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Chairman Sabo, Congressman Kasich, and Members of the Committee, I am pleased to be with you this morning to review the state of the economy and the budget. The Congressional Budget Office (CBO) last Thursday released a report, The Economic and Budget Outlook: Fiscal Years 1995-1999, that describes our current views in detail. My testimony summarizes that report.

The economic and budget outlook has not changed substantially since last September, but the deficit picture is significantly brighter than it appeared one year ago when the Congressional Budget Office projected that the deficit would soar above $350 billion by fiscal year 1998. CBO now projects that the federal budget deficit will fall from $223 billion in the current fiscal year to below $170 billion in 1996, then creep up to around $200 billion in 1999. The dramatic improvement since last January is largely the result of the enactment in August of a major package of tax increases and spending cuts--the Omnibus Budget Reconciliation Act of 1993 (OBRA-93).

Based on recent experience, some observers have doubted that deficits will actually decline as a result of OBRA-93. The Omnibus Budget Reconciliation Act of 1990, which implemented a multiyear deficit reduction plan negotiated by President Bush and Congressional leaders, also significantly improved the budget outlook. Yet despite the fact that the increases in revenues and cuts in spending that it promised were, for the most part, achieved, its deficit goals proved elusive. It quickly became evident that deterioration of the economy, shortfalls in revenues, and unanticipated increases in spending for mandatory programs (largely for Medicare, Medicaid, other benefit programs, and net interest) would result in higher deficits than had been projected before the bill's enactment.

In contrast to that experience, CBO's current economic forecast and estimates of revenues and spending have changed very little from the ones it developed immediately after the passage of OBRA-93. Projected deficits are significantly lower than they were a year ago before OBRA-93 was enacted. But despite that improvement, deficits have not been put on the road to extinction. They begin to grow again as a percentage of gross domestic product (GDP) after 1998, pushed up by continued rapid growth in spending for Medicare and Medicaid and by expiration of the tight caps on discretionary spending set in the Budget Enforcement Act of 1990 (BEA) and OBRA-93.

As always, the economic forecast and the revenue and spending projections presented here are uncertain. Future economic and technical reestimates could still push up projected deficits as they did in 1991 and 1992. Alternatively, changes that are not currently anticipated could further improve the deficit picture.

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