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CNBC Exclusive: CNBC Transcript: Representative Paul Ryan, House Budget Committee Chairman, Speaks with CNBC's Larry Kudlow

WHEN: Wednesday, December 18th

WHERE: CNBC's "The Kudlow Report"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with House Budget Committee Chairman Paul Ryan on CNBC's "The Kudlow Report" tonight.

All references must be sourced to CNBC.

LARRY KUDLOW: I'm pleased to welcome back to The Kudlow Report House Budget Chairman Paul Ryan, who is one of the heroes of the budget agreement, which-- hopefully stopped a shutdown and-- will add to our-- improved fiscal situation. Chairman Ryan, as always, welcome back.

PAUL RYAN: Good to be with you, Larry. Thanks for having me.

LARRY KUDLOW: Okay, so listen, before we get to the budget stuff. Another big event today, I'm sure you're aware of this-- the Federal Reserve-- released its minutes. And-- they're having a small taper. They're taking' $10 billion-- off of an $85 billion a month-- bond purchase. And-- I wanted to get your sense of that. The stock market is rallying big time. What do you think?

PAUL RYAN: Well, I thought they should have started tapering a long time ago. You and I have similar views on sound money. I was not a fan of these later rounds of quantitative easing. I thought it was necessary in the beginning of the crisis. Subsequent rounds of Q.E. I think did more harm than good. The long run, we will know the answer to that for sure. High time they started. This is basically symbolic, 'cause it's really not that big in the scheme of things.

LARRY KUDLOW: Periodically-- as budget chair, you've held hearings on the Fed. Let me ask you now, with the changing of the guard, does-- Janet Yellen have your confidence?

PAUL RYAN: I think we went to a more dovish-- Fed chair with Janet Yellen. Ben-- ended up becoming a dove, from my perspective, less of a sound money guy, more of a deflation fighter instead of an inflation hawk, more dovish. She's clearly in the dove category. She's a Keynesian. So I don't expect much difference from her from where we are right now.

I think she'll simply continue the soft money, easy money policies-- that we've had. And I think we have more doves at the Federal Reserve, quite frankly. I count myself along with the dissenters like Fisher and Plosser and the others. So I just have a difference of opinion on sound money versus these doves, who occupy the Fed for the most part.

LARRY KUDLOW: All right, we'll leave that there. Let's dig into the budget. As you know, there's a big flap now over-- smaller pensions, lower pensions-- for disabled military veterans. Senator Patty Murray said today that was a technical problem that was unintended and will be solved by-- technical correction, once the bill is passed. Do you agree with her?

PAUL RYAN: Yes, I do. Yeah, that will be solved with-- with a technical correction that will-- that will pass-- when Congress comes back into session. We wanted to make sure that we kept military-- pension retirement better than their civilian counterparts. Civilians who retire before 62 get no cost of living update at all. These-- military retirees will still get a cost of living update. Then they get their benefits recalculated when they turn 62 to make sure that they got back what they had last. In effect-- build back their base of their pension.

Look, Larry, we owe so much to these men and women who fight for us. We wanted to make sure that they always have a better pension system than anybody else in government. We maintain that. And we have very modest reforms to help the Pentagon with their very big-- budget problems. The Pentagon's got some budget problems. We stopped the bleeding. We stopped the cuts. We gave them some mild reforms. And we have two years before this actual provision kicks in--


PAUL RYAN: --place to give Congress enough time to adjust in-- another way if they want to.

LARRY KUDLOW: Let-- let me just be clear on this. So in other words, you agree that-- disabled military vets will not--

PAUL RYAN: That's right.

LARRY KUDLOW: --take the 1% reduction. You agree with that? And that was--

PAUL RYAN: That's correct.

LARRY KUDLOW: --an oversight?

PAUL RYAN: That's correct.

LARRY KUDLOW: What do you say to other people-- I'm seeing Senator Lindsey Graham, I think, today on the tape saying that no one in the military, none of the military soldiers should take a cost of living adjustment. What's your response to that?

PAUL RYAN: Well, we got this idea from the defense community. The defense community asked us to help with some of their problems, which is really effected in saying they have pension and legacy costs that are growing so fast in the future that it's carting out all the other things that the military needs to do.

And so we thought this was among the mildest of the ideas that were being recommended to us. For instance, Bowles-Simpson recommended doing away with completely. We clearly weren't going to do that. But that's why we put a delay date in here. This provision doesn't kick in till 2016, which means Congress has a couple of years of Defense Authorization bills to do other kinds of reforms to replace this if they want to.

