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Mr. Chairman and Members of the Budget Committee, thank you for inviting me here this afternoon to discuss the economic and budget outlook. In connection with this hearing, the Congressional Budget Office (CBO) is releasing the first volume of its annual report. The report reviews the current state of the economy, presents CBO's economic assumptions and budget projections for the next five years, and assesses the effects of alternative fiscal and monetary policies. My statement summarizes its conclusions.

Federal budgeting in 1992 is caught on the horns of a nasty dilemma. The immediate concern is an economy struggling to recover from recession. Of long-term consequence are the continued stagnation of personal incomes and a string of record budget deficits. Unfortunately, fiscal policies that would aid the economy's short-term recovery are all too likely to undercut its long-run performance.

Most economic forecasters, including the Congressional Budget Office, expect a strong rebound to begin in the spring. But even then, the pace of economic growth will probably fall well short of what normally occurs early in a recovery. Although a looser fiscal policy would do little to hasten the onset of recovery, tax cuts or increased government spending could strengthen the expansion late this year and early next year. An expansionary fiscal policy, however, will immediately add to the federal government's already mammoth borrowing requirements, and some proposals would spill more red ink down the road as well.

Fiscal year 1991 closed with a record deficit of $269 billion, but 1992 and 1993 seem certain to exceed even that figure. CBO projects that, under current budgetary policies, the deficit will reach $352 billion this year and $327 billion in 1993. Even adjusting for the size of the economy, those figures approach the highest levels ever.

The huge shortfalls will arise despite the stringent limits on discretionary spending that were imposed as part of the five-year, $500 billion deficit reduction agreement negotiated by the President and the Congress in 1990. During the 1980s, discretionary spending shrank from 10.5 percent of gross domestic product (GDP) to a postwar low of 9.5 percent. Under current policies, the ratio of discretionary spending to GDP will fall another 2 percentage points in the next five years. Achieving the reductions in discretionary spending mandated by the budget agreement will almost certainly require further substantial cuts in the defense budget, and will keep funds for new international and domestic initiatives in short supply.

Although deficit reduction is a critical goal, other budgetary claims tug in the opposite direction. Examples abound. For over a decade, the nation has curbed investment in infrastructure, education, and other forms of public capital that could increase long-term growth. Sixteen percent of people under age 65 have no health insurance coverage. The United States has a historic opportunity to help the emerging nations in Eastern Europe and the former Soviet Union develop strong market economies and sound democratic institutions. And some analysts and politicians feel that the tax burden on middle-income families is too high, while others want to reduce the taxation of income from capital.

No single step can satisfy all of those concerns simultaneously, and the Congress must decide how to balance the competing demands. For fiscal stimulus, the most effective policy is one that can be carried out quickly, takes effect promptly, and promotes spending rather than saving. Although measures that increase the federal deficit temporarily tend to be less effective than those that raise it permanently, temporary measures are less likely to spook financial markets and raise interest rates. Encouraging growth, by contrast, calls for reducing the budget deficit and increasing the share of government spending devoted to investment in physical and human capital. And, obviously, demands for additional public spending cannot be satisfied while simultaneously cutting taxes and making further inroads into the deficit.

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