situation where sound, growth-enhancing policies in the U.S. have made it an extremely attractive place to invest. Because we are growing at such a rapid pace, we are generating more investment opportunities than our trading partners. At the same time, we recognize that investment opportunities in the U.S. are growing at a rate in excess of our savings, while for Europe the opposite is true.  Those partners need to grow to address this gap, just as United States needs to save more.

If other countries strengthened their investment environment, their level of investment, and their economic growth performance, that would go a long way toward reducing the current account deficit.

The global growth deficit is something Chancellor Brown and I, along with all of the G7 ministers, have been concerned with and have dedicated our countries to addressing through our Agenda for Growth. We are each dedicated to pursuing growth in each individual country, both for the good of our own countries and for the good of our group of countries.

The G7 is also in agreement on something that is the third element of current account deficit reduction: more flexible exchange rates in countries that do not have such flexibility.

The desired policy of exchange values that are set in open, competitive markets are reflected in the G7 communiqué. We've also taken this message to China, and they have agreed. As Governor Zhou of the Central Bank of China said recently, "building a more market-driven trading system for the renminbi is now a task of top priority."

The Bush Administration has had an unprecedented level of engagement with the Chinese government on its exchange rate policy including a technical cooperation program. We have broadened our diplomatic strategy to include China's major trading partners through the G7. In early October, G7 Finance Ministers and Central Bank Governors met for the first time as a group with their Chinese counterparts and discussed these issues.

Additionally, the People's Bank of China's recent moves to increase its one-year lending and deposit rates are the latest examples of China's more systematic management of monetary policy. I believe that these actions represent significant steps consistent with China's move to a flexible and market-based exchange rate – which is, again, the third key for current account adjustment.

I'm proud of the strides that the U.S. economy has made after significant hardship. We quickly returned to our status as the best place in the world – on a risk-adjusted basis – for anyone to invest their money. We offer high rates of return and we are committed to keeping it that way, to remaining a great place for people to invest their money.

I know that I've outlined an ambitious agenda today - for both U.S. growth and global growth. I've emphasized the President's absolute dedication to reducing our budget deficit and fixing Social Security. He's also committed to putting in place a tax system that ensures high-level, long-term growth without inflation.

These goals are important for the economic prosperity of the United States. Furthermore, we have a responsibility not just to our own citizens, but also to the citizens of the world to remain the economic leader. And we are up to the task.  Let me be clear: our policy is for a strong dollar. Our dollar policy remains unchanged because a strong dollar is in both the national and international interest.

And I'm optimistic about our ability to overcome the challenges we face today. We are economically strong, have proved our resiliency in recent years, and are strong enough to continue to be the preeminent global economy.

In the spirit of continued economic progress, I've come to Europe this week to embrace our international economic partners. Because today's economy is global; and the U.S. cannot grow alone. We need our partners, we need you, and I am very much looking forward to our continued collaboration to bring economic opportunity and prosperity to this world.

Thank you so much for having me here today.