You have this commission-- by the military designing-- coming up with how to redesign our pension system in the military. So this is an issue that's coming. We know it's coming. We thought this was the-- the mildest of all the reforms on the table. We clearly didn't intend to get disable-- military retirees caught in this. And obviously, this doesn't affect veterans benefits. Let's make sure that that confusion's cleared up.

LARRY KUDLOW: Right, that kind of--

PAUL RYAN: But we need to help the military with their budget problems.

LARRY KUDLOW: That comes out of--

PAUL RYAN: Yeah, the VA is not affected by this. That's right.

LARRY KUDLOW: All right, let me ask you this. Now let's go directly to the spending. You've raised the spending caps-- from sequestration in 2014 and 2015. I think the number sums to $65 billion. What do you say to people, particularly conservatives-- and you've heard this. Conservatives are saying, "Budget caps and spending caps and sequestration, which was a signature Republican achievement is dead." Is that true? Are the caps dead? Is the spending -- discipline dead?

PAUL RYAN: No. No, not at all, actually. The Democrats came into these negotiations wanting to get rid of the caps altogether, 100% of the caps. Well, we just got them to agree in the next year and a half to 70% of the caps. 70% of the sequester is still in place for the next year and a half. The 30% sequester relief we gave $63 billion in spending, is paid for with $85 billion of permanent entitlement changes, permanent savings that result in net deficit reduction. So that exceeds the Budget Control Act's requirement of a one-for-one replacement. So we actually go farther than the law requires.

More to the point, Larry, 92% of the sequester is left intact over the lifetime of the sequester with disagreement. So what we like from a fiscal conservative standpoint is we do give relief in the sequester now, particularly because our defense hawks in our conference would not support where this was going to go. We did not have the votes to stick to that 967 number. So we got excess savings to make us have more deficit reduction. And we prevent two government shutdowns from happening in the next year, which we think is a good thing for lots of reasons, for the country, for certainty, for economic growth. We want to focus on Obamacare and Obamacare oversight. We want to focus on tax reform. We want to focus on a pro-growth agenda. We don't want to have two government shutdown scenarios. And we think this is that step in the right direction.

LARRY KUDLOW: Your critics say, however, the $85 billion in deficit savings is mostly fees and revenues. So they make the case that what's going on here is spending's going up. And it's being financed by fees and revenues, which are being called tax increases. How do you react to that?

PAUL RYAN: Yeah, there was absolutely no tax increases at all. Nothing from the revenue code in here whatsoever. There are-- a few fees which are always in the Republican budgets. And these are user fees. If you use a government service, pay for the government service. If you use airport security, pay for airport security. And don't make a hardworking taxpayer who never gets on a plane pay for your security.

If you're using pension insurance for the P.B.G.C., because you have a defined benefit pension, pay for that, instead of making the guy who doesn't have a defined benefit pension, pay for your insurance. That's conservative values. That's what we've carried in our budgets before. These are user fees that displace other spending. And there are no tax increases whatsoever.

That's one of the reasons why-- I supported this deal, Larry, which is we kept tax increases out of here. We have permanent law changes, permanent entitlement law changes, like federal employees paying more for their pensions permanently. That accrues savings. So we will actually save more than $85 billion in the long run, because these savings compound in the out years. And that more than offcents the temporary sequester relief. That's why we result in net deficit reduction. And it's a good precedent. No tax increases, reduce deficit. That's a good precedence to set going forward.

LARRY KUDLOW: So what happens in 2016, 2017, 2018? What happens to the budget caps and the sequestration in those years? Before you get to the out years, what happens in those middle years?

PAUL RYAN: They're in law. That's-- that-- we didn't turn the sequester off. The sequester's still in law. So the 2016 sequester is going to be-- a trillion 16 billion dollars, because that's what the sequester says it is. And if anybody wants to change it, the precedent we now have set is you can't raise taxes. You got to cut more than you put back to advance the goal of deficit reduction.

Look, Larry, the budget I want is the budget I passed back in March, the House budget. That's the one that balances the budget. That's the one that reforms entitlements. That's the one that pays off the debt and reforms the tax code. That's what I'm fighting for. That's what I'm pushing for. That's my ultimate goal.

But in this divided government, I'm not going to get that goal. It's divided government. You don't get everything you want. But I will take a small step in the right direction, which I clearly think this presents, on my way toward fulfilling that goal. At the end of the day, Larry, we're going to have to win some elections. We're going to have to win the Senate.

LARRY KUDLOW: No, I get that.

PAUL RYAN: We're going to have to win the White House to really fix this thing.

