Summary: This statement, which was originally prepared for a hearing before the Senate Budget Committee, discusses the President's Midsession Review and the implications of the President's proposals for fiscal policy and the federal budget. After years of budgetary belt tightening and difficult policy decisions, the goal of budget balance has finally been achieved. Congress and the President now face a series of choices that will have a major impact on the nation's economic future. Despite the euphoria surrounding the projected surpluses, the reality is that the country has run up a large debt from years of deficit spending. Using a significant portion of the surplus to pay down the debt would ultimately lower interest costs and spur economic growth. The miracle of compounding means that interest payments saved today will yield huge dividends tomorrow. Few, however, expect the entire projected surplus to go to debt reduction, and choices will have to be made about shoring up entitlement programs, boosting defense spending, and providing tax cuts. At the same time, looming demographic trends demand that the surplus be put to good use. The fact remains that our society is aging. Less than 10 years from now, the baby boomers will begin drawing retirement benefits. GAO projects that even if the country were to save the entire surplus and adhere to the budget caps, the combined spending pressures of Social Security, Medicare, and Medicaid would eventually reignite the vicious circle of escalating deficits, debt, and interest costs. Debt reduction must be accompanied by entitlement reform. In his midsession budget review, the President proposes to reduce publicly held debt more than he did in his February budget. He also wants to increase spending in several areas. But the big items in the budget continue to be Social Security and Medicare. Until these two programs are fundamentally reformed, their long-term solvency and sustainability will remain in doubt. The surplus presents both an opportunity and an obligation: to reduce the debt burden, to provide a strong foundation for future economic growth, and to ensure that government's future commitments are both adequate and affordable.