LARRY KUDLOW: No, I get that. And I want to say I worked for a guy named Ronald Reagan many years ago who made deals. He said, "Give me a half a loaf now. And I'll get the rest of it later. So I understand that. But I'm just-- putting on the table what some of your critics are saying." Look, you've got a debt limit, debt ceiling issue coming up. Nobody knows the timing. It may be February or March. It may not happen till June. But you have said that Republicans will want concessions for increasing the debt ceiling. Can you tell us about those concessions?

PAUL RYAN: Look, just like we got concessions with this, which is net deficit reduction and no tax increases-- we will not want to -- walk away with nothing from this. I can't tell you what we're going to be-- moving for, because we, quite literally, have to meet among ourselves at our conference retreats in January to discuss how we want to lay out 2014. And this is clearly one of those things we're going to be discussing.

LARRY KUDLOW: All right. Another one, the feud with the Tea Party. Speaker Boehner-- took a few whacks with the Tea Party. I've had many of them on—"The Kudlow Report." They wanted the full sequester. It's not an unreasonable request. How is your relationship to the Tea Party? What do you have to say to the Tea Party, which is kind of up in arms now, because it seems like a lot of Republicans are attacking them?

PAUL RYAN: Well, look, I have nothing but good things to say about the Tea Party. We wouldn't be here if it weren't for the Tea Party. Look, when I started my budgets back in 2008, I had eight other members of Congress who were willing to cosponsor it, to put their name on it, eight. And because of the Tea Party, because of those grassroots conservatives out in America, I was able to pass it in 2011 with, I think, 233 votes.

I was able to pass three budgets now because of these grassroots conservatives, these fiscal conservatives, which balances the budget and pays off the debt. There's no way I could have passed these kind of budgets if it weren't for them. That's why I credit them with this great success. Now you can't let the perfect be the enemy of the good. In divided government, you've got to look at the situation as it is and not as you wish it would be and keep moving the ball in the right direction, even if it's incrementally. I would prefer that these so-called feuds are in the family and not out in the public.

LARRY KUDLOW: You report to the Wall Street Journal that you want to be the Ways and Means Committee Chairman in 2015. Why? What's your agenda?

PAUL RYAN: Look, (LAUGH) you know me, Larry. There's nothing new here than what I've already said. This has been my career trajectory in the House. People ask me if I want to be speaker, I don't. And this is the next-- logical step. But what I'm really focused on right now, to be honest with you, Larry, is helping Dave Camp with the Ways and Means Committee.

He's our quarterback. He's our chairman. My dream for 2014 is that the Camp-Bachus Tax Reform Act of 2014, which reduces tax rates across the board in a pro-growth way to grow the economy becomes law. I want to help Dave do that. Then after this election, after 2015-- this is really no secret. This is not a newsworthy item. That is the natural progression of how I saw things. That's the way I've always planned it. And-- there's nothing really new here.

LARRY KUDLOW: All right, well, I think everything you do is newsworthy. And I want to ask the final question. Are you--

PAUL RYAN: I really don't, but okay.

LARRY KUDLOW: Are you leaving the presidential door open for 2016? You just had a big poll in-- Iowa. You had the best numbers of-- all the Republican candidates. A lot of people are saying, you know, "Look how he negotiated this budget. He can cut across party lines and get things done." You stopped the shutdown. Some people are saying you saved the Republican Party from itself, because you stopped the shutdown. So is the door open for a 2016 presidential run? I ask you, Paul Ryan.

PAUL RYAN: Well, I'll answer you, Larry Kudlow, that-- I'm going to make my mind up on that issue later on. I-- look, I'm just trying to do my job right now. The people here in Wisconsin elected me to represent them. My colleagues asked me to chair the Budget Committee. So I'm doing that job-- the best I can. I'm not going to let future ambition or career moves cloud my judgment today.

And what I decided-- my wife and I decided, "Let's get through this session. And then I'll make my mind up down the road." I haven't foreclosed any opportunity. I haven't made a decision one way or the other. But right now, I'm just sincerely focused on doing my job.

LARRY KUDLOW: All right.

PAUL RYAN: That's the way I see it.

LARRY KUDLOW: House Budget Chair Paul Ryan-- we've known each other a long time, Paul, if I may, Happy Holy Merry Christmas and New Year's to you. And thanks again for coming on.

PAUL RYAN: Awesome. Merry Christmas, Larry. Good to see you.

LARRY KUDLOW: Thank you.

PAUL RYAN: My 2014 wish list is to get to more debt reduction, get comprehensive tax reform to lower tax rates to grow the economy, and get the Federal Reserve to return back to the days of sound money.

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